Sunday, October 15, 2006

The Amazing Kreskin Speaks on the Future of the A380

Well, it's not really the Amazing Kreskin-it's Sunday morning here at the Dougloid Building and it is a time to power down and reflect on all the miscellaneous stuff that's coming in through our ears and eyes.

The underlying assumption that guides a lot of people is that the airlines NEED the A380 like drug addicts need heroin, and that they'll submit to any level of abuse and delay to get their hands on the airplane no matter how long it takes.

It's not a religious experience-it's a piece of machinery, like a punch press in a factory or a garbage truck. Its sole function is to generate dollars for the people that buy it. Anything else is so much malarkey. To continue with the A380 is a business decision that's based on a continuum of considerations, and it is not motivated by brand loyalty.

At some point some airlines may decide that their need for a 555 seat aircraft that's payload limited is not as strong as their need to get on with the business of selling seats and hauling freight in the not too distant future. When the dollars in one column exceeds the dollars in the other column they will bail. And then they will litigate.

Part of the problem is that the airlines have already built the capacity they thought they were going to get into their business plan, and in some cases that may have included selling the tickets. If not direct sale, they've already made commitments to reallocate other resources in other areas because of this capacity that was supposed to come on line at a date certain. American Airlines had tickets sold for MD11s that were six months or a year away from completion and delivery....they're all the same that way. It's business.

I think the only thing holding back massive cancellations is the perception in the industry that the A380 is needed and is going to generate so much additional marginal income that it's worth the wait. And any cancellation will trigger a wave of others.

I know, I know you say "B-b-but gee, Sparky! it's big! It's beautiful! It's efficient! It's trendy! It's got a spa and a piano bar and a duty free shop!" All of which is true....but it's not capturing passenger and freight dollars this month as the airlines expected it would start to. Lack of an alternative in class and the fact the airlines right now think they need it is the only thing inhibiting a wave of cancellations.

Singapore Airlines, lest we forget, cancelled an order for 20 MD11s for a lot less abuse than they're getting from Airbus because there were competitive alternatives available in the same time frame. They have the ability to pull the pin.

Friends, somewhere in an anonymous office building somewhere in Doha or Singapore sits a computer that runs financial projections for an airline. In front of it is a person whose job it is is to input new data while the computer analyzes the financial model therein, which is the business case for the A380. When the tipping point is reached the decision will be made.

None of us are privileged to know exactly what that tipping point is, and it's something of a moving target based on a number of factors including compensation paid, initial discounted cost, the price of fuel, traffic projections, the time value of money, and so on. But I have a notion we're close-very close.


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