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Emirates Rescues the Airbus A380 Jumbo Jet, Again

Adam Levine-Weinberg, The Motley Fool

During the past few years, Airbus (NASDAQOTH: EADSY) has faced a steadily shrinking backlog for its A380 jumbo jet. In fact, between 2015 and 2017, Airbus captured zero net orders for the A380. As a result, it ended 2017 with a backlog of just 95 orders, roughly half of which are likely to be canceled.

However, Middle Eastern airline giant Emirates -- already the largest A380 customer by far -- threw Airbus another lifeline last week, placing a firm order for 20 additional A380s. Still, even with this order, the A380 aircraft program's long-term future remains in doubt.

More turbulence for the A380

For several years, it has been clear that Emirates is the only airline that really likes the Airbus A380. Nevertheless, last fall, it demanded guarantees that Airbus would continue building the model for at least a decade as a precondition of ordering up to 36 additional A380s. Emirates publicly humiliated Airbus by announcing plans to buy 40 Boeing (NYSE: BA) Dreamliners just as the Airbus sales team thought they were closing in on a deal.

An Airbus A380 in flight

Demand for the Airbus A380 has been waning. Image source: Airbus.

Given the lack of interest from other airlines, retiring Airbus sales chief John Leahy declared last week that without another order from Emirates, Airbus would be forced to shut down A380 production. Publicly pressuring Emirates in this way represented a bold gamble.

Emirates caves in -- or did Airbus blink?

Fortunately for Airbus, Emirates decided that it can't live without the A380 -- at least for now. On Thursday, just a few days after Leahy made his threat, Emirates announced that it plans to place a firm order for 20 additional A380s, with options for 16 more. Deliveries are set to begin in 2020, and will be used for a combination of growth and replacement needs.

The timing of this agreement makes it seem like Leahy's threat worked. That said, in the Airbus press release announcing the deal, Leahy stated, "This new order underscores Airbus' commitment to produce the A380 at least for another 10 years." In other words, Emirates got the production guarantee it wanted.

Including the new Emirates firm order, Airbus has 68 solid orders (i.e., excluding orders that are likely to be canceled) for the A380. Singapore Airlines is set to receive its last three A380s this year; Qatar Airways will also receive one. Next year, ANA will take delivery of the three A380s it has ordered. The other 61 solid orders are all for Emirates.

Airbus seems willing to build as few as six to eight A380s annually after 2018. That means the program probably could survive for the next 10 years without any other customers signing on -- especially if Emirates exercises the 16 options.

The long-term story might be different

Boeing bulls got their hopes up early last week after Leahy's comments about potentially ending A380 production. After all, Boeing's 777X -- the largest twin-engine jet on the market -- could see a big sales lift from the A380's demise.

That scenario won't come to pass in the near future. However, things might be different a decade from now.

The main reason why Emirates needs the A380 is that its hub at Dubai International Airport is operating near capacity. Yet Emirates is scheduled to move to the much larger Al Maktoum International Airport in 2025. This airport will have more than twice as much capacity as Dubai International, which will remain open as a reliever airport. As a result, Emirates would be able to operate more frequent flights (pleasing business travelers) rather than using ever-larger aircraft to meet demand growth.

An Emirates A380 taxiing at an airport

Emirates needs the Airbus A380 to meet its growth goals -- for now. Image source: Emirates.

The other reason for operating the A380 is that customers love its unique amenities, like onboard showers for first-class passengers and a lounge area for business class travelers. Still, there's no reason Emirates couldn't add those features to at least part of its 777X fleet -- especially if Boeing eventually builds an even larger 777X model.

The 777X will be much more efficient than the A380, giving airlines (including Emirates) a compelling reason to switch. Because of the lack of demand for very large aircraft, Airbus probably won't invest in a full redesign of the A380, which would be necessary to keep it competitive.

In the short run, capacity constraints in Dubai -- and at a few other key airports like London Heathrow -- make the A380 essential to Emirates' strategy. A decade from now, Emirates' move to Al Maktoum International Airport and a new runway at Heathrow will make the A380 much more replaceable. That means that while the Airbus A380 has won the current battle, Boeing's 777X could still win the war.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.