Airbus halts sale of six A380s to Japan's Skymark

* Public row between Airbus and only Japanese A380 buyer

* Skymark says Airbus did not give it a chance to negotiate

* Airbus says Skymark was unable to perform on contract

* Cancellation adds to list of challenges facing A380 (Adds analyst quotes)

By Tim Kelly and Tim Hepher

TOKYO/PARIS, July 29 (Reuters) - Airbus said on Tuesday it had revoked an order for six A380 superjumbos from Skymark Airlines, losing the only Japanese customer for its biggest jet after the discount carrier struggled to raise cash to pay instalments.

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 ANA Holdings (Other OTC: ALNPY - news) and JAL meant it was unable to convince lenders that they should finance the purchase of the six A380s.

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

Shares (Frankfurt: DI6.F - news) in the 15-year-old company fell 13 percent.

For Airbus it is the second airliner order setback in as many months after Emirates cancelled 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 the past three months.

It also takes the edge off a successful run in Japan, a market stronghold of its U.S. rival Boeing (NYSE: BA - news) , after it won its first direct order last year from Japan Airlines.

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 engines. Neither aircraft has had its cabin fitted, and Skymark has previously reported delays in getting equipment from French supplier Zodiac (Other OTC: ZODFF - news) .

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 customised and reselling the aircraft may take time.

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

"It is not a huge surprise. It always looked like a slightly odd order when it was first announced," said Sash Tusa, aerospace analyst at Edison Investment Research in London.

"But it is clearly a disappointment for Airbus and the real problem is that it got this far, after the start of final assembly, which is going to cost Airbus a significant amount."

Backlog pressure could make it harder for Airbus to keep output of the A380 stable, he said, barring a new buyer for the jets. Possible candidates included British Airways and Asiana.

Airbus reports half-year results on Wednesday.

Engine maker Rolls-Royce said the termination of the Skymark order would shave 0.5 percent off its order book. Shares in Airbus fell 1 percent, while Rolls-Royce rose 0.6 percent.

The cancellation meanwhile adds to a growing list of challenges surrounding the A380 itself. Orders for the plane are hanging in the balance elsewhere, according to industry 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 aircraft.

Other question marks surround planes due for Air Austral, Qantas and Virgin Atlantic. Airbus cancelled an order for 5 A380s from bankrupt Indian airline Kingfisher (LSE: KGF.L - news) 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 by raising concerns over the doors, two people said. Airbus says its redesign will be approved in the autumn and that it will meet delivery goals. ($1=101.89 Japanese yen) (Editing by Edwina Gibbs, Tom Pfeiffer and Greg Mahlich)