EADS Deadline For A400M Will Pass With No Resolution In Sight

Just three weeks ago EADS (EADS:P) and its subsidiary, Airbus, threatened to unilaterally stop work on the A400M transport program unless a new deal was made between it and the seven European customers by January 31st. Talks have been held over the last two weeks to figure out a way to inject more money into the much delayed and over budget program with no resolution. The aircraft just started flight testing and is expected to deliver its first aircraft almost three years beyond the original schedule.

The way the contract was established France, Germany, Great Britain, Turkey, Spain and Luxembourg invested a large amount of money up front to pay for the development and production of the modern four engined aircraft. The goal was not only to provide a modern aircraft to meet the needs of the customers for long and short haul missions but also give EADS a product to compete with Boeing’s (BA) C-17 and Lockheed Martin’s (LMT) C-130 aircraft which have had successful foreign sales. The A400M though has suffered problems with the development and integration of its engines and fuel control software.

The European aerospace giant and the countries have now announced they will meet again on Thursday, February 4th, to discuss this again. EADS is asking that a further $9 billion be provided to cover the cost overruns to date and get the program back on track. Germany especially has not been supportive of this path. They have offered perhaps up to $4.5 billion in loans to EADS. France and Great Britain who with Germany represent the bulk of the orders have also been skeptical of providing these kind of large amounts to the company.

EADS needs more money quite clearly. They are spending hundreds of million of dollars of their own money each month to keep the program going. By the Summer three test aircraft will be flying and the plans for production will really be ramping up. That will only increase the cost of the programs. The original contract structure illustrates once again that using fixed price contracts to develop a new program, even those considered low risk, is risky and forces hard decisions when plans go awry.

This should be a warning to the Obama Administration which continues to press for the use of such contracts in future weapon programs. If an effort like the A400M faces delays due to failures to meet requirements or schedule the cost will quickly spiral upwards. This is why Cost Plus contracts are normally used. This does increase the potential for higher funding being provided by the Government but it allows the contractor to minimize risk and should help achieve the goals of the program.

In the case of the A400M it might just end with no product delivered just when it is finally getting to a point of success. EADS will be out billions of dollars as will the seven European customers. There could be law suits to try and resolve the money issues and there will still be a requirement for new aircraft and lift that another system will have to fulfill. Somebody will need to buy these aircraft from someone.