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Fri 12 Nov 2010 02:44 PM

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Airbus, Rolls-Royce riled by engine blowout grounding A380 jets

Fallout from engine explosion, threatens to sabotage gains that Airbus made on A380 this year

Airbus, Rolls-Royce riled by engine blowout grounding A380 jets
LOW PROFIT: Growth in underlying profit will be “slightly lower” than the 4 percent to 5 percent that Rolls-Royce had forecast in July

Rolls-Royce Group said it will miss its 2010 profit target and Airbus SAS said deliveries of its A380 may take a hit next year as the fallout from an engine blowout on the flagship aircraft ripples through the industry.

Growth in underlying profit will be “slightly lower” than the 4 percent to 5 percent that London based Rolls-Royce had forecast in July, according to a statement today. Airbus chief executive officer Tom Enders said providing existing customers with new engines and spare parts will take priority, which may delay the delivery schedule of the passenger jet next year.

The fallout from the engine explosion, which Rolls-Royce said was caused by an oil fire, threatens to sabotage the gains that Airbus had made on the A380 this year.

Emirates, the largest buyer of A380s with 90 on order, said Rolls-Royce must make sure to prevent a similar incident as the carrier frets about the public image of the world’s largest passenger jet.

Nick Cunningham, an analyst at Agency Partners in London said: “Progress on the A380 is very material to profitability recovery at Airbus.”

He added: “You really need to have the A380 settle down and start working normally and gradually build up the production rate.”

Qantas Airways grounded its fleet of six A380s after the blowout that occurred on a flight on November 4 from Singapore to Sydney. The aircraft returned to Singapore with a charred engine and a wing damaged by shrapnel hurled from the turbine.

None of the 466 people on board the plane were injured.

Qantas expects to resume flying its fleet of six A380s within “days not weeks,” said Simon Rushton, a spokesman for the Sydney based carrier. Rolls-Royce CEO John Rose said his company is working with Airbus, Trent 900 customers as well as the regulators to “progressively to bring the whole fleet back into service.”

The blowout was caused by the failure of a “specific component in the turbine,” Rolls-Royce said today. That failure caused an oil fire, which then led to the release of a turbine disc.

The company said it will work with customers to replace a faulty module as well as continue inspections.

Rolls-Royce rose as much as 16.5 pence, or 2.8 percent, to 600.5 pence in London, after falling as much as 3.2 percent in earlier trading. European Aeronautic, Defense & Space Co, the Airbus parent company, fell as much as 64 cents, or 3.4 percent, to 18.36 euros in Paris.

The company reported earnings today.

“The market cap came down by a billion pounds” since the engine failure, said Edward Stacey, an analyst at Execution Noble, who advises investors sell Rolls-Royce shares. “This statement seems to imply the financial impact of the A380 problem is in the tens of millions of pounds.”

Airbus has streamlined production and doubled deliveries to as many as 22 A380s this year.

Airbus has 234 orders from 17 customers for the double-decker jet, and Japanese budget carrier Skymark Airlines said today it plans to buy A380s, as the first Japanese customer for the jet. EADS said today that the A380 program continues to “significantly” weigh on profit.

China Southern Airlines Co and Korean Air Lines Co are the only new customers slated to receive A380s next year, with the remainder going to the five existing operators of the aircraft.

The A380 comes with two engine options, and Emirates and China Southern have chosen the alternative Engine Alliance engine by General Electric Co and Pratt & Whitney.

Lufthansa plans to receive four more A380s next year, and the Qantas incident has had no consequences for the timetable, spokesman Boris Ogursky said by telephone today. The German carrier switched one engine on an A380 after the Qantas incident as a precautionary measure.

Singapore Airlines also switched some engines and temporarily grounded some A380s.

Enders told journalists on a call: ‘Engines are not a commodity, they are very scarce.” The company and its suppliers will do “whatever is necessary” to assure the safety of the aircraft, the CEO said in a Bloomberg Television interview.

Singapore, the first carrier to fly the A380, has eight of the aircraft remaining on firm order, with the last scheduled for delivery before the end of the next financial year at the end of March 2012, said Nicholas Ionides, a spokesman.

Air France, the only other European carrier besides Lufthansa to operate the A380 to date, uses Engine Alliance engines. There have been no reported issues with that type following the Qantas incident.

Rolls-Royce could face a hit to its reputation should the investigations bring to light any design flaw with the Trent 900, Fitch Ratings said on November 8. Emirates President Tim Clark said in a November 10 interview that the incident is a “wake-up call” for the engine maker, which must stamp out any possibility of a repeat to avoid tarnishing the A380’s image.

“What they need to do is what they are doing: identify the real cause, work with the regulatory bodies and the airlines to prove that they are doing what’s required to get everything back on pace and the reputation back to where it was,” said Jason Adams, an analyst at Nomura International, in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua.

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