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Business: Up and Away With SIA
How the A3XX could change Asian air travel

October 4, 2000
Web posted at 10.30 a.m. Hong Kong time, 10.30 p.m. EDT

For most airlines, ordering a new aircraft is like a bus company buying a new vehicle, interesting but hardly momentous. But as the world's most aggressive trader of aircraft, Singapore Airlines often uses airplane purchases as a marketing tool. It almost always buys new commercial aircraft ahead of the pack, and makes large single-order purchases instead of several small ones. Little wonder then that SIA's purchase last week of 10 new Airbus Super Jumbos and options for 15 more made headlines around the world.

Singapore Airlines Ltd. (SIA) announced on 28 September, 2000 that the company will buy 25 Airbus super jumbo A3XX jetliners worth $8.6 billion.

SIA is not really just an airline. Apart from being a great trader of aircraft, which keeps its fleet the youngest in the world, SIA is a master marketer. Aside from the Marlboro Man, Singapore Girl is the longest surviving advertising icon in the world. When an airline like SIA announces it is buying $8.6 billion worth of planes, the world sits up and listens. When the purchase is an aircraft that will be the biggest commercial plane ever built, it creates even more buzz. Though Emirates, Air France and leasing company ILFC have already placed firm orders for A3XX Super Jumbos (to take delivery between mid-2006 and late 2007), SIA will be the first airline to actually put the new planes in the sky — in early 2006. For SIA, the deal was a publicity coup. I was at the SIA Training Center in Singapore Friday evening. Dozens of journalists from as far away as Paris, Seattle, London and Sydney had flown to Singapore just to cover the press briefing. SIA knows how to make a splash.

Since Boeing gobbled up McDonnell-Douglas over five years ago, the commercial aerospace business has become a fierce duopoly of Seattle-based Boeing and European consortium, Airbus Industrie. Each claims it is bigger than the other in terms of orders. But don't let their respective publicity machines fool you. The way order books are configured, there isn't quite an apples-to-apples comparison between the two. Suffice to say, over the next three years Boeing and Airbus are likely to split the commercial aircraft market more or less right down the middle, 50-50. Boeing still sells two of the best selling commercial aircrafts in the world — the short-haul 737 and the ultra-long haul 747. Airbus's forte has been middle-range jets for medium-haul markets.

That's changing. Airbus has been trying for nearly a decade to get into the long-haul, large jet market. Instead of challenging Boeing's 747-400, which can ferry 415 passengers non-stop from New York to Hong Kong, Airbus has been working on a two-deck jumbo that can carry up to 600 passengers. The A3XX — or VLA, for Very Large Aircraft — is its 747-challenger.

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The basic Airbus Super Jumbo A3XX has a seating capacity of 555 passengers, can fly non-stop for 15,100 kms (8,150 nautical miles) — non-stop from Singapore to San Francisco or from New York to Mumbai. Boeing has been late responding to the Super Jumbo challenge because it feels there is no market for it. Instead of designing a whole new aircraft from scratch, it has promised its customers a derivative of the 30-year workhorse 747 that goes by the project name 747-Stretch X. Basically Stretch X will literally strech 747-400's upper deck all the way back to the tail. Stretch X could carry 520 passengers and fly about the same distance as the A3XX. But airlines and passengers will recognize Stetch X as merely a derivative aircraft. The fly-by-wire A3XX, which uses cutting edge technology, has been designed from the scratch. Analysts say given a choice between a derivative of an older model and a newer aircraft type, buyers may well opt for the new aircraft. Were this not the case, McDonnell Douglas would still be independent and have 30%-40% market share.

Actually the A3XX could carry far more passengers if that's what airlines want. But the carriers, doing their own marketing, talk about adding a gym, a bar, a small library (for some folks), a casino (for others) and all sorts of other diversions for their elite long-haul passengers. SIA wants 550-seater planes because it just can't get additional landing slots at key airports like London and Sydney (where it flies three jumbos a day) or San Francisco and New York's JFK (two a day) or Hong Kong (five a day). If it can use bigger aircraft, it can maximise these two or three landing slots in key airports.

How much does the new plane cost? Analysts and industry insiders say the A3XX can cost from $235 to $260 million, depending on the configuration. Airlines like SIA would need to pay extra for such trappings as its extra-luxurious First And Business Class sections. Some analysts figure SIA is getting a 25% discount as a launch customer. Assuming a $250 million basic price,that would put the price tag for one airplane around $187 million, plus inflation. If you, Mr. Airline CEO, wanted to buy the latest 747-400 jumbo off-the-shelf (from a carrier that ordered one some years ago and was taking delivery of it today) you would probably pay about $175 to $180 million. So for just a few million extra, SIA is getting a plane that can carry 150 million more passengers a year. SIA CEO Dr. Cheong Choong Kong said on Friday that "it was the package" that attracted SIA to Airbus 3XX.

Analysts say SIA is one of the more astute buyers of aircraft and other airlines will see its decision as an important validation of the technical characteristics of the A3XX. SIA has made mistakes in the past, but it has usually quickly reversed them. For example, it ordered 20 of the McDonnell-Douglas MD-11, but when the aircraft did not live up to performance promises (it could not fly the range specified), SIA cancelled the order in favor of the Airbus A340. Analysts figure that with SIA about to fly the A3XX its two main competitors in the Asia-Pacific region, Cathay Pacific of Hong Kong and Qantas of Australia, will move fairly quickly to get their orders in. If you were the CEO of Cathay Pacific you wouldn't want SIA to be the only airline in the region flying the 3XX and benefiting from the economies of scale (in terms of lower fares and improved service) that the Super Jumbo offers.

Airbus's CEO Noel Forgeard estimates the orders for the 3XX over the next 20 years at up to 1,500 aircraft worth nearly $380 billion, a quarter of the global market for commercial aircraft. Airbus figures East Asian airlines will account for 44% of that, since eight of the world's 10 busiest routes involve an Asian destination. Boeing's CEO Phil Condit has said in the past that he thinks no more than 800 or 900 Super Jumbos can be sold in that same time frame. A 50% marketshare for Boeing might mean no more than 450 planes. If those calculations are right, Boeing would be hard put to make much money on a $10-billion investment in a designed-from-scratch Super Jumbo.

One problem with Super Jumbos is that they would basically fly hub-to-hub, say Singapore to London. So, if you lived in Kuala Lumpur and wanted to fly to Amsterdam or Zurich you'd need to change planes twice (once in Singapore and again in London or Frankfurt) and fly the longest leg with 549 other passengers and their luggage. Boeing is figuring that customers in secondary markets in particular would still prefer point-to-point, non-stop travel. Airbus's bet, that people will happily endure a couple of transit stops to get to their final destination, is a huge one. But with airports being built further and further away from center cities and with highways and rail becoming faster and more efficient, Airbus's strategy might just turn out to be the right one ten years from now. Might.

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