Arm wrestling over A400M while aircraft nears maiden flight
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EADS confronts its European partner-nations
defpro.com | Negotiations between the European aerospace and defence giant, European Aeronautic Defence and Space Company (EADS), and its four so-called partner nations over a revised development and purchase contract for the A400M transport aircraft seems to be entering the final stages as the aircraft’s first flight is reported to be imminent – and predictably enough, the parties are flexing their muscles like boxers about to enter the ring.
As confirmed by Airbus Military officials, the much-troubled A400M is scheduled to take to the skies on its first test flight late this week. If ground tests go smoothly and weather conditions are optimal, the aircraft will perform its maiden flight on Friday. The event will certainly be a major step forward, but it will not solve all the problems weighing on this programme.
When the €20 billion ($28 billion) A400M project began, it was hoped that a first test flight would be held in 2008 and that air forces would have the plane in service by the end of this year. Technical problems, however, have caused huge delays, making evident that NATO countries will not receive their orders before 2013, at the earliest. Furthermore, at the same time EADS and Airbus Military, far from asking for forgiveness and understanding for their own mistakes and mismanagement, took on a rather belligerent attitude and started claiming that the contract was no longer financially profitable and they might well renege on the entire deal unless taxpayers cough up a few extra billion. “We have already set aside reserves of €2.3 billion ($3.27 billion) for the first 180 aircraft. I reckon that this money is lost. The first 180 machines will certainly not be profitable,” said Louis Gallois, the EADS chief executive in June.
This dire predicament caused the customer-nations to reassess the entire contractual situation to see how they might best react to it. All theoretical possibilities were originally set on the table: insisting that Airbus Military shall respect the delivery dates as stipulated in the contract and imposing harsh financial penalties (as specifically called for in the contract) on the company for its failure to do so; renegotiating the contract to attempt to accommodate for Airbus Military’s difficulties; reduce the number of aircraft on order to maintain the programme’s cost within the original ceiling; and, completely cancelling the programme (a move that would require consensus by all partners).
In July, the Defence Ministers of the seven European customer-nations decided to continue to support the programme and, at the same time, agreed for the contract to be renegotiated. This decision was not to everybody’s taste, however, and last month South Africa cancelled an order for eight A400Ms, citing delays and a huge cost increase from €830 million ($1.2 billion) to €4.1 billion – and this even before an agreement on the new contract is formulated. While the remaining seven contracting countries-- Germany (60), Spain (27), France (50), United Kingdom (25), Turkey (10), Belgium (7) and Luxembourg (1)-- together ordered 180 planes, in most cases to replace ageing Transall and C130 Hercules transports, in commercial terms, the A400M will only be a success for the company if it can win significant export orders.
Hot phase of negotiations
Last week, the seven countries met in Berlin to discuss the rising cost of the programme and the possibilities of a new contract with the industry and a new delivery date, revised characteristics of the aircraft and a new price. Just before the talks, the new German defence minister, Karl-Theodor zu Guttenberg, said that he and his French counterpart, Herve Morin, agreed that Paris and Berlin expects a “financial gesture” from EADS. Airbus Military is being asked to provide the number of planes as originally ordered, with no increase in costs. "Respect of the contract is not just semantics," Guttenberg said.
Final negotiation talks between EADS and the customer-nations will now restart after the maiden flight. These talks are crucial for the company, which intends to ask the nations to contribute to the increasing programme costs. German daily newspaper “Die Welt” quoted sources close to the negotiations as saying that the cost of the A400M project would rise as much as €5.5 billion ($8.3 billion), more than one quarter over the current figure of €20 billion. The newspaper also reported that the customers were willing to take on a certain part of these additional costs.
New provocation?
In this phase, Louis Gallois signaled yesterday that the company might break its current dependence from the nations which formed the European conglomerate in 2000, by saying that EADS will henceforth only create new jobs outside Europe. The declaration released in yesterday’s “Die Welt” could be seen as a harsh provocation. Indeed, EADS is not a normal private company; the Group is, and will continue to be in the future, heavily influenced by politics. All four countries pay subsidies to EADS and France and Spain are also major shareholders in this company. And, it was the taxpayers who have spent the past billions in subsidies to build and help EADS become one of the most powerful aerospace companies across the globe. Furthermore, Mr Gallois, himself, owns his current prestigious positions not only to his management skills but also – and this is a very big “also” – to a political agreement and balancing act between the French and German governments.
Given all of this, Mr Gallois’ statement should probably be seen as a strategic move aimed at pointing out that the European nations need EADS at least as much as EADS needs the nations. This might remind all parties of the meaning of the negotiations.
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By Luca Bonsignore, Publisher
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