Wednesday, June 11, 2014

Emirates Cancels Airbus A350 Order: Jets Deal Valued at $21.6 Billion at Current List Prices

The Wall Street Journal
By Robert Wall
Updated June 11, 2014 5:46 a.m. ET

Airbus Group NV on Wednesday suffered one of the industry's largest plane cancellations when Emirates Airline decided to walk away from a deal for 70 A350 long-range jets as the carrier reviews fleet plans.

Emirates, the second largest buyer of the jet, won't take 50 A350-900s, the model currently in flight testing, and 20 larger A350-1000s, Airbus said in a statement. The move represents a 9% hit to Airbus's order backlog for its newest plane.

The deal with Emirates, whose stamp of approval for long-range jets carries weight across the industry, has a combined value of $21.6 billion at current list prices. When the order was placed in 2007 it had a list price value of $16 billion, though plane makers typically offer particularly large discounts to launch customers.

"The contract which we signed in 2007 for 70 A350 aircraft has lapsed. We are reviewing our fleet requirements," a spokesman for Emirates said. Emirates increasingly is focused on fielding larger planes as it worries Dubai airport capacity could be an impediment to growth.

"It is not good news commercially, but it certainly has no impact financially," said Airbus' chief commercial plane salesman John Leahy. Production slots vacated by Emirates would be filled, he said, with "already a queue of people who have expressed interest."

The market for additional twin-aisle planes tops 4,000 aircraft over the next two decades. "There is a very big market going forward," Mr. Leahy said.

Emirates President Tim Clark had said previously the A350 would likely be a good airplane for many airlines, though it would only have a niche role in his fleet.

"Although a cancellation by a blue chip airline is hardly a positive, when put in perspective versus the remaining A350 backlog and the aggregate Airbus backlog it's not the end of the world," said RBC Capital analyst Robert Stallard.

Emirates, the largest airline by international traffic, is the biggest buyer of Boeing Co. 777s and Airbus A380 superjumbos. The airline in November agreed to boost its A380 order commitment to 140 jets.

Airbus had booked 812 A350 orders through May, including the deal from Emirates. Emirates was the second-largest customer for the A350 along with Singapore Airlines. Only Qatar Airways Ltd., the lead customer for the plane, has bought more. Qatar, which is buying 80 A350s, is due to receive its first this year.

Emirates and Qatar have pursued almost identical strategies in building their networks around their respective hubs in Dubai and Doha. But the two biggest Middle Eastern airlines have started to diverge on strategy as Emirates builds its fleet around the Airbus A380 and Boeing 777 and Qatar opts for the smaller 787 and A350.

Emirates' A350s were due for delivery from 2019, giving Airbus time to fill the slots. Demand for the A350 has been strong so prices the Toulouse-based plane maker can achieve from a new buyer may be higher than Emirates committed to pay.

Pricing for the A350 has been improving, Mr. Leahy said. "It is obviously higher than our launch pricing."

The order cancellation also impacts engine maker Rolls-Royce Holdings  PLC, which said Wednesday its order book would fall by about 3.5% or £2.6 billion ($4.4 billion) as a result of the Emirates news.

"While disappointed with this decision, we are confident that the delivery slots which start towards the end of this decade vacated by Emirates will be taken up by other airlines," the company said in a statement.

The cancellation means Rolls-Royce has no engines on order with one of the world's biggest buyers of jets. That could change if Airbus heeds Mr. Clark's call to re-engine its A380 superjumbo. The Emirates boss has said he would buy the plane, or A380neo, as it should deliver double-digit efficiency gains with Rolls-Royce engines.

"At the present time we are not planning to do it," Mr. Leahy said of the A380 upgrade. The request by its largest A380 customer does cause the plane maker to study the option, though, he said.

—Rory Jones and Rory Gallivan contributed to this article.


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