Airbus May Stall A380 Production: Is Boeing 777X in Focus?

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Airbus Group EADSY recently announced that it may halt the production of A380 superjumbo jet, if the $15-billion deal with Dubai-based Emirates Airline fails to materialize.

Though stalling A380's production will be a setback for Airbus, the company's arch-rival - The Boeing Company BA is poised to benefit from this.

Why Airbus Might Halt A380 Production?

Historically, the A380 has always struggled to win enough customers, as a result of which this product line has been facing dearth of demand. Thus the company was left with little choice but to think of stalling the production of A380 jet.

The loss of a multi-billion dollar order in Dubai Air Show in November 2017 dealt a major blow to the A380 program. Per CNBC, Airbus was in talks with Emirates for providing 30 new A380 planes. However, the deal has not been clinched to date. President Tim Clark of Emirates maintained that if Airbus can assure of producing A380 jet for a period of minimum 10 years only then will the deal materialize.

Notably, the A380 jet has failed to maintain a loyal customer base over the years. Tepid demand has dragged the company's sales from the A380 program. This made the largest commercial jet, which was once the company's flagship product, a burden on its top line. This impelled the company to slash A380 production rate. Evidently, Airbus delivered 15 planes in 2017, and plans to deliver 12 in 2018 and eight in 2019. In the years ahead, the company is likely to slash production further to six per year.

Airbus is also grappling with issues like fixed cost-reduction measures needed to balance the impact of lower level of deliveries on its operational profit.

The massive four-engine A380 has compelled several airports to expand their runways to accommodate the 550-seat plane. While it's still in use in world's some of the biggest airports including London's Heathrow and New York's JFK, the aerospace industry as a whole has shifted toward smaller planes, going point-to-point, reducing airlines' dependence on bigger hubs (according to Bloomberg).

With a list price of $446 million, the plane is one of the most expensive and least flexible for airlines to deploy their fleet. However, a drop in contract wins will make it difficult for Airbus to record profits.

Boeing Poised to Benefit from Airbus' Plan: Here's Why

Boeing is leaving no stone unturned to pose stiff competition to Airbus as it aims to gain the leading position in the wide-body market. Interestingly, Boeing has been constantly penetrating niche markets to gain traction. Buoyed by the success of the 777 and 787 Dreamliner, Boeing manufactured 777X, which is the largest and most efficient twin-engine jet in the world.

The company predicts that the Middle East will need 3,350 new planes worth $730 billion between 2017 and 2036 and twin-aisle airplanes will comprise nearly 50% of the estimated figure. Thus, Boeing has been repeatedly requesting Emirates to consider 777X as its latest choice.

With Emirates being the largest carrier for both Airbus A380 and Boeing 777 models, A380's production stoppage will definitely force the airline to turn to Boeing for its latest model of 777, i.e. 777-10x.

Moreover, at the Dubai Air Show Boeing won a contract worth $15 billion for delivering 40 787-10 Dreamliners to Emirates. This reflects Emirates' preference for Boeing's commercial jets.

Order Growth Scenario

A380 is not the only jet produced by Airbus. The company also builds jets like A320 and A321 neo that has been gaining traction recently. In the latest Dubai Air show, Airbus won the largest commercial jet order in its history when Indigo Partners agreed to buy 430 A320neo aircraft for nearly $50 billion.

Notably a recently released report for 2017 positions Airbus at a higher level when compared to Boeing, in terms of order wins. The European plane maker's net orders after cancellations were 1,109 jets in 2017, vaulting past Boeing's 912. Without the cancellations adjustment, Airbus' gross orders were 1,229 compared with Boeing's 1,053. In terms of backlogs also, Airbus led the way by setting a new industry record by boasting an overall backlog of 7,265 aircraft at the end of 2017, compared to Boeing's backlog of 5,864.

On the other hand, Boeing delivered 763 commercial planes in 2017, while Airbus dispatched 718 jets.

Per Boeing's latest Global Market Outlook, the world will need 41,030 new planes worth $6.1 trillion between 2017 and 2036. Considering this, we can assume that Boeing and Airbus will continue to dominate the commercial aerospace manufacturing market as major airlines worldwide uses their airplanes.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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