Airbus threatens to drop A400M military plane

AP News
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Posted: Jan 05, 2010 10:51 AM

Airbus threatened to scrap the overdue and overbudget A400M military transport just weeks after its maiden flight, putting more pressure on seven European governments to give it better financial terms for the troubled project.

Analysts said the threat was aimed at forcing goverments to move ahead with a project that supports 40,000 jobs but is three years overdue and over budget. Actually cancelling would be highly unappetizing at a time of high unemployment across Europe, and alternative planes don't meet the requirements set out for the A400M.

EADS, Airbus' parent, hopes governments will either pay more for the planes or reduce the number of planes on order. Other options include reducing the specifications, or spreading increased payments out over time.

The customer governments have agreed to re-negotiate the original fixed-price contract. But competing military interests and tight budgets mean they have so far failed to find a compromise.

Airbus spokesman Stefan Schaffrath said that ending the program "is a scenario" if the military plane project "continues to contribute to a loss."

"We are suffering from a stagnation, he said. "The loss-making is serious. This needs to be urgently resolved."

Gareth Jennings, Jane's Defence Weekly's senior aviation analyst, said cancellation was unlikely. "There is too much resting on the program for the European aerospace industry in terms of job, prestige, and future capability," he said.

It suits cash-strapped governments to defer delivery _ and thus payment _ for a few years and while some air forces have expressed an interest in buying Lockheed or Boeing alternatives, governments have not, he said.

The U.S.-built Lockheed Martin C-130J Hercules carries only half the payload of the A400M, and Boeing's much more expensive C-17 Globemaster III is considered too large and lacks the tactical versatility of the Airbus design.

The A400M had its maiden flight last month in Spain _ with first delivery scheduled in three years.

The program was launched six years ago with an order for 180 planes from seven governments _ Belgium, Britain, France, Germany, Luxembourg, Spain and Turkey. The original price was euro20 billion ($29.5 billion), but a preliminary report by auditors PricewaterhouseCoopers said parent company EADS might need an extra euro5 billion _ inflating the final bill by 25 percent.

Abandoning the project would cost EADS euro5.7 billion ($8.4 billion) in advance payments it would have to return to governments _ and would dent its credibility. It has already put aside euro2.4 billion in provisions against losses related to the plane.

A German defense ministry spokesman, speaking on customary condition of anonymity, said that the decision on the A400 was due by the end of January. A meeting of high ranking defense officials is tentatively scheduled for next week, he said.

A spokesman for the Ministry of Defense said Britain "remains committed to A400M, but not at any cost. We regard the ongoing negotiations as the best means by which to determine a more deliverable program."

"Sounds like a bit of sabre-rattling by Airbus," said David Livingstone, an analyst at the London-based think tank Chatham House. "I expect that Airbus is only testing the resolve of participating nations."

Livingstone said that several alternative planes existed, including the C-130J, Italy's Alenia C-27J Spartan, and the longer-range C-17, but that none fully satisfied the performance requirements.

"Certainly a solution for tactical airlift will have to be found, although money is short in defense budgets because of the economic crisis," he said.

Livingstone also noted that existing aircraft, such as the Transall or older Hercules types, could be kept flying for a while as a stopgap, but they will become more and more expensive to maintain.

Aerospace analyst Richard Aboulafia of the Washington-based Teal Group said that with the cost of the A400M rising, Lockheed's cheaper plane and Boeing's larger jet become more attractive. "It is a great opportunity for them if something goes horribly wrong with this game of chicken," Aboulafia said.

While waiting for the A400M, Britain's Royal Air Force acquired six C-17s and has flown them in support of troops in Iraq and Afghanistan. Last month Boeing said the RAF would acquire a seventh C-17.

Sandy Morris, an analyst with Royal Bank of Scotland, said uncertainty on the outcome of the A400M is weighing on EADS' the share price. On Tuesday, EADS shares were trading down 1.2 percent at euro13.82.

"Does EADS want clarity on this? Absolutely because the A400M is dominating sentiment toward a the company," he said.

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Associated Press Writers Angela Charlton and Jamey Keaten in Paris, Kirsten Grieshaber and David Rising in Berlin, Jill Lawless in London, and Slobodan Lekic in Brussels contributed to this report.