January 16, 2015 / 8:54 PM / 3 years ago

Exclusive: GE finances first A350 powered by rival Rolls-Royce

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The General Electric logo is seen in a Sears store in Schaumburg, Illinois, September 8, 2014.Jim Young

PARIS (Reuters) - When the Airbus (AIR.PA) A350 jet made its commercial debut with Qatar Airways this week, the event marked a milestone for engine supplier Rolls-Royce (RR.L), but slipping unnoticed under the radar with financing was its arch-rival General Electric (GE.N).

Although powered by the latest generation of Rolls-Royce (RR.L) engines, the first of a new series of jets on which the company has bet its civil business is owned by GE's aircraft leasing arm GECAS, Reuters has learned.

The rare decision to invest in rival technology highlights the complexities of keeping ahead in a highly concentrated aviation industry, with GECAS seen as keen to diversify its portfolio even though its parent GE is perceived in the industry as more and more aligned with Airbus rival Boeing (BA.N).

The deal also completes a series of twists in the history of Airbus's newest jet: a journey that insiders say has helped to reshape transatlantic aerospace competition.

In this case, the world's largest lessor agreed to buy the aircraft from the airline immediately on delivery and rent it back, a routine type of financing called sale-and-leaseback.

It is not the first aircraft equipped with rival engines to end up on GECAS's books but such deals are usually kept low key and seldom if ever happen on a high-profile debut of a new jet.

The first A350 was delivered to Qatar Airways in a lavish ceremony last month in which Rolls-Royce had a starring role, but GE's involvement in the financing was not mentioned.

The head of the airline confirmed the deal to Reuters.

"We have had much interest in taking Qatar Airways' airplanes and leasing them back to us. The deal with GECAS was the best for the airline and so we concluded with them," Qatar Airways CEO Akbar Al Baker said after the first revenue flight.

Rolls and GE compete fiercely for engine sales and the A350's Trent XWB represents half the UK firm's civil order book.

Industry sources say there could be several reasons for GE getting involved in the A350. Qatar has a large fleet of GE-powered Boeing 777s and the relationship is crucial, both in engines and financing.

Yet the move highlights a delicate balancing act as GECAS seeks to diversify assets to reduce risk, even as its parent GE forges ever closer ties with Boeing.

Such juggling is becoming more difficult as the aerospace industry becomes increasingly polarized, but analysts say the pressure to keep leasing portfolios balanced will keep growing.

"If you want a successful wide-body leasing strategy you have no option but to take aircraft with GE and Rolls-Royce engines," said Rob Morris, head of consultancy at Ascend.

Just Frenemies

Airlines prefer to have a choice of engine supplier and engine makers have historically supported competing aircraft manufacturers in a convoluted world of industrial "frenemies".

But designing big twinjets is increasingly a game played between Boeing and GE on one hand and Airbus and Rolls-Royce on the other as engine firms cut exclusive deals to pay huge costs.

At the heart of this realignment is the story of the A350.

In 2004, faced with what was to become the Boeing 787, Airbus's first response was to offer new GE engines on its A330.

But customers including Al Baker rejected a "quick fix" and urged Airbus to invest in a newer family that would also offer an alternative to the larger Boeing 777. [ID:nL6N0U50HH]

GE and Airbus disagreed, however, over whether both markets could be served by one family of planes and engines.

Airbus's subsequent decision to build an all-new family led to a parting of ways between Airbus and GE on the A350 project and opened the door to Rolls-Royce as sole engine supplier.

"That somewhat polluted the relationship between Airbus and GE," said a person who closely monitored the negotiations.

A U-turn by Airbus last year only served to deepen the new alignment: Airbus now planned to upgrade the A330 anyway, but this time with Rolls instead of the original partner, GE.

This year could see Airbus upgrading its A380 superjumbo with engines from Rolls-Royce, bringing further polarization.

"It's a bad thing: it goes against globalization that helps drive the business," Teal Group analyst Richard Aboulafia said.

GE denied any cooling of ties with Airbus, saying it remains a major engine supplier for best-selling A320s through Franco-U.S. venture CFM (SAF.PA).

"CFM is far and away Airbus's largest engine supplier across its current and future aircraft models. It's a huge relationship," a spokesman said.

Rolls-Royce and GECAS declined to comment.

(This version of the story has been refiled to remove formatting error, adds GECAS declined to comment)

Additional reporting by Victoria Bryan; Editing by Mark Potter

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