LONDON -- The U.K. government's announcement this morning that it will loan BAE Systems (BTASY) 530 million pounds ($848 million) to help in the development of Airbus' proposed super-jumbo plane is a clear sign the venture is progressing. However, there are still several issues that must be addressed before the A3XX project officially gets off the ground.
The super jumbo is being developed by the Airbus consortium, which is made up of BAE,
. If completed, this new plane would hold over 550 people on two decks and there would be room for shops and exercise areas.
Needless to say, building such a plane won't be cheap. The estimated cost is between 10 billion to 12 billion pounds. One-third of that amount can be loaned by the governments of the respective partners to the members of the consortium. This "launch aid," as it is known, is a form of development funding that is permissible under
World Trade Organization
rules. BAE, formerly known as
, will use the money to help cover the costs of developing the wings for the super jumbo and the amount effectively covers the initial research and development.
The market initially welcomed the news of this money, with the shares surging 6.7%. However, the shares quickly fell back and languished below the open price for most of the day. The shares staged a modest closing up 1 3/4, or 0.6%, at 282. At noon, New York-traded ADRs were up 1/4, or 1.4%, at 18 1/2.
The reason for the market's reconsideration of the news was twofold. First, launch aid is not a particularly effective form of funding. In general, launch aid is money that is nonrefundable if the venture proves a failure. But if the venture is a commercial success, the capital repayment plan is fairly costly because the government normally charges higher interest than the capital markets might.
But the more important reason for the fall in the shares was the realization that this announcement did not constitute the official launch of the A3XX project. "This is merely another step in the process," says Colin Fell, analyst at
Dresdner Kleinwort Benson
. Fell has a buy rating on BAE and his bank acts as the broker for the company.
Airbus hopes to launch the program to develop the A3XX later this year, but won't go ahead with the project unless several criteria have been met.
Airbus says the new technologies needed to keep such a large aircraft in the sky have to be cost-effective and that the program itself must achieve an internal rate of return of 20%.
In December, Airbus put out a press release saying: "The Supervisory Board expresses deep satisfaction with the progress made and has reached the conclusion that the technical specifications of the A3XX family have been achieved according to airline requirements. The economical viability has also been confirmed." This suggests that Airbus has resolved those two issues to its satisfaction.
However, Airbus also says that it needs to get on board the airlines before it launches the project. It wants clear indications from the major airlines about "quantity in demand and timing."
is to be believed, this won't happen anytime soon. Boeing has done its best to criticize the whole super-jumbo project, arguing that airlines just don't want this size of aircraft. Curiously, Boeing doesn't believe this extends to its own customers, as the U.S. manufacturer is currently working on the "stretch" version of its 747, which will hold 500 passengers.
While the level of demand remains to be seen, what is certain is that this super jumbo won't be taking to the skies anytime soon unless Airbus gets these commitments from the airlines.