EADS, Customers in Showdown Over Eurofighter Tranche 3
Fresh from brinksmanship around the go-forward plan for Europe’s multi-national A400M military transport, EADS has dived into another spat with European governments. The firm is reportedly threatening to suspend production of its 4+ generation Eurofighter Typhoon if the 4 consortium governments can’t firm up their promised 236 Tranche 3 orders by the end of Q1 2009.
Tranche 3 Eurofighters will be the most capable aircraft in the 3-stage program, with full strike capabilities built in, and desired additions that include an AESA radar. In 2008, EADS submitted a range of procurement options to the aircraft’s launch customers (Britain, Germany, Italy and Spain), with the intention of offering them flexibility by dividing promised Tranche 3 orders over time, adding new technologies in faster, smaller stages instead of in large chunks, and other options. Nevertheless, the member countries have yet to commit, and are now late. This situation is actually somewhat familiar, as EADS halted production for about 6 months between the Tranche 1 and Tranche 2 orders…
Reports were not clear concerning the threatened shutdown, but deliveries of Tranche 2 aircraft just began in late 2008, and Saudi Arabia’s in-process export order of 72 Eurofighters make a full shutdown of the production line a very risky move.
The other lever EADS has at its disposal is the contract conditions, which include almost dollar-for-dollar contract penalties to countries that choose to cancel orders.
Its problem is that a combination of Europe’s unwillingness to invest in defense and the current financial crisis have created a serious budget squeeze. Italy (46 Tranche 3) has been hardest hit, and cut its defense procurement budget by 20%; but Britain (88 Tranche 3) is also debating its options, and Spain (34 Tranche 3) has yet to clarify its priorities.
The Eurofighter agreement’s penalty clauses have generally been aimed at the German government, which has been late with key approvals before. Ironically, Germany (68 Tranche 3) has pledged to buy its full allotment of Tranche 3 Eurofighters, with Secretary of Defense Franz-Josef Jung commenting that “before one would pay for [contract cancellation penalty fees], it makes more sense to rather take the aircraft.” Germany is headed into a September 2009 election, however, which could paralyze its coalition government’s ability to approve an expensive defense program.
RESOLUTION: The Eurofghter Tranche 3A order was issued in September 2009.