EADS Threatens To End A400M

(MoneyWatch)  Locked in continuing discussions with its European partners over how much more they should pay to keep the behind schedule A400M transport aircraft program going EADS (EADS.P) has not raised the idea of ending the program. The A400M has been the premier aerospace program in Europe and was funded through investment by seven countries. The aircraft has started to begin its testing program with a recent first flight.

Unfortunately this is over two years late. The program due to delays in developing the engine and fuel control system is also very over cost. EADS has been negotiating now for a year to restructure the contract as because of their failure to meet deadlines they would have to pay penalties to their customers. The contract is a good example of using a fixed price contract when there was too much risk to really justify it.

Now it is being reported that despite a further extension of the deadline to complete talks on a new contract EADS is threatening to pull the plug themselves on the program. While EADS would be faced with paying severe financial penalties for doing this they would still be less then the losses they currently face if the price of the program is not renegotiated. EADS as well has been stockpiling cash against this eventuality. A year ago the company said that it had decided not to pursue an acquistion in order to maintain the funds for the A400M penalties.

EADS management feels that the continuation of their Airbus line and the development of the new A350 XWB fuel efficient airliner is more important then the military A400M. This aircraft is in competition with the Boeing 787 and has already had over 500 orders placed. The A400M has had one overseas customer, South Africa, cancel due to the cost increases. The total number of aircraft to be purchased is less then 200 with the South Africa cancellation.

Can EADS really do this? They have invested billions more then the funding already received. They not only would be losing that investment but also the penalties paid out. If the biggest customers, the Germans, French and English, hold firm though on sticking to the original terms as they are right now without accepting the 25% price increase proposed then there is no chance of recouping any of the money already spent. It may be the ultimate negotiating ploy to try and find a happy medium. Either way it will be apparent in the next thirty days or so where the program is going.