Page last updated at 18:05 GMT, Wednesday, 3 February 2010

Airbus' military plane continues to distract

By Jorn Madslien
Business reporter, BBC News

Airbus chief executive Tom Enders with the Airbus A400M
Airbus chief Tom Enders says the agreement to build the A400M was a mistake

The fate of Europe's largest defence project is expected to be decided soon - though hopes of a resolution before the weekend are fading fast.

Aircraft maker Airbus has threatened to walk away from the construction of the A400M military transport plane unless seven European governments - Belgium, France, Germany, Luxembourg, Spain, Turkey and the UK - agree to fund a proportion of an 11.2bn euros ($15.6bn; £9.8bn) cost overrun.

Discussions during a Nato meeting in Istanbul on Thursday and Friday, as well as informal talks between French President Nicolas Sarkozy and German Chancellor Angela Merkel on Thursday, are not expected to result in a resolution to the problem.

However, an eventual compromise could look a bit like this, industry observers predict:

  • Airbus would identify cost cuts to the tune of 7.6bn euros
  • Airbus and its parent, the defence giant EADS, would foot some 3-4bn euros of the remaining bill
  • European governments would pay a further 2-3bn euros towards the project.

Big mistake

Rescuing the project, which has cost European taxpayers billions of euros already, would go some way towards safeguarding about 10,000 jobs in Europe - about a fifth of the Airbus workforce is currently busy working on the A400M.

Boeing C-17
As the A400M tends to slip out, that does represent some opportunities, I believe internationally, for the C-17
Dennis Muilenburg, Boeing

Having the plane built would also aid military capabilities as the four-engine turboprop would replace Europe's ageing transporter fleet with an aircraft that is designed to carry helicopters, armoured vehicles and troops.

But the chaotic situation means the project is no longer a prestigious one, neither for individual nations nor for the aircraft maker.

Indeed, for Airbus, which initially agreed a fixed price for the planes, the A400M project remains a headache it could do without.

"We made a big mistake when we contracted for this aircraft six or seven years ago," Airbus' chief executive, Tom Enders told the BBC last month.

When asked by the BBC to comment on the A400M issue at this week's Singapore air show, Airbus declined.

No profit

The A400M project has been hampered by a series of serious delays - some caused by meddling nations eager to influence matters such as choice of engines, others, such as weight issues, by Airbus itself.

The project is now three years behind schedule, with planned deliveries set to start in 2012 rather than in 2009 as initially indicated.

Arch-rival Boeing has been quick to take advantage of the situation, aggressively and successively marketing its own C-17 military transport plane to Asian customers.

The cockpit section of an Airbus A400M military transport airplane unloaded from an Airbus A300-600 ST "Beluga"
Airbus has already invested billions of euros in the A400M project

"As the A400M tends to slip out, that does represent some opportunities, I believe internationally, for the C-17," says Dennis Muilenburg, president and chief executive of Boeing's defence, space and security unit.

Last month, Airbus chief Mr Enders said that without the right level of additional financial support from governments it would have been "less risky... to stop the development and redeploy our engineers on other important projects".

Indeed, even if a European compromise deal was eventually reached, Airbus executives would still worry that there is no market for the A400M beyond the nations that have already committed to the project.

South Africa and Chile have both cancelled its A400M orders in response to the project's delays and new orders have been hard to come by.

It seems any hope of Airbus making a profit from the aircraft has long since vanished, even though the seven European nations have ordered 180 of the aircraft for 20bn euros.

Everyone in the market is waiting for a final clarification of how this project might go on
Winfried Becker, Oppenheim Research

Airbus executives are also fretting over how the aircraft maker's relatively small military division has become a distraction and a drain on resources that it would have preferred to channel towards its stumbling A380 project or the development of the A350.

There is even talk of spinning off Airbus' military manufacturing into a separate unit.

Sharing the pain

Last month, Airbus gave the European nations until 31 January to come up with the money or face the consequences.

Instead, it seems the discussions will continue until the end of February.

Indeed, living up to its threat and walking away from the project would have cost Airbus at least 7.5bn euros.

In addition, European nations might well respond by demanding the repayment of state aid for other Airbus or EADS divisions.

Stuck between a rock and a hard place, every party to the talks knows that the outcome will be painful in every event. This is never going to be a win-win situation; instead it is a matter of sharing the pain.

Until the matter has been resolved, it will remain a serious distraction for Airbus.

"Everyone in the market is waiting for a final clarification of how this project might go on," says Winfried Becker of Oppenheim Research.

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