Air Berlin canceled $1.7 billion worth of firm orders for Boeing Co's 787 Dreamliner aircraft amid uncertainty over whether it will increase long-haul flights.

Air Berlin, Germany's second-biggest airline after Lufthansa , said on Tuesday that it has cut its order to 15 planes from 25. It also reduced the number of options for further 787 aircraft to five from 10, it said.

We will continue to fly long-haul, but the bulk of our business is medium-haul, a spokesman for the company said. He did not comment on whether Air Berlin will increase the number of its long-haul flights in the future.

The airline ordered the Boeing planes in 2007, when it planned to buy charter airline Condor from Thomas Cook . Air Berlin backed out of the planned takeover a year later, citing soaring oil prices and worsening economic conditions.

Since then, the company has left investors wondering what it would do with the order for the twin-aisle, mid-sized Dreamliners, which can carry about 250 people long distances.

The cancellation depletes orders slightly for the hot-selling but long-delayed 787, which promises greater fuel efficiency for airlines as they struggle to control costs and boost ridership.

Boeing, the world's No. 2 planemaker, has suffered a decline in orders in the last two years as a number of airlines canceled or deferred orders amid the industry's worst downturn in decades.

The drop in global passenger demand led Boeing and rival Airbus to face their worst annual order tally last year in at least 15 years. [ID:nSGE611057] But deliveries remain strong, and planemakers usually collect payment upon delivery.

Under Air Berlin's original deal with Boeing, the German carrier was to receive its 787 aircraft between 2013 and 2017. Air Berlin also said on Tuesday it is deferring delivery of nine Boeing 737 aircraft to 2015 from 2010 or 2011.

Air Berlin has stated clearly that it remains committed to the 787 Dreamliner as the right choice for its long-haul fleet program, Boeing said in a statement.

Boeing reaffirms its commitment to work closely with Air Berlin to find solutions that meet their needs in this dynamic environment, it said.

Boeing has taken orders for 25 Dreamliners in 2010. The company has orders for more than 850 of the planes on its books.

Boeing has carried out several Dreamliner test flights, putting the planes through many tests that must be completed for the craft to receive certification from the U.S. Federal Aviation Administration.

The Dreamliner is more than two years behind its original schedule. Boeing says the first plane will be delivered this year, but some experts are doubtful.

Shares of Air Berlin were down 1.49 percent at 3.980 euros at 1216 GMT. The stock has risen almost 18 percent over the past 12 months. Shares of Boeing, a Dow component, were down 21 cents, or 0.3 percent, at $69.19 on the New York Stock Exchange.

Air Berlin said last year that it could cancel or defer some of its outstanding aircraft orders, which also included Q400s built by Bombardier and A320-family aircraft from Airbus.

For Air Berlin, the agreement means a significant reduction of its financial obligations, the company said on Tuesday.

Last year it placed a convertible bond and launched several capital increases to generate cash and cut its debt, which stood at just over 500 million euros ($683.2 million) at end-September. It had said it planned further measures to reduce debt, such as the sale of some of its aircraft.

Air Berlin had 129 aircraft at the end of September. Most were from the Airbus A320 family as well as Boeing 737 planes, usually used for short- and medium-haul flights.

(Reporting by Maria Sheahan; Additional reporting by Kyle Peterson in Chicago; editing by Sharon Lindores and John Wallace)

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