Haunted by old pledges, Airbus aims to boost A340 value

Reuters

PARIS, Dec 5 (Reuters) - Airbus and its engine makers haveacted to try to shore up the value of second-hand A340 aircraftas the European planemaker tries to reduce its financialexposure to depressed market prices of an aircraft that it nolonger produces.

Airbus has told bankers, airlines and other owners of theaircraft that it is working on plans to increase the maximumcapacity by 8 percent to 475 seats in a bid to make it moreattractive to airlines looking to replace Boeing 747-400s.

Britain's Rolls-Royce is also fine-tuning engineservice contracts so that airlines can maintain the A340's fourengines for a similar cost to servicing the two larger GeneralElectric engines on the rival Boeing 777, Airbus said.

The move comes after parent EADS said in its 2012 annualreport that Airbus was "currently engaged in taking mitigationaction to reduce the impact of asset value guarantees fallingdue in the coming years relating to A340s in particular".

Airbus stopped making the A340 in 2011 after improvements inengine technology caused airlines to switch to two-enginedmodels such as the Boeing 777 and, in future, the A350.

But it has been left with a financial exposure to theaircraft after issuing guarantees underpinning its resale pricewhen striking deals to sell it during a period of weak demand.

Additionally, it faces potential losses on deals to buy backold A340s as it sells new aircraft of other types, peoplefamiliar with the matter said.

"We share a motivation with the finance community to keepthe A340 in service for a good while," said Andreas Hermann,Vice President Freighters and A340 Asset Management at Airbus.

As of Dec. 31, 2012, EADS had 1.046 billion euros ($1.43billion) of asset value guarantees outstanding, excluding 333million euros where the risk of execution was considered to beremote.

It says the risk covers just part of the residual value ofthe aircraft and is included in total EADS provisions for assetvalue risks of 712 million euros, as of Dec. 31 last year.

Airbus does not break out the guarantees by plane type butanalysts say the A340 makes up a significant share.

Rolls-Royce reported gross financial exposure from suchsupport of 569 million pounds ($929 million)at the end of 2012,but does not break this down by aircraft or the type ofinstrument used.

The British engine manufacturer provides powerplants forlater models of A340 and has been criticised for beinginflexible in its service contracts. The company has told A340investors that it would address this as part of efforts to boostinterest in the A340, according to Airline Economics.

Industry sources say airlines have begun breaking up oldA340s because their parts are sometimes worth more than the costof scrapping the plane. Some have been trying to sell thembecause of the perceived inefficiency of running four enginesinstead of the now-standard two engines on long trips.

Some 25 second-hand A340s are currently posted for sale.

Airbus officials urged a special meeting of A340 ownershosted this week by Airline Economics magazine to take anotherlook at the aircraft's value and argued it could hold its own asa replacement for older Boeing 747-400s.

They said the combination of low prices on the second-handmarket and reduced maintenance charges would make the aircraftattractive against the 777, whose arrival combined with high oilprices is credited with driving the A340 out of production.

Boeing officials rejected the claim, saying Airbus would beable to resume production if the jet's economics made sense.

Airbus said it is working to get the plane certified for 475seats in all-economy seating, compared with the current approvedcapacity of 440 seats in the largest version, in order toaddress demand from charter operators.

This would involve 18-inch-wide seats laid out eight acrossin a single economy class or else 17-inch-wide seats in atighter nine-abreast layout in the main economy cabin ifairlines also wanted to reserve some space for a business classsection.

Airbus has recently been running a campaign to establish aminimum standard seat width of 18 inches in economy class.

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