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5 months ago
Airbus faces cash headache, lengthy talks over A400M delays
March 31, 2017 / 1:42 PM / 5 months ago

Airbus faces cash headache, lengthy talks over A400M delays

An Airbus A400m military aircraft participates in a flying display during the 51st Paris Air Show at Le Bourget airport near Paris, June 15, 2015.Pascal Rossignol

PARIS/BERLIN (Reuters) - Airbus (AIR.PA) faces a cash squeeze and months of uncertainty over its troubled A400M troop plane after buyer nations upheld penalty clauses for delays to Europe's largest defense project.

The Toulouse-based group has called for help on the 20 billion-euro ($21.4 billion) program as it continues to encounter technical problems, seven years after winning a 3.5 billion-euro bailout from seven NATO nations.

On Thursday Airbus defense boss Dirk Hoke met European buyers and a source with knowledge of the talks said nations maintained penalties, but agreed to keep talking.

Airbus has hinted at a broad shopping list of demands including a better share of liabilities on the A400M's engines, whose development has faced a series of problems.

However, people familiar with the project say Airbus's campaign chiefly boils down to concerns over a shortfall in cash payments, especially from the largest customer Germany. It is not this time asking for an injection of new public funds, they add.

Insiders say Germany is withholding some 15 percent of cash payments under financial retention clauses in the contract because some A400M systems are not working as planned.

That hurts Airbus when it faces volatility in cash planning due in part to choppy commercial markets.

It also risks inflaming prickly relations between Airbus and one of its government shareholders. Berlin owns 11 percent of Airbus and is the biggest A400M buyer with 53 planes on order.

Airbus declined to comment on the talks.

TECHNICAL PROBLEMS

Technical problems have put the A400M years behind schedule, with Germany's share of the costs having risen to 9.6 billion euros from an initial estimate of 8.1 billion.

An Airbus A400M military transport plane is parked at the Airbus assembly plant during an event in the Andalusian capital of Seville, southern Spain, December 1, 2016.Marcelo del Pozo

Problems range from genuine shortfalls in its ability to wage war to apparently minor discrepancies.

In one example that some describe as splitting hairs, one of the fuel tanks is supposed to hold 64,000 liters but only holds 63,500 and has been marked as "contract not fulfilled".

But in an example of deeper issues, a defensive system for the German air force does not meet specifications, though Airbus insists it is still ahead of many rivals.For now, buyers are standing their ground and forcing Airbus to provide what was agreed, though some have not ruled out short-term relief.

German Defence Minister Ursula von der Leyen has indicated she plans to make full use of clauses that allow Berlin to withhold payments. German officials say none of the eight aircraft delivered to Germany so far fully met specifications.

Germany has also asked for 39.4 million euros as compensation for delays on the first five aircraft.

Defence sources say the hard-nosed approach reflects a shift away from cozy relationships when arms firms would freely commit to unrealistic assignments and then strike a compromise.

Buyers, on the other hand, would order over-ambitious kit to secure extra work for their own factories. Such over-reach was typically worked out in negotiations, but cash-strapped European governments are nowadays playing by tougher rules.

Analysts say the A400M was one of the first major defense projects to contain a fixed price but failed to get rid of bloated requirements, putting Airbus repeatedly on collision course with buyers over the bill for sorting out problems.

Buyers insist mismanagement inside Airbus is largely to blame for billions of euros of cost overruns.

Although all sides have agreed to meet in June, little progress is expected until German elections in September.

That echoes the pattern of previous bailout negotiations when Airbus called for a new deal in early 2009, which was also a German election year. Talks only began in earnest after that year's September polls and a final deal was struck in 2010.

(This story corrects name of Airbus representative in third paragraph from CEO Tom Enders to defence boss Dirk Hoke)

Editing by Keith Weir

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