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Emirates cancels 70-plane A350 order in blow to Airbus, Rolls

By Cyril Altmeyer and Tim Hepher

TOULOUSE (Reuters) - Airbus suffered an unexpected reversal for its newest aircraft on Wednesday when Dubai's Emirates scrapped a $16 billion order for the A350, hitting shares in the European planemaker and engine firm Rolls-Royce.

The surprise decision by Airbus's largest customer to cancel all 70 A350s on order comes months before the long-haul jet is due to enter service and removes 9 percent of the order backlog for a plane which took eight years and $15 billion to develop.

Airbus said it was not worried about replacing the lost orders, with its top salesman saying some airlines had immediately expressed interest in buying some of the Emirates aircraft, the first of which was due to be delivered in 2019.

But shares fell as analysts told investors the move raised questions over aircraft demand, whether for the A350 itself or implying a more general wobble of confidence that could also hurt Airbus's main rival, the U.S. planemaker Boeing.

Shares in Airbus closed down 3.1 percent at 52.21 euros and Rolls-Royce, the sole engine supplier for the A350, fell 5.5 percent to 10.17 pounds.

Airbus acknowledged it was disappointed with losing the A350's joint second-largest customer, but said it did not see any financial impact and that flight tests were on track.

"It is not good news commercially but not bad news financially," Airbus sales chief John Leahy told reporters, adding the rival Boeing 787 had suffered more cancellations.

"There is certainly going to be no hole in production," Leahy said.

The A350 is Europe's first jetliner built mainly from advanced new materials and was designed to compete with two types of aircraft from Boeing - the lightweight mid-sized 787 Dreamliner and the larger but older 777 mini-jumbo.

Emirates was among the first buyers for the A350 when it placed the order for 50 A350-900s and 20 A350-1000s in 2007.

The deal was worth around $16 billion according to 2007 list prices, and would be worth close to $22 billion if placed now, although launch customers typically negotiate large discounts.

FLEET REVIEW

Both Airbus and Emirates said the decision to cancel the A350 resulted from a review of Emirates' fleet requirements. A spokesman for the airline said the order had "lapsed".

The decision to scrap the order, which may be the industry's largest single cancellation, demonstrates the leverage of Gulf carriers over planemakers. In 2000, Emirates cancelled an order for Airbus A340 aircraft.

Emirates Chief Executive Tim Clark has in the past criticized Airbus over delays to the A350, and then again when Airbus changed the design of the largest A350 model in 2011. In 2012, Clark told Aviation Week the order was "in limbo".

The first A350 is still due to be delivered to Qatar Airways in the fourth quarter of this year, Airbus said.

Emirates and Qatar Airways are part of a trio of Gulf carriers, alongside Abu Dhabi's Etihad, that have secured large fleets of wide-body jets to support the growth of new hubs.

Nick Cunningham of UK-based Agency Partners said the latest move posed questions including whether Middle Eastern carriers have over-expanded or are expecting lower growth than before.

Airbus and Boeing have dismissed warnings of a "bubble" in aircraft orders, which have mostly defied the economic downturn.

"We do not see this cancellation as a significant change in the outlook for commercial aircraft demand, but more about a rationalization of fleet types at Emirates," said Bernstein Research analyst Douglas Harned in a note. "Emirates growth plans are based on a very long-term strategy."

Emirates placed a record provisional order in November for 150 of a revamped 350 to 406-seat version of the Boeing 777 called 777X, which Boeing plans to introduce from mid-2020.

At the same time, it increased its order for Airbus's even larger 525-seat A380 superjumbo, consolidating its position as the biggest customer for the world's largest passenger jet.

The combined moves leave the Gulf heavyweight splitting its future growth requirements between competing suppliers, with Boeing providing its twin-engined long-haul needs and Airbus filling superjumbo capacity through total orders for 140 A380s.

However, the decision to cancel the A350 may also increase pressure on Airbus to revamp its largest model, analysts said.

Emirates has been pushing for months for Airbus to upgrade the A380 superjumbo with a more efficient engine, a solution favoured by Rolls-Royce which is among the companies most directly affected by the airline's decision on the A350.

Emirates had reserved deliveries more than a decade after it placed the order, and Airbus may now be able to resell these at better prices than those available for launch customers.

Still, the cancellation cast a shadow over an annual media event designed partly to showcase its wide-body strategy.

Airbus said it continued to work on a proposal to update the smaller A330 jet with new engines, but confirmed it may not be ready to launch it at the Farnborough Airshow in July, the industry's largest annual event. A decision on whether to revamp the A380 will take more time.

Rolls-Royce, which could be involved in both projects, said the Emirates A350 decision would result in a 2.6 billion-pound ($4.4 billion) hit to its order book.

(Additional reporting by James Regan in Paris, Victoria Bryan in Frankfurt, Sarah Young in London and Nadia Saleem in Dubai; Editing by Christopher Cushing and Greg Mahlich)

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