Sanctions, 650+ seats and an A380Neo

Dino D'Amore
By Dino D'Amore May 1, 2014 13:29

Sanctions, 650+ seats and an A380Neo

As US Secretary of State John Kerry states that additional sanctions may be applied to entire sectors of the Russian economy, we have to remind ourselves again of whom we do business with and what this means for Russian operators.

For brokers, lessors and financiers the world over, treading lightly around US and EU sanctions has always been a risky business – from knowing who you are selling an asset to, to knowing where it will end-up, will always be a serious business. But at the moment there is a situation of drip-fed sanctions on Russian individuals and companies due to the Ukraine crisis that threatens to entrap many aviation businesses in a web of uncertainty, which, if the Ukraine situation were to continue its steady escalation, should lead many banks and lessors to simply put the brakes on all business with Russia for the avoidance of doubt if nothing else.

Indeed one effect of the sanctions in the here and now is the withdrawal of export credit guarantees for aircraft bound for Russian operators. This in turn cuts out a huge swath of possible funding for deliveries. We are already seeing investors showing great reluctance to fund transactions of Russia-bound aircraft; the risks are just too great. So, we are able to state that we are entering a wait-and-see phase of aircraft investment/finance/placement where Russia is concerned.

So with four A380s about to deliver to Transaero you can bet that some in the market are getting a little hot under the collar as Eastern Ukraine continues to plunge into political uncertainty. For now though the main thing to watch for is Russian economic contraction due to sanctions and possible disruption of titanium supply to OEMs as that material makes up around 15% of both the A350 and 787 airframes. The OEMs will have contingency plans ready, no doubt about that, but you have to ask: At what additional cost to production? This could weigh heavily on Airbus and Boeing shares during 2014.

All this is a great shame as the Transaero A380s need to be delivered on time in a secure economic environment to show airlines what the aircraft can do in a high-density layout for the first time. Each aircraft will each seat 652 passengers, with 616 seats in economy with 32 inch pitch, 12 in first and 24 in business. The Transaero layout adds 114 seats to the current Air France SFO route record so this is a big leap forward for commercial aviation.

But when thinking about the A380 one cannot help but feel that Emirates is pushing Airbus, Engine Alliance and Rolls Royce into a corner to force a re-engined version sooner rather than later with the target fuel saving for any A380Neo being +8% in time for the 2013 A380 orders to be delivered as improved versions. Tim Clark, CEO of Emirates has already stated that his airline will replace all 65 current A380s with an improved version and order more if it is launched and that, make no mistake, is all that John Leahy will need to move the project forward.

The A380 is the most popular aircraft in the world with passengers and any version that is lighter and burns less fuel will be a world beater and should push the program forward with many more orders. Of course the side effect will be a far steeper residual value curve for current A380s than was envisaged at point of purchase and this might be a problem for A380s currently on order that are not due for delivery just before any new A380 production run. Would you want to finance one of those deliveries?

Dino D'Amore
By Dino D'Amore May 1, 2014 13:29
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