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Airbus halts sale of six A380s to Japan's Skymark

07/29/2014 | 09:44am US/Eastern
Woman checks in at a Skymark Airlines desk at Haneda airport in Tokyo

Airbus (>> AIRBUS GROUP) said on Tuesday it had revoked an order for six A380 superjumbos from Skymark Airlines (>> Skymark Airlines Inc), losing the only Japanese customer for its biggest jet after the discount carrier struggled to raise cash to pay installments.

Airbus (>> AIRBUS GROUP) said on Tuesday it had revoked an order for six A380 superjumbos from Skymark Airlines (>> Skymark Airlines Inc), losing the only Japanese customer for its biggest jet after the discount carrier struggled to raise cash to pay installments.

The collapse of the contract, worth over $2 billion when it was formally signed in 2011, triggered a public clash with the principal owner of Japan's third-largest airline, who accused the European planemaker of refusing to negotiate a compromise.

"We didn't get a chance to revise the contract. We never once formally sat down to discuss it," Skymark's chief executive and main investor, Shinichi Nishikubo, said.

"Airbus informed us in a fax to our office on Sunday."

Nishikubo, a former Internet entrepreneur who had promised to halve the price for business-class tickets by introducing the world's largest airliner, said Airbus had refused to consider reducing the number of jets or offering smaller ones.

He said Airbus had asked loss-making Skymark to become an affiliate of a major carrier as a condition for changing the contract, and demanded a cancellation fee when it refused.

In France, an Airbus spokesman denied this and said it had been negotiating with Skymark for months.

"Airbus had discussions with Skymark over the past few months and explored various solutions to ensure that Skymark was in a position to take delivery of the first two aircraft," the spokesman said by email.

"Those discussions are confidential but Airbus terminated the contract when Skymark made it clear that it was not going to perform its contractual obligations."

Skymark, which began flying in 1998, has been Japan's most successful discount carrier to date and a rare case of a small carrier in Japan able to survive without becoming an affiliate to either of Japan's leading airlines.

But losses incurred as it grappled to win market share from Japan's two dominant carriers, ANA Holdings (>> ANA Holdings Inc) and JAL, meant it was unable to convince lenders to finance the purchase of the six A380s.

Skymark is unlikely to recover 26 billion yen ($255 million) in installments it has paid to Airbus, Nishikubo said.

Shares in the 15-year-old company fell 13 percent.

For Airbus, it is the second unexpected order setback in as many months after Emirates canceled 70 A350s and comes amid concern about the number of cancellations so far this year, which have helped to push its shares down 13 percent in three months.

It also takes the edge off a successful run in Japan, a stronghold of its U.S. rival Boeing (>> The Boeing Company), after it won its first direct order last year from Japan Airlines (>> Japan Airlines Co Ltd).

Airbus has reported 225 cancellations since the start of the year, or about 130 after adjusting for conversions between models. Boeing has posted 54 cancellations, but both planemakers face signs that a recent aircraft ordering boom is slowing down.

REMARKETING CHALLENGE

Although significantly smaller than the Emirates A350 cancellation in value, the loss of the Skymark A380 order presents Airbus with a more immediate headache as two of the jets are virtually built and the market for them is thin.

Two aircraft are nearing completion, with one already fitted with its Rolls-Royce (>> Rolls-Royce Holding PLC) engines. Neither aircraft has had its cabin fitted, and Skymark has previously reported delays in getting equipment from French supplier Zodiac (>> ZODIAC AEROSPACE).

The first Skymark jet was due to have been delivered at the end of the year and the second soon afterwards. A380 aircraft are heavily customized and reselling the aircraft may take time.

Analysts said the last-minute cancellation could also squeeze near-term cash generation and put a negative spotlight on Airbus's objective of reaching breakeven on the A380 in 2015.

Airbus reports half-year results on Wednesday.

British engine maker Rolls-Royce (>> Rolls-Royce Holding PLC) said the termination of the Skymark order would shave 0.5 percent off its order book, a reduction of 351 million pounds ($595.6 million). Shares in Airbus fell 0.9 percent, while Rolls-Royce rose 0.6 percent.

The cancellation meanwhile adds to a growing list of challenges surrounding the A380. Orders for the plane are hanging in the balance elsewhere, according to aerospace sources, including 10 aircraft earmarked for Hong Kong Airlines.

Reuters reported this month the Hong Kong carrier no longer wanted the jets after an associated leasing company struck an expanded deal to buy 70 smaller A320-family aircraft.

Since March the order has not been attributed to Hong Kong Airlines, but to an "undisclosed" customer, raising questions over its status, according to Airbus data.

Other question marks surround planes due to Air Austral, Qantas (>> Qantas Airways Limited) and Virgin Atlantic. Airbus canceled an order for 5 A380s from bankrupt Indian airline Kingfisher in January.

Airbus has meanwhile been forced to redesign part of the A380's doors after leaks and noise, and faces a refusal by Qatar Airways to take its first three aircraft over what the airline describes as inadequate installation work on the cabin.

Although Airbus is confident of resolving the cabin problem, the clock is ticking towards a roughly 180-day contractual deadline for delivering the first plane that was originally due in May, according to one person familiar with the matter.

The airline has increased the stakes further by raising concerns over the doors, two people said. Airbus sought to allay concerns over the doors at this month's Farnborough Airshow and has said it expects its fix to be approved in the autumn.

(Editing by Edwina Gibbs and Tom Pfeiffer)

By Tim Kelly and Tim Hepher

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