Buyers look set to ignore an end-of-January deadline from Airbus for a deal to bail out its A400M transport, after Germany refused to be “pushed” but sought to allay fears that the troubled project would fail.
Representatives of seven countries that ordered the European heavy airlifter met in London last night. Reuters notes that in an apparent snub to the European planemaker, delegates said Airbus parent EADS was not invited to the talks and a decision might not be made before early February.
“We are not expecting any concrete decisions today,” a source briefed on the talks said. No statement issued afterwards.
The A400M, a powerful turbo-prop, was designed as Europe’s next generation long-range airlifter but its future is threatened by an 11 billion euro or 55 percent over-run in development and production costs, overshadowing a successful maiden flight carried out last month.
EADS wants to split the bill almost evenly with the nations involved in Europe’s largest arms project — France, Germany, Britain, Spain, Belgium, Luxembourg and Turkey. That would see nations picking up a 5 billion euro overrun in production costs. EADS is offering to shoulder up to 6 billion euros in potential extra development costs, of which 2.4 billion euros has already been written off its balance sheet and spent.
France said on Wednesday it would agree to contribute, but Germany has so far refused to allow Airbus to budge from a fixed 20 billion euro development contract which it signed in 2003.
Asked what he expected from last night’s meeting, Germany’s defence minister Karl-Theodor zu Guttenberg told Reuters: “That contracts are honoured.” Speaking in Munich, Guttenberg added it is important that the buyer nations present a united front.
With investors clamoring for clarity, EADS called on Tuesday for a funding deal by January 31 and ruled out extending a “standstill agreement” which allows negotiations until then. Airbus also disclosed contingency plans to axe the project, something military analysts say could derail Europe’s efforts to deepen economic union into the costly world of defence. Germany — the top buyer with 60 planes on order and severely critical of EADS over the spike in costs — rejected the deadline.
“We are trying to find a solution — on the basis of the contract which has been agreed and which is valid — and also on the understanding that we do not want to be held to ransom or be pushed into taking some steps,” government spokesman Ulrich Wilhelm said on Wednesday. Any deal must be “justified in terms of the project and also in terms of our expectations on the financial burden,” he said.
Airbus can’t afford to carry the can
Airbus CE Tom Enders insists that Airbus, which is spending 100-150 million a month to keep the A400M afloat, will need government help to prevent the problem from damaging its core airliner business. “Without a very significant contribution of governments it will be very, very hard to continue the project,” he told reporters on a trip to Tokyo.
Natixis Securities analyst Olivier Brochet said the figures being bounced around make it impossible to determine a value for EADS, which has a market capitalisation of 11.5 billion euros. “The situation strikes us as being very unhealthy indeed and fraught with risks,” he said in a note advising investors to stay clear until the year-long budget stand-off was resolved.
Under a formula first agreed between EADS and Britain last year, countries facing budget problems would avoid having to find new cash by reducing the number of planes they receive under the original budget — effectively paying more per plane.
Some 40 out of 180 planes on order would be deferred to a second tranche, for which funds would be needed only after 2020. Spain, where the A400M is assembled, and France, the second-largest customer after Germany, are said to support the plan. “It is impossible that we should not be capable of successfully completing this program,” Spanish Defense Minister Carme Chacon told journalists in Brussels.
French Defense Minister Herve Morin told parliament a final decision would likely be reached on the sidelines of a NATO ministerial meeting in Istanbul on February 4 and 5. He said later that France would be sympathetic to a funding deal. “The idea of bearing some of the cost overruns is not a source of concern, because I think that this project is a magnificent project,” Morin told radio station RFI.
Reuters meanwhile separately reports that problems with the A400M could result in some additional sales opportunities for Boeing’s C-17 cargo plane. “As the A400M tends to slip out that does represent some opportunities I believe internationally for the C-17, so that’s a significant factor for us,” Dennis Muilenburg, president and chief executive of Boeing’s recently reorganised Defense, Space and Security unit, told the National Aeronautic Association in Chicago earlier this week.
Muilenburg said Boeing expected international demand for the plane to continue to grow, noting that the United Arab Emirates recently ordered six C-17s, and India last week submitted a letter of requirement for 10 aircraft.
The Boeing executive declined to discuss the rival A400M programme in detail, but said pressure on the program was expected to have an impact on the overall global market for such planes. He said Boeing had studied how to respond to waning production rates for the C-17 transport, given current Pentagon plans that call for no further orders, and was investing to ensure it could keep the price of the C-17 steady.
“From a productivity standpoint we’re spending a lot of time right now investing in the technology that’s required for a flexible line (so) that depending on what the production rate might be, we have the ability to hold unit costs,” he said. He said the company continued to work closely with the US
Air Force, arguing that having a “hot” production line for a large aircraft was important to the overall US economy. Ultimately, he said the future of the C-17 production line depended on combined international and domestic demand.
Muilenburg said his unit’s name change, from integrated defence systems, was aimed at positioning the company better for flatter US defence budgets in coming years, and signalled the growing importance of security to the company’s portfolio.
Boeing was well-positioned to bid for a projected $50 billion in orders for new aerial refueling aircraft, Muilenburg said, predicting that the Air Force would release a final, revised request for proposals within the next month.
One industry official familiar with the tanker program, who was not authorised to speak publicly, said he expected minor revisions or “tweaks” to the draft request for proposals released by the Air Force last year, not major changes. Northrop Grumman and its partner EADS have said they will not bid for the contract unless significant changes are made.
Muilenburg said the company remained engaged in a robust and ongoing dialogue with the Air Force about the competition. He said he expected the Pentagon to stick to its plan to make it a fixed price development contract, but said officials appeared to understand the preconditions necessary to make such a contract structure successful, and recognised that fixed price contract were not appropriate for all projects.
“What it demands is that the technology up front is mature and well defined. It demands that we have a very clear definition or statement of work, and demands that we understand up front that we will be implementing changes during the development program,” Muilenburg said.