According to various reports from Japanese media, full service All Nippon Airways (ANA) is set to become the 14th** customer for the Airbus A380 superjumbo, as it is set to purchase three A380 frames that will be introduced in fiscal year 2018. According to Bloomberg, the deal forms part of a larger strategic vision for ANA which is scheduled to be announced in January 2016.
This grew out of the battle over Skymark
A380 order is almost certainly linked to ANA’s purchase of a 16.5% stake of rival Skymark Airlines. In August of 2015, ANA won backing from creditors of the bankrupt Japanese low-cost carrier (LCC) to lead a turnaround planning, winning out over a competing bid from Delta Air Lines. The deal gave ANA access to 36 additional pairs of takeoff and landing slots at restricted Tokyo Haneda Airport.
While ANA won roughly 2/3 of the overall votes from Skymark’s 170 creditors, it certainly would not have won the overall battle against the Delta-led plan had it not been for the support of Airbus, who was Skymark’s second largest creditor. Airbus’ financial interest in Skymark stemmed primarily from an order for six Airbus A380s that Skymark placed back in 2011 in a fit of exuberant expansionism, representing Airbus’ first major victory in the Japanese market in decades. But as Skymark’s finances deteriorated, it found itself unable to make payments for the delivery of these aircraft.
By 2014, Airbus had given up on Skymark ever taking delivery and cancelled the order, demanding a $710 million cancellation fee from Skymark. This demand triggered Skymark’s bankruptcy filing, and more importantly left Airbus with two white tail A380s that it had already built and now lacked customers for. This left Airbus as a creditor of Skymark, and gave it a significant voice in the decision between Delta and ANA.
For ANA, the benefits of the Skymark deal were clear. Even with its hub at Tokyo Narita diminished, Delta is the third largest competitor on long haul routes from Japan after ANA and rival Japan Airlines. Allowing Delta access to Skymark’s Haneda slots, even indirectly, would ratchet up competitive pressure on ANA, who enjoys a relatively cozy position at Haneda Airport with the lion’s share of long distance slots thanks to its close ties to the current Japanese government. Even beyond their competitive position vis a vis Delta, the slots at Haneda, which are almost as coveted as those at London Heathrow or New York’s La Guardia International Airport, have inherent value.
At a conservative valuation of $15 million per slot pair (half of that of an average Heathrow slot pair), the 36 slot pairs would be worth $540 million; at a more realistic valuation of $20 million, the total value would be $720 million. Between the raw value of the slot pairs and the added benefits of reduced competition, it was a no brainer for ANA to accept pretty much any deal that would win Airbus’ support, at least within reason.
Initial A380 destinations include Hawaii
The initial news reports indicated that ANA plans to deploy the A380 on its flights to Hawaii. This makes sense for several reasons:
The Japan – Hawaii market is huge (mostly driven by Japanese tourists) at more than three million passengers (roundtrip) annually. Add in demand from ANA’s Asian markets served at Narita, and there will be plenty of traffic to draw upon: important in filling the A380.
Hawaii-Japan is also primarily a leisure market, and thus is very price sensitive. The A380 has the lowest per-seat costs (CASM) of any airplane on the market, particularly if ANA was able to get any sort of discount*** and at current fuel prices, it would enable ANA to offer by far the lowest fares in this price-sensitive market.
ANA’s current service to Hawaii consists of two daily 767s from Narita and one from Haneda. The two flights to Honolulu depart from Narita an hour apart (8:35 pm and 9:35 pm) while the return flights depart an hour and a half apart (10:30 am and 12:00 pm). In a leisure market such as Honolulu, frequency matters very little, so it makes a lot of sense to combine these two flights into a single A380 departure. The 767s are configured with 200-215 seats (for 400-430 total seats). Assuming the A380 is configured with 550-600 seats, ANA will be able to offer 120-200 additional seats (added revenue potential) at a lower CASM and more or less the same trip costs as two daily 767s.
However, one daily flight to Honolulu isn’t enough to satiate a fleet of three aircraft, and two daily flights would be overkill. Because of this, it makes sense for ANA to also consolidate service to a couple of Asian destinations.
Bangkok in particular makes a lot of sense because it is a leisure driven market like Honolulu and also has two daily departures from Narita that leave within 55 minutes of each other (5:20 pm and 6:15 pm). The two return flights are actually spaced further apart, as one is a redeye that arrives in Narita at 8:25 am while the other is a morning departure that arrives in Tokyo at 3:05 pm. Given that eastbound connectivity in the US begins at 11:00 am in the morning, the red-eye would likely be retained though the morning departure would not substantially affect rotations.
Singapore is another strong candidate with a similar service profile at Narita. The two Singapore departures are 1:15 apart (4:50 pm and 6:05 pm) while the returns are once again a red-eye and a morning departure. Depending on how dependent the Singapore flight is on US/Canada connections, ANA can keep either the morning flight or the red-eye.
Operating each of these three flights daily would provide for good utilization of the aircraft at close to 14 hours per day, but would also leave ANA with little slack in the fleet. An alternative is to opt to operate 13-17 weekly roundtrips: daily to Honolulu and 3-5 weekly to each of Bangkok and Singapore. Right now, each city has one daily Boeing 787-8 flight and one daily Boeing 777 (-200ER and -300ER respectively) flight, taking up ~1.5 of each aircraft type. The 1.5 787s could instead be deployed to operate 2-4 weekly as double daily flights to each of Singapore and Bangkok (technically this would eat up 2 787s at a time, but the 1.5 comes from the fact that the aircraft would be rotated with other 787s flying to other destinations at Narita). This would still free up the 777s for other expansion while allowing for slack in the A380 fleet as well.
A precursor for a larger fleet?
The initial order of three aircraft is an odd size for fleet, given that the smallest real**** A380 fleet on order is five aircraft for China Southern. There is certainly a chance that ANA is using these first three A380s as a test bed, and plans to expand its fleet with another 3-7 aircraft, becoming a solid customer for the A380 once it sees the benefits.
Looking at ANA’s current schedule, the main options for consolidation of multiple daily flights come at hubs of and in conjunction with trans-Pacific joint venture (JV) partner United Airlines. The two daily flights from Houston (one each on United and ANA on 777-200ER) have disparate departure times from Narita (10:50 am and 5:00 pm for ANA and United respectively) but do depart Houston almost simultaneously (10:15 am and 10:40 am – ANA/United in that order).
A symmetrical opportunity arises in Chicago, where ANA operates double daily 777-300ERs alongside a daily United Boeing 747-400. ANA and United have Narita departures 45 minutes apart (5:10 pm and 5:55 pm). The return journey is disparate though, with two departures (10:45 am and 12:15 pm) necessitating impossible turns or several hours on the ground and a third departure at 4:15 pm. The same applies in Washington Dulles (11:00am/4:40 pm from Narita and 11:10 am/12:20 am from Dulles).
Los Angeles (5:05 pm/5:50 pm from Narita and 11:05 am/11:30 am from Los Angeles) and San Francisco (5:10 pm and 6:20 pm from Narita and 11:10 am/11:10 am from San Francisco are better opportunities and large enough destinations for origin and destination traffic (O&D) traffic to Japan and Asia to justify the larger gauge. So these two are likely to be the first destinations to go A380 on long haul flights if ANA goes in that direction. Increasing Bangkok/Singapore to daily, adding these two as daily A380 flights, and perhaps converting a few weekly flights at one of Chicago/Houston/Dulles to A380 would add up to an overall fleet of 8-10 aircraft.
A major benefit of the A380 would be to restore ANA and Narita’s competitiveness as a trans-Pacific connecting hub. In recent years, Seoul, Taipei, and even Shanghai/Beijing have overtaken Narita as a connecting complex for North/South America due to the lower cost base in those countries. But an A380 would allow ANA (and by extension JV partner United) to compete on an equal CASM footing, resuscitating some of Narita’s original hegemony.
But there’s a major weakness in this line of thinking – the reports of Hawaii as an initial destination. All of the US markets mentioned, and for that matter Singapore as well are business travel markets with a substantial demand for true international first class. And Tokyo is one of few cities worldwide with genuine international first class demand. But Hawaii is a leisure market where a first class cabin makes no sense. Given this, a large A380 fleet at ANA would necessitate either a sub-optimal aircraft for the Hawaiian route or a costly sub-fleet of leisure configured aircraft.
The only saving grace here is if ANA opts to deploy the leisure A380 for high volume domestic flights (replacing the 777-300 non-ER which seat 514 passengers). This would allow for a sufficiently sized A380 leisure fleet (5-6 aircraft) with decent utilization and a long haul sub-fleet would be entirely separate. In our opinion, this is the most likely path for ANA to take while the long haul changes are more uncertain. Still, even for the long haul A380s, we put the chances of ANA eventually signing for those additional aircraft at better than 40%.
Airbus (and Amedeo?) breathe(s) a sigh of relief
For Airbus the victory here is clear. In one fell swoop, it has gotten something in return for its position as a creditor in Skylark, has won a new customer for the A380 and some positive PR momentum after nothing but bad news for more than a year, and managed to unload 3 (presumably) white tail A380s that have already been built and are sitting on the tarmac in Toulouse (two for Skymark and one for Transaero). Moreover, Airbus has to be optimistic that ANA may develop into a solid A380 customer, as every financially secure airline with a suitable home market (British Airways, Singapore Airlines, Emirates, Korean Air, Asiana, Qantas, Lufthansa, and even Air France) has found them to be a useful tool for serving key medium and long haul markets.
By extension, ANA’s newfound status as an A380 customer could also be a boon for leasor Amedeo, who has not found a single customer for the 20 A380s that it has on order. Given the small sub-fleet and likelihood of a top up order as discussed above, ANA could be a home for some of those A380s on leases, solving one of Airbus’ bigger outstanding headaches.
A less likely but still possible option is for ANA to acquire additional A380s from the used market. Thai Airways and Malaysia Airlines each operate 6 A380s apiece with Rolls Royce engines (ANA’s planes will also reportedly sport the Rolls-Royce Trent 900s) and are reportedly shopping their aircraft on the market. These aircraft are relatively young and would allow ANA to acquire a fleet of 10-15 aircraft overall for a price of $1.3-1.8 billion, a relative bargain for an aircraft with the size and revenue potential of the A380.
** While there are currently 15 customers for the A380, we regard the order for two A380s by Air Austral or for six A380s by Virgin Atlantic as highly unlikely to ever be fulfilled, leaving ANA as the 14th customer for the A380.
*** The normal discount for wide body aircraft on the market is about 45%, so for the A380 that would be $235 million. However for these white tails, the pricing was likely to be more aggressive and it wouldn’t be surprising if ANA acquired the aircraft for as little as $180 million all in.
**** i.e. excluding Air Austral’s two aircraft.
Da Airwaysnews
