Airbus has taken a calculated gamble on its industrial and political future by attempting to force reluctant buyers into a last-ditch, three-week negotiation to rescue the A400M military plane from cost spikes and delays.
The planemaker and its parent group EADS used a key annual press conference – held for effect in the A400M hangar in Seville, Spain, to inject a sense of urgency into a row with nations, led by Germany, over responsibility for billions of euros of exposure that could scupper the project.
EADS Chief Executive Louis Gallois said Airbus was spending 100 to 150 million euros a month to keep the project afloat. “We just cannot continue beyond the end of January without knowing where we are going financially,” he said.
Investors agreed, sending EADS shares down up to 4 percent as the company also warned of further financial strain for some years to come from production delays on its Airbus A380 superjumbo and reported lower than expected revenues for 2009. “The company’s forecast is not inspiring and the A400M mess is becoming a real sword of Damocles,” a Paris trader said.
The powerful turbo-prop A400M was designed to transport troops and heavy equipment to remote areas such as Afghanistan. But it has been hit by an anticipated overrun of 5 billion euros in production costs, which Airbus blames partly on political interference over industrial decisions, Reuters reports.
EADS and European governments, facing severe pressure on their economies, cannot agree how to divide up the shortfall. Airbus CE Tom Enders said he wanted to see a “very significant contribution from governments”. Officials from Britain, France, Germany, Spain, Belgium, Luxembourg and Turkey are due to meet in London tomorrow.
Enders told the Seville gathering he and Gallois “will do everything possible and reasonable to continue the programme.
“But we cannot carry on with the A400M programme without a significant financial contribution from our customers. Otherwise we would eventually jeopardise the whole of Airbus (and maybe even EADS!), our ability to innovate and modernise our product offering and, hence, our competitiveness,” he said.
Adding to the confusion surrounding the programme, EADS is uncertain over whether it is invited to take part, fuelling frustrations which spilled over in public yesterday.
“Today I am sending a message of urgency to the governments: we are ready to negotiate at any time and I regret deeply to note that, so far, there is no negotiation meeting scheduled with us,” Gallois told reporters in the A400M production hangar.
Negotiators say Berlin is holding out against a complex compromise first hatched in Britain, which had once threatened to pull out of the A400M over budget problems, and which has now gathered support among key partners such as France and Spain.
Gallois said EADS had already written off 2.4 billion euros in future losses and was prepared to take an unspecified portion of the remaining risks in return for a deal with buyers to increase the unit price and supply fewer planes initially. “I have the feeling that we have already taken our share.”
According to figures obtained by Reuters, EADS is offering to take up to 6 billion euros in actual or potential development risk while asking buyers to absorb 5.2 billion euros in increased production costs — meeting a gap of 11 billion euros. EADS proposals would defer any new spending for a decade.
Sources close to the project said they remained confident the deadlock would be resolved despite ardent sabre-rattling. Although Airbus says it is ready to axe the plane without a financial deal, even that would not be straightforward and would need a new set of negotiations with buyers, executives said.
The Independent broadsheet in London reports today the new aircraft finally made its maiden flight just before Christmas, more than two years later than originally planned, in part because of technical problems. “The most significant were with the engine’s full authority digital engine controls, the so-called “FADEC” software that is the interface between the engine and the rest of the aeroplane.
“There have also been issues over the weight of the aircraft, with some critics warning it would only be able to lift 29 tonnes, way below the 37-tonne capability in its specification and not even enough to carry a modern armoured infantry vehicle.
“Airbus claims that, in the 14 hours and 10 minutes of flying time clocked up since last month’s first test flight, the aircraft has not only proved it can meet its lift and range specifications, but also avoided any major pitfalls,” the paper says.
“The troubles with the FADEC software have been blamed for the lion’s share of the three-year delay. But it is the confused specification from the partner governments, the convoluted structure of the supplier organisations, and Airbus’s rash contracting that are at the heart of the problems.
“A considerable share of the blame rests with EADS itself. Not only did the company unwisely agree to a fixed-price contract, leaving it bearing all the risk associated with any new development, it also signed a fixed-price deal with its engine suppliers, which left it to take on the cost of those overruns as well. Then, on top of the precarious agreements, the company agreed to a timescale of just six-and-a-half years, barely two-thirds of the 10 to 12 years usually needed to design, build and commercialise a new plane,” the Independent avered.
“Put simply, the problems stem from what Airbus and EADS agreed to when they signed up,” Peter Felstead, the editor of Jane’s Defence Weekly, told the broadsheet. “They signed a stupid contract and all the current management readily admit it was a stupid contract.”
“Then there is the politics. Initially, EADS planned to use an engine from Pratt & Whitney, the US aircraft engine specialist. But it was pressurised into commissioning an entirely new design from a specified array of European companies – Britain’s Rolls-Royce, Germany’s MTU Aero Engines, France’s Snecma and Spain’s Industria de Turbo Propulsores. The move was rationalised with the argument that this would avoid any clash with US technology export regulations. But the structure of the resulting Europrop International consortium – described by the chief executive of EADS, Louis Gallois, as ‘the most baroque I’ve ever seen’ – made things even more difficult.
“The set-up made the already difficult task of producing a completely new engine ten times harder,” Felstead said. “There are snags in any technical development, but if there is a huge layer of organisational bureaucracy then solving them is even harder.”
Record year: despite recession
Reuters reports Airbus delivered a record 498 airliners last year, up from 483 in 2008, beating Boeing for the seventh year running. Enders said Airbus planned to keep overall 2010 deliveries at “roughly” the same levels seen in the past two years.
He voiced disappointment with a fall in A380 superjumbo deliveries to 10 from 12 in 2008 and predicted at least 20 deliveries in 2010. A380 costs remain a headache for Airbus. Despite higher Airbus plane deliveries, EADS said group revenues fell 3.6 percent to about 41.7 billion euros in 2009, 1 billion euros below market consensus forecasts.
Gallois blamed the weak dollar and stepped up calls for international action to tame currency volatility. “I am very frustrated to see that at the last G20 meeting nobody was talking about currencies. It is much more important for me than bonuses of bankers,” he told reporters.
Airbus beat its forecast for up to 300 new orders with a 310 sales in 2009. It predicted 250-300 airliner sales in 2010 and no solid recovery in depressed aviation demand until 2012.
Enders added that if the A400M programme was stopped, “this would no doubt be very painful but we would swiftly redeploy re-sources from A400M, especially engineers, to the A350 XWB and other needy programmes. We have started to draw up contingency plans already in December.”