How Airbus May Put a Japanese Budget Airline Out of Business

Nearly four years ago, Skymark Airlines (9204:JP), a Japanese budget airline with a meager but profitable domestic business, decided to buy the world’s largest airplane, the Airbus A380, with grand ambitions of becoming an international, premium-class player.

Skymark’s A380 order was ridiculed by industry observers before the ink had even dried on the 2011 contract—and may now prove to be the company’s demise. “They had rocks in their heads when they ordered it,” a Credit Suisse Group analyst told Bloomberg News this week.

On Tuesday, Airbus (EAD:FP) canceled the order, which had expanded to six A380s, amid negotiations for delivery that have turned acrimonious, according to media reports. The first two A380s have been built, and Airbus apparently grew concerned about Skymark’s ability to pay for the double-decker jets, which have a list price of $414.4 million each, making it the most expensive commercial aircraft in service. Airbus wanted to quash the order before interiors customized to Skymark’s specifications were installed, which would make finding a new customer difficult.

Airbus is likely to retain the $260 million Skymark has paid so far and could seek additional penalties of 70 billion yen ($681 million), according to Japanese media reports. As a result, Skymark shares have plunged, and the airline warned today there is uncertainty about its ability to remain a “going concern” given its potential exposure to Airbus. The airline also reported a quarterly loss today and said it may borrow money and quit flying unprofitable routes.

“We of course understand that Airbus puts [its] first priority on delivering the aircraft to us in accordance with the purchase agreement and collecting the bill,” Skymark President Shinichi Nishikubo said in a statement (pdf) after Airbus announced the cancellation. That suggested the manufacturer was seeking radical changes in the airline’s business plan and ownership. “However, we definitely cannot accept their forceful way of negotiation threatening our independent business management,” Nishikubo said.

Airbus press officials did not respond to e-mails today, July 31, seeking comment. An Airbus spokesman told Bloomberg News today that the company doesn’t comment on talks with customers.

In late 2012, the Centre for Aviation, an aviation research firm in Australia, published a detailed analysis of Skymark’s “quixotic order” and why the scheme was doomed to fail, from its plan to have the fewest seats of any A380 operator in the world—only 394—to its lack of airline partners to provide feed traffic. The airline had planned to begin its initial A380 service from Tokyo to New York in late 2014.

The spacious cabin seating plan meant that Skymark would have needed to command extremely high fares for each seat, on a par with, or higher than, its two larger domestic rivals, All Nippon Airways (9202:JP) and Japan Airlines (9201:JP), both of which offer premium-class services within global airline alliances. No major U.S. or Japanese airline has bought the A380, considering it too large for their networks.

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How Airbus May Put a Japanese Budget Airline Out of Business
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