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A400M rollout, Seville
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Airbus’ A400M is a EUR 20 billion program that aimed to repeat Airbus’ civilian successes in the military market. A series of smart design decisions were made around capacity (35 tons, large enough for survivable armored vehicles), extensive use of modern materials, multi-role capability as a refueling tanker, and a multinational industrial program; all of which leave the aircraft well positioned to take overall market share from Lockheed Martin’s C-130 Hercules. If the USA’s C-17 is allowed to go out of production, the A400M would also have a strong position in the strategic transport market, with only Russian IL-76 and AN-124 aircraft as competition. To date, orders have been placed by Germany (60), France (50), Spain (27), Britain (25), Turkey (10), South Africa (8), Belgium (7), Malaysia (4), Chile (3, to finalize), and Luxembourg (1).

In the immediate term, however, the firm’s biggest issue is timing. In November 2007, “Airbus A400M Program Delayed 6-12 Months” covered ongoing issues with Airbus’ new military transport aircraft. Without no flying aircraft and a backlog of almost 200 planes, Airbus has already lost potential opportunities in Norway, Canada, and India; even as Lockheed Martin uses that time to solidify the MC/HC-130J variant’s position as a Special Operations aircraft. June 26/08 saw the first A400M aircraft rolled out at the final assembly line in Seville, Spain, but aircraft weight growth is being reported as a critical issue, testbed issues are slowing engine certification, and first flight has now been moved back again again from summer 2008 to early 2009.

The key milestone remains the beginning of deliveries, which has escalated into a significant contractual issue at Airbus. In September 2008, EADS CEO Louis Gallois has reportedly sent a letter to the governments of 7 countries who have ordered the A400M, asking them to waive the contract’s built-in penalties for late delivery. Or face a freeze in production from Airbus.

Those production delays have come to pass, and EADS’ Q3 2008 financials include a number of elements related to the A400M…

A400M concept
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Gallois is quoted as saying all expected profits from the initial 180 orders are already invested, adding that the A400M is “a heavy lossmaker” which is creating problems for EADS’ financial performance. He reportedly adds that the present position could become “untenable” within months unless a deal is agreed that “keeps everyone happy.” Based on reports in the French and German press, program cost escalation of around EUR 700 million could add cost renegotiation to the discussions, as well as the waiver of penalty clauses.

EADS is currently facing several major investment sinks. One is the ongoing effort to address issues with its A380 super-jumbo, which has cost the firm billions of euros. Another is the decision to develop the A350XWB as a major new technology project, after existing customers told Airbus that its plan for incremental improvements to existing designs would not be able to compete with Boeing’s 777. Then there’s the market for “single-aisle” airliners like Airbus’ A320 family, which makes up the bulk of Airbus’ orders. With Boeing working on a 737NG project to bring the next generation of aircraft to market in that class, Airbus must continue to invest billions of its own or face the prospect of a serious strategic setback.

The A400M’s issues leave the project flying directly into this financial storm. Project delays are already costly in that situation, and a November 2007 release from EADS reported a EUR 1.2 – 1.4 billion charge to earnings flow (up to $2 billion) as a result of the existing delay. Payment of significant penalty clauses on its first 180 aircraft would exacerbate that problem sharply, by slashing profitability on what could still turn out to be a majority of the A400M’s total lifetime orders.

With anticipated A400M profits already invested, every dollar of profitability slashed would have to be replaced with investment dollars, at a time when multiple investment projects are already straining Airbus’ capacity. All without any assurance that the A400M’s initial margin issues would be made up with enough subsequent orders at full rate to create an acceptable average return.

Worse, Airbus’ classic resort to government subsidies for investment dollars is constrained by a trade dispute with the USA over that exact issue, at a time when a $35 billion aerial tanker contract that Airbus now leads hangs in the balance.

To date, Germany is holding somewhat firm, saying that “financial concessions” should only be discussed upon receipt of the planes. Reactions have yet to become public from other customers, but even a deal that achieved relief from penalties in Germany, France, and Spain would cover 76% of the aircraft’s initial orders. Reports from London’s Financial Times, however, indicate that partner governments in France and the UK were consulted before Germany issued its refusal.

If so, the ball is now firmly in EADS’ court.

Related Updates

slow starter?
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Nov 14/08: EADS releases its Q3 2008 results, which include considerable discussion of the A400M. Key excerpts:

“As the outcome of the A400M construction contract cannot be estimated reliably, EADS can currently not comply with all requirements to account for the contract under the estimate-at-completion accounting methodology…. EADS has suspended the application of estimate at completion methodology accounting [“milestone accounting” for the A400M project] and has then recognised contract costs incurred to date as an expense directly in the income statement as well as corresponding revenues as far as such contract costs incurred are expected to be recoverable under the “early stage” method of accounting. The loss-at-completion provision was then updated only to cover additional losses under the contract which EADS was able to estimate reliably.”

Nov 4/08: Reuters relays a report from the French newspaper Les Echos that Airbus Military has suspended A400M production, and the first flight. A new planning schedule for the project is not expected before December 2008.

At present, 2 planes have been assembled, a 3rd is mostly complete, and some plane sections have been built or are undergoing assembly. The French newspaper quoted a source close to the program, which translates as:

“If the rate isn’t slowed down, the problem is one will end up with lots of aircraft parked up that risk having to be taken back [to fix the issues that one always finds in flight testing].”

See: Les Echos [Francais] | De Tijd [Dutch] | Reuters.

Oct 29/08: In the wake of cabinet approval for France’s 6-year defense planning law, Reuters quotes French defense minister Herve Morin:

“I told (EADS CEO Louis) Gallois I agreed to look at things with regard to penalties. With the explicit condition that if one day we were ready to close our eyes to a certain number of penalties, EADS commits itself to a precise, firm and definitive delivery date.”

Sept 25/08: Safran Group, part of the EuroProp International consortium building the A400M’s TP400-D6 engines, issues a release in response to EADS. It says:

“SAFRAN, along with its partners in EPI, the European consortium in charge of the engines for the A400M military transport, would like to clarify the following points.

2) The control software for these engines, also covering control of the propeller and the nacelle, which are the responsibility of Airbus Military, are currently in the final phase of compliance with civil aviation standards. However, prior to the first flight of the A400M, this software will integrate adjustments following the completion of engine test flights on a C-130. These tests, which are under the responsibility of Airbus Military, have not yet started; EPI delivered the test engine in late 2007, and received flight readiness approval for the engine and associated software on the C-130 in April 2008.”

Translation: if there are program delays look to EADS Airbus, not EPI.

Sept 25/08: An EADS release confirms that the A400M’s first flight will be delayed, but will not commit – yet – to early 2009:

”...because of the unavailability of the propulsion system. The first flight actually depends on the results of the test campaign to be done on the flying test bed, which should start in the coming weeks, and on the readiness of the propulsion system. Only after this and further discussions with customers, the financial, technical and schedule implications can be reliably assessed. The 2008 guidance of the group is not changed at this point.”

Additional Readings

• Financial Times, London (Sept 21/08) – Berlin snubs EADS plea. “The reply from Berlin, which officials said was made after consulting with partner governments including France and the UK, is bad news for Mr Gallois, who has said the A400 will never make a profit under the seven-year-old contract.”

• Agence France Presse, via Yahoo! (Sept 20/08) – EADS could freeze A400M production amid late-delivery row

• Reuters (Sept 20/08) – UPDATE 1-EADS pleads not to be fined for A400M delay -FTD

• South Africa’s Engineering News (Sept 19/08) – SA aviation company admits to challenges with A400M. Cites weight growth issues, and adds: “South African aircraft components manufacturing and aircraft assembly company Denel Saab Aerostructures (DSA) has had to redesign some of the components it is producing for the multinational Airbus Military A400M transport aircraft project, owing to a number of critical factors affecting the basic design. DSA is also considering joining the [DID: C-130 sized] Embraer C390 military transport aircraft project…”

• Flight International (Sept 17/08) – A400M gets a boost, as TP400 engine hits full power. First time achievement on the testbed aircraft. The engines are designed to generate 11,000 shp.

• Aviaiton International News (Sept 16/08) – Testbed Problems Add To A400M Delay. “AIN understands that the problems have included vibration in the fuselage from the eight-blade propellers, and the need to protect the C-130’s rear wing and flap from the much greater heat produced by the TP400….In the 14 weeks since the TP400 was first ground-run on the C-130, only six hours have been logged. Program officials previously said that 30 hours of ground running would be required before the testbed could fly, and 50 hours of flight time would be required before the A400M could make its first flight.”

• EADS (June 26/08) – First A400M Military Transporter Rolled Out

• DID (Nov 5/07) – Airbus A400M Program Delayed 6-12 Months. Expected first flight moved from January 2008 to summer 2008.