EADS Facing Pressure Over A400M

EADS (EADS.PA), the parent company of Airbus, has struggled over the last two years to renegotiate the contract to produce the A400M transport for several different European and foreign countries. The aircraft is the premier aerospace program in Europe right now and is expected to deliver an aircraft that can challenge the C-130 Hercules for sales. Unfortunately the program has faced development problems with the engines and software that has led to an over two year delay in the start of flight testing.

Under the contract the customers have the right to demand payment from EADS because of the delays. One customer, South Africa, went ahead and canceled their order as the delays had led to large cost growth and they could no longer afford it. The primary European customers led by England, France and Germany had agreed to delay demand of money from EADS since January this year with a goal of renegotiating the contract by December.

These negotiations have been on-going and it is expected the A400M will have its first test flight before the end of the year. It was reported yesterday though that France and Germany are leaning to not only holding EADS to the original contract but also finally demanding some form of payment from the aircraft manufacturer. England has not yet made a similar pronouncement but due to the pressure their budget has been under because of the global economic problems and the cost of operations in Afghanistan had been the only one to discuss canceling their order outright.

It may be that the two governments simply want EADS to make a gesture of paying some of the money they owe due to the contract conditions. This means that it won’t be as harsh as if the actual terms and conditions were enforced which would hit EADS’ cash reserves fairly hard. It has been reported that EADS has delayed or given up on some Merger and Acquisition (M&A) activity due to the need to reserve money in case the worst actually happens.

The fact that now it is coming out that changes to the contract are not necessarily desired after the company and customers gave themselves six months to renegotiate it indicates that the program is either back on track or the governments have run out of patience for the whole situation. In a world economy where Airbus has seen sales plummet keeping the military programs going provides work and revenue. EADS will have a hard time if it comes to layoffs of its work force due to the joint Franco-German organization that they have.

If they do end up paying money over the A400M it will be a blow for the company as they had been working hard to avoid this happening. It also illustrates that the countries who historically have been supporters of EADS may only go so far with their purses and patience.