New Blow to EADS: Britain Cuts Order for A400M Aircraft

On Monday the British government announced that they are renegotiating the quantities of the A400M transport aircraft that they plan to buy. This is to make up for the ten percent price increase agreed to earlier this month. The U.K. will offset this price increased by buying at least three fewer aircraft. This will allow their total financial commitment to remain the same.

Last month EADS (EADS:P) was able to negotiate a new contract to save the A400M transport aircraft. The premier defense aerospace program in Europe, the A400M had suffered from development delays and cost overruns. The way the original contract was structured if EADS did not meet the schedule it would have to pay penalties to the seven European countries that helped fund the development. The company negotiated furiously with them for a year to come up with a new contract structure that avoided the penalties and allowed them to recover some of the cost overruns.

The new deal called for a slight increase in the negotiated price of the aircraft ten percent to increase the money paid to the manufacturer by about $2.7 billion. There would also be loans to EADS from European governments worth $2 billion. EADS would still be responsible for some of the overruns and agreed to absorb the $3.6 billion in charges.

While this deal at least seemed to solve most of the problems with the program it was a hard sell. The British, in particular, are in difficult economic straits, and their defense establishment is already stretched from the cost of their operations in Afghanistan.

The new contract rescueing the A400M program was based on selling the same number of aircraft as originally planned. With Britain reducing the number of aircraft they plan to order, unless EADS can make up the gap overseas or with another European buyer, the company will lose more money on the airplane. Moreover, if Great Britain is able to renegotiate, other buyers might do the same. EADS needs every penny of the deal or they will have to take more charges. In the past they had threatened to walk away from the program entirely unless the customers paid more money. While the loss of less then two percent of the total planned order is not a great deal it is still a few hundred million dollars EADS won't get.

Photo: Benurs