Airbus’s Failed 25 Billion-Euro Bet

The Airbus A380 has an unmistakable grandeur by virtue of its enormity and capacity. After all, it can fit 553 passengers spaced across two decks. 

It hit the market running, with airlines ordering 48 aircraft even before the aircraft was announced to the public. Progressively more and more international airlines sought to integrate the aircraft into their business model, hoping to take advantage of the large economies of scale that inherently accompany such a large aircraft. Emirates is, by far, the largest customer to the program with the order of 162 aircraft. In fact, if you traveled between Toronto and Dubai recently, you would’ve been aboard the magnificent A380! But with its astronomical rise, came a devastating fall accelerated by the pandemic. Airlines rushed to retire the aircraft, and even Emirates scaled back its order to favor smaller, more fuel-efficient aircraft. Airbus, eventually delivered its last A380 at the end of 2021, marking the end of the programme after just 15 years. 

Airbus started developments for the plane in 1988 and is rumored to have spent over 25 billion euros in project development. The project was borne out of a necessity to break the monopoly held by Boeing in the “Very Large Aircraft Market”, with their flagship plane the Boeing 747, most easily distinguished with the iconic hump towards the front of the plane. With the two planes being relatively similar in operating costs, passenger capacity, and designed for similar purposes, it’s hard to fathom why the Boeing 747 was one of the most successful planes of all time, while the A380 has largely been deemed a failure. In fact, Airbus even acknowledged that they will never be able to recuperate the investment cost of the programme. 

To completely understand why the Boeing 747 soared high while the Airbus failed, it’s necessary to look at the market conditions of the introduction of both aircraft. The first Boeing 747 flew in 1969. This was as good a time as any to be an airline: with the Reagan administration granting business-friendly macroeconomic conditions and passenger demand skyrocketing. The aviation market even became deregulated a decade later, which further pushed prices lower, due to increased competition, spurring passenger demand. 

The Boeing 747 with an approximate seat capacity of 350, had also laid the groundwork for the acceleration of the hub-and-spoke model in the aviation market. As indicated by its name, the model directs passengers to high-frequency routes between ‘hubs’ and connects onto smaller planes to more regional destinations. For instance, a passenger wanting to go from London to Calgary or Paris to Guangzhou will most likely be finding themselves connecting through Toronto or Beijing, respectively. Naturally, routes such as London to Toronto or Paris to Beijing will have incredibly high demand, and hence justify using larger planes to take advantage of economies of scale.  Further economies of scale are realized when we take into account that there are slotting, landing, and takeoff fees at big airports, which naturally diminish costs per passenger as the number of passengers rises. 

Airbus, at the time, was not in the ‘Very Large Aircraft’ market and was well aware that Boeing possessed a monopoly in this market. With hopes for the hub-and-spoke model to grow, Airbus predicted that an increasing number of airlines would be willing to buy the A380 at a list price of 455.6 million USD. They predicted that a plane such as this would have around 1,250 orders. In reality, Airbus received only 251 orders. 

The aviation industry seemed to be blind to its own Achilles heel: extreme inelastic supply. Low supply elasticity is a condition where firms are slow to respond to changes in prices caused by changes in market demand. This is often a symptom of a low degree of mobility amongst the factors of production, causing firms to be slow to respond or reallocate productive units to different products. In the aviation industry, it takes exorbitant funds to develop and test the aircraft, design its global supply chains, and finally produce it, which often takes over a decade, by which market conditions may have changed. After all, the A380 started development in 1988 and the first commercial service took place in 2007! A production process such as this cannot be abandoned or restructured with ease.  Generally, to make sure their aircraft will suit future market conditions, Boeing and Airbus spend millions understanding the demands of airlines, predicting the landscape of the aviation market decades into the future, and making bets as to what planes will be useful. 

To Airbus’ dismay, the pricey bet on the utility of the A380 did not come to fruition. Although several factors led to this setback for Airbus, a large one was the industry-wide gravitation from the hub-and-spoke model to the point-to-point model. Contrary to the hub-and-spoke model, this model has found that passengers are extremely favourable towards direct services to their destination. So, airlines are much more likely to have direct services between London to Calgary and Paris to Guangzhou. McKinsey’s market forecasts have shown that post-pandemic air travel will favour medium-density routes, as opposed to connecting itineraries, that feature more fuel-efficient and medium-sized aircraft such as the Boeing 787 and Airbus A350, that allow for more network versatility and opening up of more routes to underserved destinations. Using our examples, Paris to Guangzhou is, in fact, operated by an A350 and London to Calgary is operated by a Boeing 787.  Naturally, this dilutes the relative importance of high-density hubs such as Dubai, London, and Beijing, reducing the capacity of airlines, and making the A380 an unreasonable choice. 

This became especially true due to the unforeseen demand shock of the pandemic that made it close to impossible to fill seats on the large aircraft. Many airlines, such as Air France, Lufthansa, British Airways, Qantas, chose to retire all or some of their A380s over the pandemic.  Emirates, the largest customer to the program, reduced their order size by around 25%, by restructuring their deal with Airbus to get aircraft that are better suited to the point-to-point model. These aircraft are smaller and more fuel-efficient aircraft like the A330 neo or A350. 

After a production life of just 15 years, the last A380 was produced and delivered at the end of 2021. This failure was largely due to inaccurate predictions of the market decades in the future. Therefore, it’s worth keeping in mind the conditions of the aviation market are constantly evolving. Analysts speculate that the point-to-point model will only become more prevalent, with the increased use of more fuel-efficient aircraft. 

Looking further into the future, we can see stakeholders hedging their bets. With increased climate-consciousness amongst the masses, Airbus has announced plans to release three new hydrogen-powered aircraft types by 2035. A startup called Boom Overture, for instance, is forecasting that there will be a huge market for faster travel and is currently working on a supersonic plane that can make the journey between New York and London in three hours, half of the six-hour journey it is today. 

The interdependent nature of the technological, business, and economic aspects of the industry combined with the extremely supply inelastic market forces manufacturers to be extremely cautious of the decisions they make, knowing that they are irreversible. The world is changing by the second, and it’s difficult to imagine what conditions and constraints will arise in the future. Companies are spending millions trying to find a good answer, but a definite one will only be told by time.