First Shoe Drops For EADS On A400M

(MoneyWatch)  The A400M transport program is the premier military aerospace system under development in Europe. Designed to compete with the C-130J Hercules in the operational transport mission the aircraft has been ordered by a variety of European and foriegn customers. Unfortunately it has been delayed due to engine integration and software problems. This has led to the different customers discussing either pulling out of the program, demanding payment as the contract obligates EADS (EADS.PA) or restructuring the program.

Under the original contract because the aircraft was over two years late the purchasers had the right to be paid back by EADS the money they had put upfront into the program. The major European customers such as France, England and Spain met and agreed to postpone these payments multiple times. In the late Summer it was decided to give EADS until the end of the year to re-negotiate the contract to account for the delays and without having to pay the required penalties.

Some of the non-NATO customers such as South Africa were also confronted with a decision. The delays had led to major cost increases for the aircraft and they too had a deadline as to whether accept the higher cost or cancel their order. In the case of South Africa the price for their eight aircraft had increased almost $4 billion over the original contract price. South Africa took a chance with buying a new development program rather then one that had been in steady state production for a few years.

Now it was announced yesterday that the African nation would not go ahead with the order. This leaves only one committed foriegn military sale - Malaysia. All of the rest of the current planned production is for European countries. The loss of the aircraft also means that the existing orders will be more expensive as their will be less production to spread the costs of development across.

The A400M was an ambitious project that stretched EADS. There were problems with the design and integration of the engines into the aircraft. As with many types of these programs the cancellation of an order comes at a time when real progress is being made. It is expected that the first A400M will fly by the end of the year and begin testing. This is almost three years late but does push the program forward.

If a customer such as England which is facing major budget issues due to the economic downturn and the need for increased stimulus and social spending was to cancel its order that would probably be the end of the A400M. It should be able to survive the South African cancellation as long as the other customers are able to absorb the price issues caused by the loss of eight aircraft.