In late 2005 we can expect the huge Airbus A380 super-jumbo jet to take off on its maiden test flight, before entering service in Spring 2006. Although the absolute costs of building the 555- to 650-seater A380 super-jumbos are dramatically higher than for today’s 350–400-seater jumbos, the cost per passenger seat is estimated to be some 15% to 20% lower than for the widely used Boeing 747-400. How can this be? 

Certainly, the hugely expensive $10.7 billion (£6.7 billion) program will require 6,000 engineers at factories in Germany, France, Spain, and Britain, with an assembly hall in Toulouse more than twice the size of a football pitch! To bring all the component parts of the A380 to Toulouse from the 15 different manufacturing plants in the four countries will also be hugely expensive. For example, purpose-built roll-on roll-off ferries, barges, and road trailers have had to be designed and built to transport to Toulouse in southern France the huge wings (from Broughton, Wales), the rear and forward fuselage (from Hamburg, northern Germany), the tailpiece (from Cadiz, southern Spain) and the center fuselage and cockpit (from St Nazaire, western France). Roads are having to be widened and secure overnight parking facilities provided (e.g. three nights of stops needed for transporting the slow-moving road convoys in France).

 Nevertheless, a ‘value chain’ for production which involves specializing in these individual parts using firms in different countries is thought to be cost and quality efficient and to more than compensate for the huge costs and logistical problems in transporting them for final assembly in Toulouse. The design of the A380 has taken into account the views of numerous focus groups of potential users from many airlines. It has been designed with 20% of the airframe made from the most modern tough, light-weight plastic materials to keep within the maximum take-off weight of 560 tones. The basic version with 550 passengers will be able to travel some 8,000 miles without refueling, and an extended version will carry 650 passengers an extra 1,000 miles (i.e. 9,000 miles in total). 

Airbus will need to sell around 250 of these A380 jets to break even and stated that it was over halfway to that total by late 2003, with orders from ten different airlines. Airbus estimates the total market for aircraft in the 400-plus seat category to be around 1,100 over the next 20 years. It also predicts that an air-freight version will be in demand, with some 300 extra customers attracted. The annual traffic growth for air passengers has been predicted at around 4.7% per annum over the next 20 years. However, much of this growth will involve the Asia Pacific region, and Airbus has yet to receive orders from Japan Air Lines or All Nippon Airways – both major carriers in that region. Other companies also challenge the Airbus strategy, with its main rival, Boeing, believing the market will be better met by flying smaller aircraft into a wider range of smaller airports, rather than huge aircraft into a few hub-to-hub centers.

Questions

1 What sources of economies of scale are helping the A380 achieve the projected 15% to 20% lower seat cost?

2 Can you identify some of the benefits and costs (e.g. risks) to Airbus in following this scale economy strategy?

Answer rating: 100% (QA)

1 In order to achieve economies of scale the A380 relies on a number of different sources Firstly th... View the full answer