Thai Airways "Stuck" with A-380s

[Gaybutton]

The following appears in the BANGKOK POST:

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THAI Stuck with A380s

 

Cancellation Penalties Could Reach $700m

 

By: BOONSONG KOSITCHOTETHANA

Published: 11/07/2009

 

Thai Airways International (THAI) has no other options but to keep its order for six Airbus 380 megajets it wanted to cancel as doing so would lead to huge adverse consequences.

 

"The best option available for us is to delay taking delivery of those A380s," Wallop Bhukkanasut, the chairman of THAI's executive board, said last night.

 

The flag carrier had earlier sought to terminate the A380 contract or change to another future Airbus model, the A350-1000, as it had come to believe the world's largest commercial aircraft would not be economical to operate.

 

In the recent negotiations with the European planemaker, Airbus has ruled out those changes and THAI itself has come to realise that the cancellation will result in a legal battle that would have a significant impact on THAI and the image of the country as a whole, something the airline wants to avoid, according to Mr Wallop.

 

The cancellation would expose the airline to US$700 million in penalty costs - $300 million in pre-payment for airframes and $400 million for contracts already committed.

 

"Several contracts involved in the A380s are restricted with absolutely no room for change," Mr Wallop told reporters after the airline's board meeting.

 

THAI is now proposing that the delivery of its first three A380s, each costing $300 million, be put off to 2012 and the remaining three in 2013.

 

The airline has been contracted to take delivery of the jets in two lots, in October 2010 and June 2011.

 

"In 2012, global economic conditions should be in much better shape, and so will traffic volume. By then, THAI's cash flow problem should have been resolved and the economic environment improved," he said.

 

THAI will continue to negotiate with Airbus on details of the new proposal but it wants the company to cap the cost escalation in order to minimise the financial impact, he added.

 

The airline will also reconsider how the aircraft could be deployed, he noted.

 

THAI had earlier planned to fly the A380s on its long-haul routes, such as Bangkok to London, Paris and Frankfurt.

 

Airbus has scaled back production of the A380 this year as customers resist taking large planes because of the global travel slump.

 

THAI is seeking to cut costs after posting a net loss of 21.3 billion baht, its first in its history, in 2008. It earned 7.8 billion in profit in the first quarter this year, mainly on currency gains.

 

Mr Wallop acknowledged that the chance of getting the A350-1000 early in the event of a change from the A380 was slim as there was a huge order backlog for the aircraft, for which deliveries are not expected until 2018.

 

THAI shares closed yesterday on the Stock Exchange of Thailand at 13.20 baht, down 90 satang, in trade worth 77.88 million baht.

 

[Guest fountainhall]

The airline will also reconsider how the aircraft could be deployed

 

"Ay, there's the rub!"

 

In those heady far off days when THAI ordered their six A380s, I wonder which routes the management decided would actually justify the acquisition of such a large aircraft in 2010 an 2011? London, Paris and Frankfurt are mentioned in the article. Yet even prior to the rise in oil prices and the present recession, I just cannot see how TG thought it could make money on those routes.

 

Perhaps it did not foresee its difficulties in making its US routes profitable, or in the increased competition from the newer Gulf airlines in ferrying passengers between Europe and Thailand. Whatever, with the current state of the industry, I wonder how THAI is going to generate profits from the aircraft, even with the later delivery dates.

 

Of the airline's ultra long haul routes, now that the JFK service is dead, only LAX is left. Given that towards the end of last year TG had tried to add a stop en route but was forced by its inability to sell its A340-500s to keep the service non-stop, present load factors clearly could not fill the larger 744, let alone an A380. Resurrecting JFK seems out of the question, as avoiding losses is dependent on a business traffic that is clearly not there - or which prefers the non-stops offered by Singapore Airlines and Cathay Pacific.

 

Of the 8 - 12 hour long hauls, the kangaroo route between Europe and Australia might make sense, were it not for the fact that competition over the last 5 years has increased immeasurably. Singapore and Qantas already ply the A380s on this route so the novelty factor has gone, and several airlines have either increased frequency or started up. Plus, the increasingly highly-rated Gulf airlines have now started flying from Europe to Sydney without any Asian stopover at all.

 

Even if the world pulls itself out of the present recession by 2012, my gut feel is that front-end traffic (i.e. that which generates the profits) will take even longer to revive. In such a scenario, the A380 to an airline like TG makes zero sense. My read is that Thai's management will have to end up leasing most of them out - if, that is, they can find an airline wanting them.

 

 

[Gaybutton]

My read is that Thai's management will have to end up leasing most of them out - if, that is, they can find an airline wanting them.

That's what I thought too . . . leasing them out and trying to re-sell them. I agree with you in that I don't see how they're going to fill flights with aircraft that size unless the tourist industry dramatically picks up, and so far there's no sign of that. I don't know what they're going to do with six of those planes, but they're going to have to come up with something. I think they may try to use at least some of the planes for cargo rather than passenger flights.

[Guest fountainhall]

I think they may try to use at least some of the planes for cargo rather than passenger flights

 

I'm not sure if there is a freighter version of the A380 being planned. Conversion of a passenger model would require a lot more cost and would place it in direct competition with the Antonov (think that's the name) cargo plane which is bigger than a 747. But with orders being cancelled and delayed, Airbus must surely be thinking about this possibility.