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Price rise may be only option to save Airbus A400M

Source: Reuters - Thu 26th Nov 2009

A higher sticker price and fewer guaranteed deliveries may be the only way to rescue Europe's new military transport plane after years of costly delays.

The Airbus A400M is being prepared for a December maiden flight in southern Spain even as its fate depends on the outcome of talks to save the 20-billion-euro (13 billion pounds) project from collapse.

The plane making subsidiary of aerospace group EADS is pressing for concessions in Europe's biggest ever defence contract, saying it faces unaffordable losses in delivering the 180 troop and equipment carriers to seven European NATO nations.

Germany leads pressure for Airbus to stick to its terms.

Thousands of jobs are at stake and observers say the outcome could affect the industrial shape of Europe as well as the region's stammering progress towards a common defence identity.

Investors in EADS and suppliers are bracing for billions of euros in charges and penalties if the rescue bid fails and Boeing and Lockheed Martin are ready to fill the gap with increased sales of their own troop and cargo carriers.

Now, with an end-2009 deadline weeks away, a formula for hiking prices without any immediate burden on taxpayers appears the most widely acceptable answer to a year-long deadlock.

If adopted, such a deal could stretch the targeted total of 180 aircraft over a longer period, but result in fewer planes being handed over during the previously agreed delivery period. 

It is a device negotiators typically use to engineer a unit price increase when new cash is unavailable, according to current and former arms procurement officials, and many see it as the only pragmatic starting point during the economic crisis.

One scenario, which implies an approximately 25 percent unit price increase, would call for about 40 planes being pushed back into budget limbo pending a recovery.

New cash to build them would not be needed until the decade after next, well beyond the day-to-day political horizon.

"Presentation is a problem but the hard facts are that the only way to save the A400M programme is through a price increase per plane" said Teal Group aerospace analyst Richard Aboulafia.

For investors, such a deal could lift the threat of severe penalties that EADS would otherwise face for the 3-4 year delay.

However it may also leave EADS dependent on exports to erase previous losses, and the manufacturer suffered a setback when South Africa, one of only two overseas buyers so far, cancelled.

And it leaves little room for manoeuvre if there are further cost overruns, since they have to be amortised over a decreasing number of planes - a phenomenon nicknamed the 'death spiral,' which Aboulafia says can chip defence projects down to the bone.

Huge A400M turbo-prop engines may at last be ready after long delays but insiders say systems integration is not free of headaches. Such problems have weighed on previous delays.

EADS and Airbus both declined any comment on the talks. 


Outlines of a comparable two-stage solution surfaced at the Dubai air show last week when France's air force chief said it would make sense to do the contract in tranches.

Sources close to the talks also told Reuters last month that deliveries could be spread over a longer period.

Britain is said to be on board after threatening to pull out and France and Spain are seen as supportive of the idea - even though France is keen not to leave Germany isolated in public.

But Germany's new coalition government is not ready to give ground on costs and has signalled a deal is far from certain.

"The German position is traditionally that contracts should be honoured," a senior German source said. The contract can only be altered through unanimity among seven core European buyers. There is potential friction too over lucrative support deals.

That said, there is little evidence for now that any detailed alternative is on the table. "There is no plan B. Plan B is cancellation" a source close to the matter said this week.

Two events stand out as possible decision points for a compromise. After months of bad headlines, the A400M must have a successful flight before most politicians will publicly back it.

And Airbus must open its books to auditors ordered in by the buyers to see exactly how far its costs are up. 

A recent complex internal reorganisation makes that exercise harder than it may sound. But the sort of cost increase most procurement experts call realistic is roughly 25 percent. That means a corresponding reduction in the main batch of deliveries - implying 40 planes pushed back into the second 'limbo' phase.

If that working premise were applied evenly, then Britain would initially get 19 planes instead of 25, Germany 45 instead of 60, France some 38 instead of 50 and Spain 20 instead of 27.

Although each has urgent needs in Afghanistan, those nations are also the ones with most at stake in shoring up the rest of Airbus, which provides some 60,000 high-tech jobs. Each also hopes that A400M work will reinforce workshare on civil planes.

Less certain is whether Turkey, Belgium and Luxembourg would be expected to reduce their combined quota of 18 planes.

With no air force, Luxembourg's single plane will anyway be operated by Belgium, whose own allotment of 7 planes would be hard to trim for operational reasons. Turkey is slated to get 10 A400Ms, smaller than any of its existing transporter squadrons.

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