UPDATE 2-Airbus reassures on jet market, gets set for Dassault sale

Wed Jul 30, 2014 9:16am EDT

(Updates throughout after conference call, refiled to remove repetitious wording in second paragraph)

* Airbus Group says cancellations linked to overbooking

* CEO says aerospace cycle not heading lower

* CEO sees net increase in order backlog in 2014

* Airbus says focusing on Dassault stake sale

* Shares rise 4 percent

By Tim Hepher

PARIS, July 30 (Reuters) - Airbus Group moved to allay concerns over a wave of order cancellations on Wednesday, sparking a rally in its shares helped by better than expected half-year results.

Chief Executive Tom Enders said global aircraft markets remained strong despite worries about an overheating in Southeast Asia and a number of order cancellations which have concerned investors since this month's Farnborough Airshow.

"We are not approaching the end of the cycle or a precipice," Enders said. "The commercial aircraft market is still very strong - certain regional weak spots notwithstanding, but we can deal with that".

Lifting the veil on a growing but little-publicised part of the $100 billion market, Enders said about half of the underlying cancellations seen so far this year resulted from conversions to orders for different aircraft and 'overbooking'.

Most of the cancellations involve narrowbody jets, the busiest part of the market where Airbus and rival Boeing are offering upgraded models such as the Airbus A320neo.

Just as most airlines overbook flights in anticipation of no-shows, planemakers sell more narrowbody models than they can make, knowing that some in the cut-throat airline industry will not take delivery.

That means they have to juggle orders in the year of delivery, pushing the less robust orders out to later dates.

Now that the new A320 is close to being delivered from 2015, buyers of the older model are being encouraged to take the new one instead, Enders said. This triggers a cancellation offset by a new order. Of the 225 cancellations in the first half, 65 happened in this way.

Enders said he expected to see more such cancellations and predicted Boeing would see the same issue when it gets close to introducing the 737 MAX, its own upgraded shorthaul jet.

But he denied this represented a downturn in the market.

The reshuffle nonetheless marks a change of policy by Airbus whose sales chief had said "virtually nothing" would be sold at the expense of existing business when launching the A320neo.

Still, in a change of emphasis, Airbus toughened its target for 2014 orders to a "net" total after cancellations, rather than aiming for a gross figure that ignores such conversions.

Analysts say Airbus appeared to have soothed nerves about demand for now, but could face a bigger challenge in plugging a gap between old and new models when it comes to the upgrade of the larger A330, launched at this month's Farnborough Airshow.

Even then, some bankers insist the jet market has peaked.

Airbus shares were up 4.25 percent at 45.56 euros by 1258 GMT, having fallen around 8 percent since the Farnborough show on fears that the commercial aerospace business cycle may be weakening or that Airbus may have to slow A330 production.

Enders predicted a "little bit of a dip" in record A330 output of 10 jets a month during the 2015-2017 changeover.

"Airbus has done a good job filling orders in the production gap. They will have a seamless transition on the A320 but the A330 will be much harder," said Sash Tusa, aerospace and defence analyst at UK-based Edison Investment Research.

BETTER RESULTS

First-half results that included a 10 percent increase in core operating profit and 6 percent rise in revenue led by airplane and helicopter sales made the company's restated guidance for 2014 look "comfortably conservative," Tusa said.

Airbus said it was confident of finding buyers for two A380s left without homes after it revoked a sale to Japan's Skymark Airlines because of the airline's inability to pay.

But it declined to say what would happen to 10 A380s from Hong Kong Airlines which industry sources say are in the process of being cancelled, except to say that not all A380s sold would be delivered.

DASSAULT

Airbus meanwhile gave the strongest signal yet that it is gearing up to sell its 46 percent stake in Dassault Aviation , ending an increasingly uncomfortable arrangement to warehouse the stake on behalf of the French government.

It inherited the stake from former state-owned Aerospatiale, along with a Paris headquarters overlooking a racecourse - whose recent sale also boosted Airbus's half-year earnings.

Activist hedge fund TCI last year called the holding in Dassault "a poor use of capital" and urged Airbus to sell it due to a lack of synergies. Dassault makes the Rafale combat jet, a rival to the Airbus-affiliated Eurofighter Typhoon, as well as Falcon business jets and the stake has a current market value of 5 billion euros.

Enders said the sale was now "not a question of if but ... when," but declined to comment when asked about the timing.

People familiar with the matter said Airbus was in advanced talks with the French state and Dassault family, whose holding owns 50.6 percent, and a deal could take shape later this year.

Scenarios may include selling part of the stake to the Dassault family, placing all or part of it in the market or finding an investor interested in Dassault's profitable Falcon jet business, or a combination of these, Paris analysts said.

The French state has a right of 'first offer' over any sale. (Editing by James Regan and Greg Mahlich)

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