Contributor - Middle East

Peter Shaw-Smith

With 36 A380 aircraft in the fleet as of late September and a further 104 now on order, the aviation community is trying to calculate what will happen to Emirates’ superjumbo fleet when the time comes to retire the type, at around halfway through its lifetime. Some analysts believe that, given a lifespan of 25 years, a proxy for the useful life of a modern widebody aircraft, the A380 will face problems in the secondary market when major leases come to an end after the standard 12-year term. 
In an interview ahead of the Dubai Airshow, Emirates president Tim Clark told AIN that he expects the carrier will take delivery by the end of the year of almost half of the 90 A380s it has ordered. “Seven more A380s being delivered between [late September] and December 21. That will take us to 43,” he said.
Clark said no A380 in the fleet would be retired in less than 12 years. In the case of Germany’s Doric GmbH, lessor of 14 A380s to Emirates (as well as five to Singapore International Airlines), he said the lease term is the longest of any aircraft that Emirates operates. “After 12 years, the arrangement we have with Doric falls away and the aircraft will be returned to them. That’s the deal we have with [A380 lessors]. Our first lease [with Doric]…was in July 2008 [for retirement] in July 2020.”
Emirates has a reputation for having one of the lowest average-age fleet in the business, thought today to be around six years. “The [average fleet] age hovers around that. [The long A380 lease-span is] more driven by the terms on which the lessor was prepared to do the deal. It [wouldn’t] do it for less than 12 years. If you have windows that come in before then, it becomes very expensive to break out. Twelve years suits us. [Then, reallocating the aircraft] is their problem.”
“Emirates’ average fleet age today is 6.1 years,” said Rogério Leão, Emirates’ manager, route planning and analysis. “Current fleet projections indicate that the EK fleet average age should remain stable between six and seven years old between now and 2017, as a result of the net effect of retirements and the stream of new aircraft inductions.”
In any event, it doesn’t appear likely there will be enough A380s in the fleet to dent Emirates’ record low average fleet age. “That depends on the rest of the fleet,” said Clark. 
“We have [B777-300]ERs coming until 2018, and A380s coming through until 2017. By 2020 we start retiring the old ones and we’ve got a bunch of new ones, so the average is coming down. We’ve got A350s, we’ve got the 777X coming...but [as to] the fleet age, bear in mind that by that time, we will have rid ourselves of 64 of the old aircraft. If you’ve got A380s coming, you push the average age up, but then you’ve got a far greater number pushing the average age down.”
Clark is coy about what the state of the industry will be in 2020, and how A380 lessors will fare when aircraft are returned to them. “Much will depend on what the market’s doing at that particularly time. We’re still seven years out. We need to know what will happen. It’s a difficult one,” said Clark. He said he expected the fleet to number more than 200 aircraft at the time of Dubai Airshow 2013. “On 17 November we [will] have [a total of] 206-207 [aircraft].”
Uncertain Future?
Aviation analyst Richard Aboulafia of Teal Group, based in Fairfax, Virginia, is one of those who believe that the completion of 12-year leases on the A380 will then pose problems for their owners, when the time comes for the aircraft to find new homes. He wonders whether lessors like Doric have bitten off more than they can chew with the aircraft. The lack of operating lessors is an indication of a weak-to-nonexistent secondary market, he thinks. 
“They might retire them after 12 years in service. It raises one question: who takes responsibility for marketing the plane? There is no secondary market. What do you do with a retired A380? Who takes responsibility for used industry behemoths? It is very unlikely [Emirates] will have a fleet of 90 A380s at any given moment,” he said. “I am not so sure there’s much of a market for this plane. There is very little data for the in-service specific aircraft type. There are a couple of issues. One, there is absolutely no operating lessor that ordered this plane [and two] it is not suitable for cargo conversion. 
“Everyone involved has said that this is a long-range plane, restricted to long-haul carriers who don’t care about operating new aircraft; that’s a small number. The market is intra-Asia, Africa, Europe and transatlantic. The A380 makes sense only for very long ranges, to premium carriers that want a new jet. The only [second hand-market] fit is Delta in the U.S., which has shown no interest.”
Aboulafia’s analysis makes the point that little traffic through Dubai is origin and destination (O&amp;D). Some 70 percent of Dubai International passengers transit to a different type. “Their percentage of transit passengers is way, way up. It’s not O&amp;D traffic. They have recognized the problem by targeting 20 million tourists in Dubai by 2020. Can you do that? What can you really do to grow? Baseball has a history of build it and they will come [but] history has proved that doesn’t always work.
“On the point-to-point travel that passes by these hubs: I’m not stopping in Dubai. I am London to take-your-pick, say Perth. I am not stopping in Dubai. In terms of economics, a lot of gas weighs a lot. What if the next generation of long-range planes–the A350 or the 777X–are really good at this? What if they are really good at doing 8,000 nautical miles? The advantage of stopping gets eroded.” 
If Gulf airlines go all out for the A380, he thinks they might be caught out. “Three things could derail the Gulf carriers: trade action–there’s no hope of that at all; political instability–probably not, but you never know; or the advent of more economic, very long-range aircraft.”
On the lessor side, he zeroes in on Doric. Its website claims to have 36 aircraft out on lease, 14 of them A380-800s to Emirates. “They don’t have much experience in this industry. There is a risk, not necessarily from Emirates, that everything could go horribly wrong. What do you do after they come off lease? There is no reason these planes shouldn’t last 25 years like any other widebody. This is wide open here. They could survive as Hajj carriers. The residual value is the same as the 747-400 [though].” 
Aboulafia puts the A380’s list price at $330 million. Straight-line depreciation would put the aircraft’s value at $172 million after 12 years. If Emirates were to then retire all its A380s, this would leave Doric with a rolling $3.5 billion of metal looking for an uncertain home. That would leave another 22 in-fleet planes today to be retired and accounted for. 

Doric’s View
Dr. Peter Hein, Doric’s managing director, admits the lessor’s A380 program faces “hard questions,” but expresses satisfaction with the aircraft to date. “With respect to our Airbus A380s under management, we only have excellent experience,” he said, before explaining the mechanics of his business. 
“Over the 12-year lease, the debt is fully amortized and the investor(s) [get] more than 100 percent of the equity investment in distributions. The relevant amounts to pay debt service plus distributions result from the contractual monthly lease rents. At Year 12, investors have a positive return already, plus an unencumbered plane with four engines. 
“Investors do not assume that the plane including the four engines will be scrapped, but will create further income. [This] can result from re-leasing to the existing lessees for a couple of years; shorter term leases to other parties; sale of the plane; [or] scrapping. We also act as remarketing agent for third parties and have some recent experience there.”
Hein admits that it is still early days to assess the A380’s future. “I think we cannot say much...at this point in time...The aircraft is still in its infancy,” he said. He expects more lessors to enter the market and, to underline his optimism, cites data from a presentation by John Leahy, Airbus chief commercial officer for customers, showing the A380 outselling the Boeing 747-8 eight to one. “The broader the market becomes, the more lessors will enter the market. For sure there is substantial potential for the type.”
He is not losing any sleep: “There is not much to be said at this point in time other than pure speculation. The first aircraft will only come back to the market in more than six years.”

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