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Airbus grounded: Emirates cancels $16 billion order

June 11, 2014, Toulouse, Fra. - 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.


June 11, 2014
By Reuters

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 per cent 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 per cent at 52.11 euros and Rolls-Royce, the sole engine
supplier for the A350, was down 2.13 per cent 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 commercially
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.

 

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 per cent 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 per cent on the year before.