The following entry is a record in the “Catalogue of Catastrophe” – a list of failed or troubled projects from around the world.
Airbus SAS – France
Project name : A380
Project type : Commercial aircraft development
Date : Feb 2019
Cost : Undeclared, but certainly in the billions of dollars in lost opportunity and other costs.
Synopsis :
An old Danish proverb (sometimes incorrectly attributed to Yogi Berra) quips that “It is difficult to make predictions, especially about the future”. Unfortunately, organizations making large, long-term bets on a project are in the difficult position of having to do just that. Normally those predictions are embedded into the project’s business case and that business case becomes the platform upon which the project’s ultimate go / no-go decision is based. If the analysis in the business case turns out to be incorrect or incomplete the organization may have invested significant amounts of money which they will never recoup.
A380 airborne – Source wikicommons
The Airbus A380 project has recently provided a good example of the perils involved. Sadly, in Feb 2019 Airbus has announced that the A380 production program is to be wound up with just 253 aircraft built, far short of the 700 plus predicted by Airbus when the aircraft was first launched. Airbus is not declaring the net loss for the project as a whole, but given that development costs are said to have been in the order of $20 to $25 billion and only about 35% of the anticipated aircraft were built, the write offs are likely to be considerable. Not only are the development costs being spread across fewer aircraft, but the lower build total will likely have meant higher unit costs due to the failure to scale the production line up to the full capacity originally planned (failure to achieve economies of scale).
Although the full Airbus business case documentation isn’t public it is pretty clear from Airbus’ public statements that the project has not lived up to expectations. Asa result it is fair to assume that the predictions in the business case have turned out to be overly optimistic. That of course begs the question of what went wrong. Were the sales targets wrong or is there something at a deeper level that held the program back from its full potential?
A number of industry overseers have been predicting the failure of the program since day one. In fact, the cancellation of the production program concludes a long-held debate in the aviation industry. From the earliest stages of the project (back in 2002) there was a debate as to whether large aircraft (like the A380) would be the key to linking congested airports in the world’s major cities or if airlines would prefer to use smaller aircraft that operate at higher frequencies (i.e. more daily flights). With one notable exception (Emirates that operates over 100 A380s) airlines certainly have voted with their chequebooks. Sales of the twin engine mid-size Boeing 787 and competing Airbus A350 aircraft have far exceeded those for larger four engine A380. To some that will be vindication of their argument that the failure of the project was simply a matter of the airline’s preference for smaller aircraft.
There certainly is no doubt that smaller aircraft are inherently less risky from an operational standpoint. It’s easier to sell out a small aircraft than it is a big one and if there were another major recession, carriers operating the large A380 may well find themselves operating aircraft that they can’t fill. So it is certainly plausible that in part the failure of the larger aircraft is due to airlines being risk adverse. However perhaps that is not the only issue. Instead, what seems to be an equal concern is the failure of a second-hand market for used A380s to develop. Top tier airlines typically only operate their aircraft for 10 to 12 years. To maintain their top tier status these airlines sell the aircraft on (or return the aircraft to the lessor) while the aircraft still have plenty of life left in them. The problem is that to sell the aircraft on, there needs to be a market for second-hand aircraft. If that market doesn’t exist then the airlines are left amortizing to zero their full investment over just 10 years rather than recouping a big chunk of that investment when they sell second-hand.
Given that the first A380 entered operational service in 2007, it’s pretty clear now that the second-hand marked just isn’t there. The operators who might have taken the second-hand aircraft have not budged. Perhaps fearing the operational risks of having such a large aircraft to fill or recognizing that the aircraft requires special tooling to service (e.g. new larger hangers, new equipment to handle the massive engines, specialized flight simulators for training, etc), the second-tier operators have steered clear. Of the early aircraft coming off their original leases only 1 has found a permanent home. Several others are already being stripped for parts. The cost for those holding the aircraft leases or the airlines who purchased outright the write off of a 10 year old aircraft is a bitter pill to swallow. Having seen early adopters face that pain, it’s pretty clear that no other operators are going to want to purchase the aircraft new and likely that is part of the reason to shutter the production line early.
As a lesson learned it appears that the problem was that the business case focused on initial sales and did not anticipate that the second-hand market simply would not be there. Perhaps if Airbus had put more thought into how they could stimulate a strong second-hand market right from day one, the A380 story may have had a different ending?
Contributing factors as reported in the press:
Issues with the scope of the business case (not enough attention to the second-hand market). Bad assumptions.
Related stories:
- Boeing 787 Dreamliner (which had its own issues when first launched)
- A380 – Prior story about problems with the original launch of the aircraft
Reference links: