Price rise may be only option to save Airbus A400M
A higher sticker price and fewer guaranteed deliveries may be the only way to rescue Europe’s new military transport plane after years of costly delays.
The Airbus A400M is being prepared for a December maiden flight in southern Spain even as its fate depends on the outcome of talks to save the 20-billion-euro project from collapse.
The planemaking subsidiary of aerospace group EADS is pressing for concessions in Europe’s biggest ever defense contract, saying it faces unaffordable losses in delivering the 180 troop and equipment carriers to seven European NATO nations.
Germany leads pressure for Airbus to stick to its terms.
Thousands of jobs are at stake and observers say the outcome could affect the industrial shape of Europe as well as the region’s stammering progress toward a common defense identity.
Investors in EADS and suppliers are bracing for billions of euros in charges and penalties if the rescue bid fails and Boeing and Lockheed Martin are ready to fill the gap with increased sales of their own troop and cargo carriers.
Now, with an end-2009 deadline weeks away, a formula for hiking prices without any immediate burden on taxpayers appears the most widely acceptable answer to a year-long deadlock.
If adopted, such a deal could stretch the targeted total of 180 aircraft over a longer period, but result in fewer planes being handed over during the previously agreed delivery period.
It is a device negotiators typically use to engineer a unit price increase when new cash is unavailable, according to current and former arms procurement officials, and many see it as the only pragmatic starting point during the economic crisis no checking account payday advance.
One scenario, which implies an approximately 25 percent unit price increase, would call for about 40 planes being pushed back into budget limbo pending a recovery.
New cash to build them would not be needed until the decade after next, well beyond the day-to-day political horizon.
“Presentation is a problem but the hard facts are that the only way to save the A400M program is through a price increase per plane,” said Teal Group aerospace analyst Richard Aboulafia.
For investors, such a deal could lift the threat of severe penalties that EADS would otherwise face for the 3-4 year delay.
However it may also leave EADS dependent on exports to erase previous losses, and the manufacturer suffered a setback when South Africa, one of only two overseas buyers so far, canceled.
And it leaves little room for maneuver if there are further cost overruns, since they have to be amortized over a decreasing number of planes — a phenomenon nicknamed the ‘death spiral,’ which Aboulafia says can chip defense projects down to the bone.