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Haunted by old pledges, Airbus aims to boost A340 value

An Airbus A340-300 takes part in a flying display during the 48th Paris Air Show at the Le Bourget airport near Paris, June 17, 2009. REUTER
An Airbus A340-300 takes part in a flying display during the 48th Paris Air Show at the Le Bourget airport near Paris, June 17, 2009. REUTER

PARIS (Reuters) - Airbus and its engine makers have acted to try to shore up the value of second-hand A340 aircraft as the European planemaker tries to reduce its financial exposure to depressed market prices of an aircraft that it no longer produces.

Airbus has told bankers, airlines and other owners of the aircraft that it is working on plans to increase the maximum capacity by 8 percent to 475 seats in a bid to make it more attractive to airlines looking to replace Boeing 747-400s.

Britain's Rolls-Royce is also fine-tuning engine service contracts so that airlines can maintain the A340's four engines for a similar cost to servicing the two larger General Electric engines on the rival Boeing 777, Airbus said.

The move comes after parent EADS said in its 2012 annual report that Airbus was "currently engaged in taking mitigation action to reduce the impact of asset value guarantees falling due in the coming years relating to A340s in particular".

Airbus stopped making the A340 in 2011 after improvements in engine technology caused airlines to switch to two-engined models such as the Boeing 777 and, in future, the A350.

But it has been left with a financial exposure to the aircraft after issuing guarantees underpinning its resale price when striking deals to sell it during a period of weak demand.

Additionally, it faces potential losses on deals to buy back old A340s as it sells new aircraft of other types, people familiar with the matter said.

"We share a motivation with the finance community to keep the A340 in service for a good while," said Andreas Hermann, Vice President Freighters and A340 Asset Management at Airbus.

As of December 31, 2012, EADS had 1.046 billion euros ($1.43 billion) of asset value guarantees outstanding, excluding 333 million euros where the risk of execution was considered to be remote.

It says the risk covers just part of the residual value of the aircraft and is included in total EADS provisions for asset value risks of 712 million euros, as of December 31 last year.

Airbus does not break out the guarantees by plane type but analysts say the A340 makes up a significant share.

Rolls-Royce reported gross financial exposure from such support of 569 million pounds ($929 million)at the end of 2012, but does not break this down by aircraft or the type of instrument used.

The British engine manufacturer provides powerplants for later models of A340 and has been criticized for being inflexible in its service contracts. The company has told A340 investors that it would address this as part of efforts to boost interest in the A340, according to Airline Economics.

Industry sources say airlines have begun breaking up old A340s because their parts are sometimes worth more than the cost of scrapping the plane. Some have been trying to sell them because of the perceived inefficiency of running four engines instead of the now-standard two engines on long trips.

Some 25 second-hand A340s are currently posted for sale.

Airbus officials urged a special meeting of A340 owners hosted this week by Airline Economics magazine to take another look at the aircraft's value and argued it could hold its own as a replacement for older Boeing 747-400s.

They said the combination of low prices on the second-hand market and reduced maintenance charges would make the aircraft attractive against the 777, whose arrival combined with high oil prices is credited with driving the A340 out of production.

Boeing officials rejected the claim, saying Airbus would be able to resume production if the jet's economics made sense.

Airbus said it is working to get the plane certified for 475 seats in all-economy seating, compared with the current approved capacity of 440 seats in the largest version, in order to address demand from charter operators.

This would involve 18-inch-wide seats laid out eight across in a single economy class or else 17-inch-wide seats in a tighter nine-abreast layout in the main economy cabin if airlines also wanted to reserve some space for a business class section.

Airbus has recently been running a campaign to establish a minimum standard seat width of 18 inches in economy class.

($1 = 0.7323 euros)

($1 = 0.6127 British pounds)

(Reporting by Tim Hepher; Editing by Sonya Hepinstall and Anthony Barker)

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