Airbus CEO to Meet A400M Ministers on March 30

PARIS --- The seven partner governments of the A400M program will meet in Madrid on March 30, and have invited the CEO of Airbus to discuss the troubled program, which Airbus revealed Feb. 22 continued to “hemorrhage” cash and which still faces substantial shortfalls in its contractual performance. The meeting will be held at deputy minister level, and will be chaired by Spain's junior defense minister, Agustin Conde.

Airbus CEO Tom Enders will ask governments to stop charging “financial penalties, liquidated damages and cash retentions” over delivery delays and performance shortfalls on the A400M, but is not looking for additional government funding, he told reporters Feb 22. “The problems are a mixture of many things, but we need to stop the bleeding.”

Governments, if initial reactions from Germany and Spain are a guide, are likely to insist that the company live up to its obligations in terms of deliveries and aircraft capabilities. In addition to Spain and Germany, the UK, France, Turkey, Belgium and Luxembourg are also funding the A400M.

Some government officials involved in the program say the penalties levied so far are symbolic, and their amounts should not worry a company as large as Airbus. They think the company is really seeking a radical overhaul of the program’s structures and contracts to ensure future profitability.

The latest crisis erupted on Feb. 22 when, during a web broadcast about the company’s 2016 financial results, Enders told reporters that Airbus had taken an additional financial charge of 1.21 billion euros for the A400M in the fourth quarter, bringing the total write-off for the year to 2.21 billion euros, something it is no longer willing to continue, Enders said. “These losses are too big.”

While it was doing all it could to deliver compliant A400Ms, Enders said Airbus was struggling to cope with “a lot of penalties, liquidated damages and cash retentions” from customer governments, as well facing as red tape and unreasonable delays when it requests government assistance or assets to certify or qualify aircraft performance.

The penalties levied by individual governments are tied to late delivery of the A400M, to the delivery of aircraft with incomplete capabilities and performance, and to repeated technical faults.

A Spanish defense ministry spokesman told Agence France-Presse that Enders had "surprised the seven partner countries with declarations to the media about difficulties encountered in the development of the program," while a German defense ministry spokesman urged the firm to live up to its contractual obligations and deliver the promised A400M.

Germany is unhappy that its latest A400M broke down while flying defense minister Ursula von der Leyen to an official ceremony in Lithuania, forcing her to fly home in an old C-160 Transall.

France’s defense ministry is particularly unhappy that Airbus failed to deliver the six tactically-capable A400Ms it had promised for 2016 (the last two were delivered by mid-February), as France needs the new aircraft to resupply its troops deployed in Mali and Jordan.

In addition to the partner nations, Airbus also wants to more closely involve the makers of the A400M’s engines in any future renegotiation of the program’s contract framework, as it considers that the engines have caused more than their share or technical problems.

We also “need a big contribution by our engine partners…without them, we cannot deliver,” as “a huge part of the problems on this aircraft are caused by immature engines” for which Airbus is contractually responsible because, “when we signed the contract, we also took on liability and responsibility for the engines.” The A400M’s TP-400 turboprop engines are made by the Europrop consortium, a joint venture of France’s Safran, Rolls-Royce, Germany’s MTU Aero Engines and Spain's ITP.

However, Airbus is unlikely to obtain much relief there. Safran said Feb 24 it would be prepared to discuss changes to the A400M engine contract, but ruled out sharing in Airbus’ penalties, Reuters reported from the company’s annual press conference here.

"We can't pay other peoples' penalties when our contract doesn't foresee it, so that is out of the question and we will respect our contract. If, for the future, there is a proposal for different conditions which could offer more incentives for everyone, then we will look at it with great attention and we will decide collectively," Reuters quoted Safran Chief Executive Philippe Petitcolin as telling reporters.

What Airbus said about the A400M in its Feb. 22 statement

-- The A400M FY 2016 charge totals € 2.2 billion: significant EPS burden, programme remains a concern.

…/…

“We have delivered on the commitments that we gave a year ago, and achieved our guidance and objectives, with one exception, the A400M, where we had to take another significant charge totalling 2.2 billion euros in 2016. De-risking the programme and strengthening programme execution are our top priorities for this aircraft in 2017,” said Tom Enders, Airbus Chief Executive Officer.

…/…

On the A400M programme, deliveries increased to 17 aircraft in 2016 (2015: 11 deliveries) with two delivered year-to-date in 2017. The propeller gearbox (PGB) crisis was addressed in the second half of the year with the interim fix to increase the time between inspection intervals.

Capability was stepped up with the aircraft now being delivered including some tactical capability. During the second half of 2016, further challenges were encountered to meet military capability enhancements and management reassessed the industrial cost of the programme, now including an estimation of the commercial exposure.

As a result of these reviews a total charge of € 2.2 billion was recorded in 2016 (including € 1.2 billion in the fourth quarter). Cash retentions by customers will continue to weigh significantly in 2017 and 2018 in particular. Challenges remain on meeting contractual capabilities, securing sufficient export orders in time, cost reduction and commercial exposure, which could be significant.

Given the size of the cumulative A400M programme loss, the Board of Directors has mandated management to re-engage with customers to cap the remaining exposure.

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