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Talks To Save A400M Continue

Representatives of the seven European countries that have invested heavily in the new A400M transport aircraft met with EADS (EADS:P) and its subsidiary Airbus to discuss the financial restructure of the troubled program. For the last year there has been a back-and-forth over the terms of the original fixed price contract as to how much the buyers were willing to give in more funding. Yesterday's talks should be the beginning of the end one-way-or-another as patience on both sides has been wearing thin.

The new aircraft is over two years behind schedule in its development due to engine and software issues. It recently achieved its first flights in December and is expected to be available for delivery sometime in 2012. Under the original contract the first aircraft should have been accepted in 2009. Due to the delays and cost increases one foreign customer, South Africa, did cancel its planned order. That leaves only Malaysia as an FMS customer. The aircraft is supposed to compete with the very successful C-130 aircraft made by Lockheed Martin (LMT) that due to the demands of the current operations in Iraq and Afghanistan is seeing good sales to the U.S., Canada and a variety of countries across the world.

Making the situation worse is that the economic downturn of the last eighteen months has meant that available funds from its European customers may be limited. Great Britain especially has looked to save money by pulling out of the program while France and Germany have also indicated that their patience and money may be in short supply.

Two weeks ago EADS threatened to abandon the program itself and eat the cost overruns if no agreement could be reached soon on the customers paying more money for the program beyond the several billion already committed. This move would most likely lead to lawsuits and recriminations as both sides attempt to recover money from the program.

Germany has also engaged in negotiating ploys as they have been the hardest over on having EADS absorb most of the new costs. They supposedly leaked the results of an audit by PricewaterhouseCoopers (PWC) of the program and its management. This concluded that not only did EADS and Airbus management not control the program properly or provide for an adequate accounting system but that the company has the ability to cover most of the cost overruns. The publicizing of this just prior to these talks is considered a way to put pressure to end the negotiations.

The talks like all of the ones before it did not achieve closure on the issues and they will continue today. The end of the program or the transfer of most of the cost overruns to EADS may have a serious affect on their stock valuation and performance even though the company has been stock piling cash for this eventuality. While all this is going on the test aircraft continue to fly and gather data and the A400M moves closer to being ready to be delivered.

The loss of the most important European aerospace program would be embarrassing to both the industry and the countries that originally invested in the idea. EADS has said they need resolution by January 31st so after fourteen months of talks it might actually come to some form of completion.