Tuesday, July 29, 2014

Skymark's Airbus A380 order in jeopardy.

On July 29th, Airbus announced that they had terminated Skymark Airlines' (BC/SKY) order for six Airbus A380s, just hours after Japan's third largest airline reported it was locked in tough negotiations with the European manufacturer to amend the order.

The first aircraft has already completed its first flight (Skymark's first Airbus A380 completes maiden flight.) and was planned for delivery in October or November this year, though a 2.5-to-six-month delay was announced in June (Skymark's Airbus A380 to be delayed up to six months.) due to interior components not meeting required specifications and needing a redesign. Skymark originally planned to launch super-jumbo operations between Tokyo/Narita (NRT/RJAA) and New York/John F. Kennedy (JFK/KJFK) as early as December in an all-premium 394-seat layout, including 114 business class and 280 premium economy seats.
Airbus A380-841 F-WWSL/JA380A is now unlikely to be delivered to Skymark. (Photo: Airbus)

"Our economic and business environment has become severe due to the depreciated yen and harsh competition, and we have to change the direction of this project," President and CEO Shinichi Nishikubo said, revealing talks to amend the contract had been underway since April, but "have not been making good progress." Mr. Nishikubo told that Airbus is demanding that the carrier join a larger airline group as a condition for making any changes, and should they refuse, the European manufacturer would request "outrageous cancellation penalties beyond the realm of common sense."

NHK, Japan's national public broadcaster, reports the figure is around 70 billion JPY, though Skymark declined to comment. This may be in addition to the 26.5 billion JPY that the airline has already deposited; 7 billion JPY each for the first two machines and 12.5 billion JPY for the remaining four. For the six airframes, Skymark had calculated the acquisition cost to total 191.6 billion JPY as of May. With the first already complete except for the interior and their second almost there, Skymark would need to pay a hefty fine. These have been tailored to the airline's specifications, so it would be difficult for Airbus to re-sell them without an expensive modification, which would obviously be included in the penalty.

Mr. Nishikubo went on to say "Skymark has been contributing to the Japanese aviation industry throughout its history by offering reasonable airfares, resulting in the conservative or bureaucratic industry becoming very competitive. We take great pride that we have been independent without the help of any major carriers, which has enabled us to change the industry significantly. We definitely cannot accept their forceful way of negotiations that threatens our independent business management," adding "It is absolutely unthinkable for us to become a subsidiary of any major airline."
Skymark's President and CEO Shinichi Nishikubo at today's press conference. (Photo: Aviation Wire)

Hours later, the planemaker denied Skymark's claims and said in a press release "Following discussions with Skymark and in light of the airline's expressed intentions in respect of the A380, Airbus has in accordance with its contractual rights, notified Skymark that the purchase order for the six A380s signed in 2011 has been terminated," adding "Airbus is reserving all its rights and remedies," probably implying they are prepared to take legal action.

The airline revealed it had been requesting a six-to-12-month deferral for the first two examples and indefinitely postpone the remaining four, or convert some to the smaller A330, which entered service with Skymark in June (Skymark Airlines inaugurates Airbus A330 service.). After Airbus's announcement, Mr. Nishikubo responded "We were informed with a fax on Sunday that the contract had been terminated because we hadn't made pre-payments after April," adding "We haven't talked enough. Questions like what would happen to the pre-deposits or whether we have the option to convert the order to other types have not been answered. Official meetings haven't been held either." He regretted "It has been unilateral. And this has been leaked to local media (in Europe). It's against the rules."

Skymark reported a net loss of 1.8 billion JPY for FY2013, its first full-year loss since FY2008, amid increasing competition from LCCs, a depreciated JPY, and fuel costs remaining high, as well as costs related to bringing in the A330, the service entry of which was delayed four times, and the now jeopardized A380. Their foray into second and third-tier markets to avoid LCC competition is not bearing fruit so far (Skymark's new routes suffering low load factors.) as well. Its balance sheet has deteriorated, and having avoided borrowing any cash from banks since its birth, ironically, it does not have any rapport with financial institutions to receive support.

Simply put, Skymark just couldn't afford to take delivery of the behemoth. Although in line with their strategy to pursue the under-served market for affordable premium travel (Skymark posts loss but optimistic with strategy tweaks.), an all-Boeing 737 (until the A330s) domestic-only airline making a shot at the scheduled international long-haul market with the world's largest passenger aircraft in an unprecedented all-premium layout without any partners was way too ambitious. However, Mr. Nishikubo reiterated they haven't given up on international dreams, saying "Our A330s can be deployed on international routes as well. New York is not possible, but we would certainly like to consider Bangkok, Hawaii, and Singapore. We want to push (the government) for international slots from Haneda."

With cash reserves dwindling and the domestic market becoming even more competitive, and notwithstanding Airbus's expected lawsuit against the airline, can Skymark manage to get itself back on a profitable track?

Reference: Aviation Wire, July 29th. (in Japanese)
Reference: Skymark Airlines, July 29th. (PDF; in Japanese)
Reference: Bloomberg Japan, July 29th. (in Japanese)
Reference: Centre for Aviation, July 29th. (in English)
Reference: Nikkei Shimbun, July 29th. (in Japanese)

*Edited/updated on July 30th.

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