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

TOULOUSE Wed Jun 11, 2014 7:49pm IST

The logo of Airbus Group, Europe's largest aerospace group, is pictured in front of the company headquarters building in Ottobrunn, near Munich February 26, 2014. REUTERS/Michaela Rehle/Files

The logo of Airbus Group, Europe's largest aerospace group, is pictured in front of the company headquarters building in Ottobrunn, near Munich February 26, 2014.

Credit: Reuters/Michaela Rehle/Files

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TOULOUSE (Reuters) - Airbus suffered what could be the jet industry's worst cancellation and a setback to its newest aircraft on Wednesday when Dubai's Emirates scrapped a $16 billion order for the A350, hitting shares in the 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 the jet, 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 analysts said the move raised questions over new aircraft demand, whether for the A350 itself or a more general wobble of confidence in a previously solid market that could also hit Airbus's main rival, Boeing.

At 1230 GMT shares in Airbus were down 3.25 percent at 52.11 euros and Rolls-Royce, the sole engine supplier for the A350, was down 2.13 percent to 10.53 pounds.

Espirito Santo analyst Edward Stacey said that the A350 programme was a large part of Rolls-Royce’s civil aerospace business and would account for about half of all of that business’s new engine shipments by 2020.

"The Emirates cancellation on its own doesn’t really do anything to the financial numbers for Rolls-Royce but the shares are down as people are wondering if Emirates will be the last to cancel," he said.

Airbus acknowledged it was disappointed with the loss of the joint second-largest customer for its prestigious new model, but said it did not see any financial impact.

"It is not good news commmercially but not bad news financially," Airbus sales chief John Leahy told reporters in Toulouse, adding that Boeing had suffered more cancellations for its 787 Dreamliner.

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

'NO ORDER BUBBLE'

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.

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

"Emirates was one of the original customers interested in the programme but always seemed rather critical of the aircraft specifications," Cantor Fitzgerald Europe said in a note.

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

Airbus and Boeing have dismissed warnings of a 'bubble' in commercial aircraft orders, which remained robust throughout the financial crisis, but some industry bankers say airlines have ordered too many aircraft despite growth in emerging markets.

Both Airbus and Emirates said the decision to cancel the A350 resulted from a review of Emirates' fleet requirements, but the airline did not give specific reasons.

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 pattern of announcements leaves the Gulf heavyweight balancing its future growth requirements between the transatlantic rivals, with Boeing providing its twin-engined long-haul needs and Airbus filling superjumbo capacity through total orders for 140 A380s.

Emirates is expected to phase out other Airbus jets.

But 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.

The carrier's chief executive, Tim Clark, said earlier this month that a revamped A380 could have a 10-12 percent performance improvement and that "we are hoping to move on that pretty soon".

Leahy said Airbus was considering the request but declined to comment on the timing for a decision, which is widely expected to come well after a separate discussion over whether to upgrade its smaller, older wide-body jet, the A330.

That decision is expected later this year but may not come in time for next month's Farnborough Airshow, Leahy confirmed.

Rolls-Royce, which could be involved in both projects, said the Emirates A350 decision would meanwhile result in a 2.6 billion-pound ($4.4 billion) hit to its order book, which for civil aerospace stood at 60.3 billion at the end of 2013, up 22 percent on the year before.

(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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