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On a wing and a prayer – Malaysia Airlines to lease A380s

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A potential paper weight? A Malaysia Airlines A380 model. Pic/Shukor Yusof

Airbus has a new unofficial spokesman for its A380 aircraft in the form of Malaysia Airlines Berhad (MAB) managing director Peter Bellew. In the past few weeks Bellew has waxed lyrical (ok, so he’s Irish…) about the aircraft. “It’s a super aircraft… there is a great future for the aircraft“.

The irony is that this is the same aircraft that MAB had tried (and failed) to flog over the past 18 months or so. If it’s as fantastic as Bellew says it is, why did the airline put it up for sale or wanted to swap it for the A350?

The reality is that the A380 is indeed a fabulous plane for passengers. “It’s incredibly comfortable. It’s wonderfully quiet. It’s fun to travel on,” Bellew gushed. But we would like to ask MAB’s chief a simple question – was it fun to look at the yields of the six A380s since they first arrived four years ago?

This past week Bellew made world headlines by revealing that his airline will start a new leasing company and offer its six A380s for rent specifically to cater for the pilgrim flights.

Alas, the idea is neither new nor innovative. Flyglobal Charter Sdn Bhd, a small enterprise based in Kuala Lumpur, has already beaten MAB to it. The company, founded and managed by ex-AirAsia senior staff, is using Boeing 777-200ER planes to ferry pilgrims on the hajj and umrah. It’s a clever move to use the B777s because there are so many of them around and they are relatively inexpensive to operate and maintain compared to an A380.

Let’s assume that MAB goes ahead and places its reconfigured A380s up for lease – (a) how much does it cost to wet lease an A380 per month? and, (b) why would a potential client rent an A380 that is likely to cost at least USD1 million a month when it can get a used B777 or an A330 for a third of the price?

Has MAB done the maths? Have they worked it out – what sort of yields will the A380 generate if there are 700 seats (according to MAB’s plans)? And not forgetting that on pilgrim services, there’s a chance the planes will be empty on its return flights.

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Beautiful to behold but tough to make money. Inside an A380 cockpit. Pic/Shukor Yusof

In this report (read here) an airline spokesperson said the pilgrim services will keep the A380s busy for eight months of the year and thus “cover its annual costs” – so the plan isn’t really to make money but to just cover the cost of maintaining the big birds?

It’s not that the idea won’t work; just that it is unlikely to generate the kind of revenue that MAB thinks it can acquire. First, the economics of a 4-engined aircraft are at a disadvantage compared to twin-engined planes. Second, who are the potential clients?

Indonesia has the world’s largest Muslim population and demand from its citizens to go on the hajj and umrah is incredibly high. So why hasn’t Garuda thought about using A380s to fly Indonesians to the holy land if it was such a marvelous proposition?

The truth is, Garuda has looked at it, and found it to be unfeasible. Hence, Indonesian pilgrims will be among the passengers on chartered flights to Saudi Arabia operated by the likes of Flyglobal and other established lessors such as Atlas Air and Air Atlanta Icelandic. Interestingly, none of these operators are using the A380 or has any plans to buy it.

What really is MAB’s motive in doing this? It would appear that the airline is running out of options (and ideas) on what to do with its A380s. Turkish Airlines was said to be interested to lease two MAB A380s but nothing came of it.

MAB has invested heavily in the A380, with customized hangars and licences to conduct full C checks. The carrier has also bought simulators and has A380s instructors available.

But now the planes are like albatrosses around Bellew’s neck and it’s not even his fault!

The acquisition of the six A380s in our view was a gross miscalculation by the Malaysian government (it is owned by an SPV which in turn is owned by the finance ministry) and was bought using sukuk bonds.

There is, at the time of writing, no secondary market for the A380 and nobody can say what its residual values are as all operating lessors, with the exception of one – Amedeo – have steered clear of this aircraft and that says a lot about where the A380 is heading.

Supporters of the A380, such as Bellew (he thinks the plane will still be flying 50 years from now), reckon it’s a matter of time, pointing to expanding growth in the air travel market and acute congestion at some of the world’s major airports.

We concede that is true – but how is it that the demand today is more for smaller (compared to the A380) widebody planes such as Boeing’s 787 Dreamliner and Airbus’ own A350XWB – an aircraft we feel is the best value-for-money plane in the market?

And this is Airbus’ big headache: they’ve built a plane – A350XWB – that can do a far better job than the A380 or any other widebody aircraft in the market today.

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An A380 tailfin. Pic/Shukor Yusof

Singapore Airlines, long considered a benchmark in the industry, has purchased 67 A350s, and will soon restart non-stop flights to the US using these planes. Within the next few years SIA’s A350s will replace its ageing B777s as its workhorses. The Gulf carriers, too, have embraced the A350s.

The advantages of the A350 over the A380 are obvious, namely: (i) lower weight (hence, lower seat mile costs), (ii) lower maintenance and fuel cost, (iii) greater range, (iv) use of composites (leading to reduction in operating costs), and importantly, (v) better residual values in the secondary market.

Where does that leave the A380? SIA’s CEO was being politically correct when he said (hint: in Toulouse) that the airline “continued to see a role” for the aircraft on high-demand routes to slot-constrained airports.

However, Airbus has cut the A380 production plans and plans to build just 12 starting in 2018, down from 27 in 2015. The plane’s catalogue price is over USD400 million.

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Part of an A380 fuselage at Airbus’ Hamburg plant. Pic/Shukor Yusof

Airbus has thus far delivered just 193 (majority of them to Emirates) and has orders for just 126 more (assuming no cancellations). We can’t see Airbus recouping its USD25 billion investment in the R&D of the A380 or that more airlines will place an order for it.

That being the case, it’s only a matter of time before Airbus has to make a very difficult decision, and that could come even before Bellew has a chance to put his A380s up for lease…

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