Airbus A380: A $500 Billion Mistake
In early 2005, Airbus proudly presented the A380 super-jumbo: the largest passenger plane ever built. The jumbo jet, with its world-record seating capacity and spacious interior, seemed to be an ingenious idea upon its release.
Capable of transporting up to 900 passengers, the A380 offers the lowest seat-to-mile cost of any large air carrier.
Airbus believed that this cost-efficiency would be a hit among large airlines operating in high-traffic airports, as the A380’s extraordinary capacity would reduce the crowdedness of runways and the cost of long, high-volume flights.
Additionally, the A380’s interior features, including ambient lighting, lower outside noise, and a higher level of pressurization, offered a more comfortable travel experience for passengers. Thus, the A380 project was a win-win: more cost-efficient for airlines and more comfortable for customers.
At least, it was thought to be a win-win. Now, 15 years later, the A380 has fallen (very) short of the high expectations that accompanied its release. After investing $25 billion in the creation and development of the A380, Airbus has announced that they will cease production of the super-jumbo in 2021.
The company expected to sell at least 750 units of the aircraft at $450 million each ‒ at the time of their announcement, they had sold only 250.
Furthermore, numerous airlines have recently cancelled their orders for the A380 or have decided to get rid of the A380s that they already have ‒ Air France, for example, announced that they will retire their entire fleet of A380s, resulting in a write-down of about $549 million.
How could a project with such initial promise end up being such an expensive failure?
Perhaps COVID-19 is to blame? U.S. air travel decreased by 50% in March and 40% in April 2020 following stay-at-home orders and travel restrictions in light of the COVID-19 outbreak.
This sudden decline in travel volume seems to be a likely culprit for the A380’s downfall, as the giant aircraft would essentially become useless with such a low number of travelers.
However, a more detailed investigation of the A380’s business model reveals that the jumbo jet was likely doomed for failure from its very inception, even without the onset of a global pandemic.
Airbus introduced the A380 during a time when air travel primarily followed a “hub and spoke” model.
This model involves a fairly small number of massive airports (referred to as “hubs”) that provide a select number of routes to “secondary” airports within their region (referred to as “spokes”).
Required special jetways that airports had to spend tens of millions of dollars on to service the A380
In hub and spoke travel, passengers typically do not make a single trip to their final destination; rather, passengers must fly from one hub to another (a “layover”), with the final hub bringing them to their destination via a spoke route.
The large hubs are the central points of the travel network, and they often become very crowded with both outgoing flights and incoming connections.
Airbus proposed the A380 as a solution to overly-crowded hubs: the A380’s capacity would allow central airports to fly more passengers from hub-to-hub without increasing their total number of flights, thus decreasing congestion and the number of planes on their runways.
Therefore, the A380’s utility is essentially contingent on the use of the hub and spoke model.
Unfortunately for Airbus, hub and spoke travel has become less popular throughout the last two decades; airlines have solved the issue of airport over-crowdedness by adopting the point-to-point model, where passengers are flown directly to their destinations without any stops in between.
The emergence of planes like the Boeing 737, with its lower maintenance costs and higher fuel efficiency, have allowed airlines to dispatch more point-to-point flights without having to face higher overall costs.
As a result, the demand for larger, more expensive air carriers has decreased in favor of smaller, twin-engine aircraft, which require less maintenance and offer higher fuel efficiency.
Moreover, airlines have struggled to make a profit from using the A380.
Although the A380’s ability to seat up to 900 passengers makes it the most efficient aircraft in terms of seat-to-mile cost, the A380 achieves this cost-efficiency only when it’s filled to near-capacity, and most airlines are not able to fill this massive plane throughout the year.
The period between April and October represents the peak of business for most airline companies. During this span of months, many airlines could likely fill the A380 and enjoy its seat-to-mile efficiency. In the winter, however, the volume of air travel is simply too low for most airlines to fill a large proportion of the A380’s 900 seats.
Consequently, airlines face two unprofitable decisions during the winter months: either fly their A380s at half-capacity, where the jet’s fuel costs outweigh its ticket revenue, or rest their A380s until the spring, resulting in maintenance and storage costs.
This explains why several companies, including Air France, Emirates, and Lufthansa, have retired many or all of their A380s in the past two months.
It seems, then, that the A380’s downfall was caused by its most iconic feature: its size.
Indeed, the main selling point of the A380 was that its unrivaled capacity would cut costs for high-volume travel.
This same feature, however, has made the A380 a financial burden for many airlines during half of the year, as it is nearly impossible to fill this gargantuan aircraft during the off-season of travel.
And, as the current pandemic continues to suppress domestic and international travel, the chances of the A380 making a comeback are unlikely, at best.
Written by Alexandar Ristic & Edited by Alexander Fleiss
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