A400M Moves To First Flight Amid Contract Discussions

The EADS (EADS.P) developed A400M transport is slowly moving towards its first flight. The program which is the primary aerospace system under development in Europe is over two years late and faces cost problems. EADS, the parent company of Airbus, has reorganized the program while struggling with engine and software integration issues. The nations who sponsored the program have been locked in contract re-negotiations with EADS all year.

The contract had called for EADS to pay back much of the money provided upfront if the aircraft did not meet the schedule. This payback was originally supposed to happen early in 2009 but the customers had agreed to postpone this and work out an agreement and possibly a whole new contract. The aircraft is supposed to fly its first test flight before Christmas.

The negotiations are hinging around whether the increased costs of the program should be passed onto the buyers. South Africa one of two foriegn customers has already ended their plans to buy several of the aircraft due to the higher costs. The other, Turkey, has yet to decide. Britain, France and Germany earlier this year discussed not going ahead with their purchases. Britain especially is facing budgetary difficulties with the economic downturn and increased social spending. Other countries like Spain have continued to be very supportive of the program.

This week a rumor was floated that if EADS could not get a commitment for more money it might unilaterally end the program. EADS denies this report. If they did there would still be significant financial fall out as the company would have to pay back some of the money and try to get the customers to pay for some of the work done. It would take years of legal maneuvering to resolve those kind of issues.

Certainly large defense programs have been canceled in the past and escalating cost has been one of the reasons used. The United States recently ended the DDG-1000 new destroyer program for just these kind of reasons. They went ahead and renegotiated the contract with General Dynamics (GD) and Northrop Grumman (NOC) to have some sort of equitable resolution. This will prove harder with EADS over the A400M due to the number of different countries involved and the amounts already spent on it.

One problem that is faced is that a reasonable competitor already exists and is in steady state production. The C-130J made by Lockheed Martin (LMT) would be an easy buy for anyone considering the A400M. In fact foriegn sales have been so good that Lockheed is planning on increasing production.

All of this puts pressure both on EADS and its customers. How much do they want this aircraft and how much are they willing to pay for it?