Airbus Gets Extension of A400M Contract Moratorium (Update2)

July 24 (Bloomberg) -- Airbus SAS won an extension until the end of this year to renegotiate the contract for its A400M with the governments that ordered the plane in 2003.

At a meeting today in Le Castellet in southern France, ministers from the seven purchasing countries extended a previous moratorium that let talks continue without the governments’ being allowed to cancel the orders, valued at 20 billion euros ($28.4 billion). The original agreement was signed by Airbus parent European Aeronautic, Defence & Space Co.

Airbus is running four years late on the program and terms in the original contract gave purchasers the right to walk away from the deal by April 2009 if the first test flight of the military-transport plane hadn’t taken place by then. The first flight is now planned for December in Seville, Spain, where the plane is being assembled, and the ministers plan to meet there to see the flight.

“We want to succeed, but in financial and physical conditions that are acceptable,” French Defense Minister Herve Morin said at a briefing. “Now we are going to renegotiate the contract until mid-October.”

A willingness to negotiate doesn’t guarantee success, said Nick Witney, a former director of the European Defense Agency and now a Paris-based independent analyst.

‘Very Hard’ Negotiations Ahead

“This decision is just a prelude to some very hard negotiation,” Witney said in a telephone interview. “The single most difficult thing is, who’s going to pick up the tab? There are some big sums of money involved here and customers are not in a mood for letting the company off.”

The British in particular “will dig in their heels on the financial side,” he said.

Attendees of today’s meeting included ministers from France, Britain, Germany, Luxembourg, Spain, Belgium and Turkey.

The officials plan to meet again in Germany in mid-October, followed by another meeting on the day of the test flight. The governments aim to sign a revised contract by the end of this year or early next, Morin said.

Last month, junior defense minister Quentin Davies signaled that the U.K. was reluctant to pay for cost overruns on the A400M, saying talks with EADS and other nations were in a “difficult” stage.

The countries originally signed a fixed-price contract for the A400M in 2003. EADS is pushing the purchasing countries to bear more risk. EADS has lost at least 2.3 billion euros on the project, which involves about 6,000 jobs across Europe.

‘Fully Committed’

“EADS and Airbus are fully committed to finding an agreement that is technically and contractually acceptable to both sides,” the companies said in a statement.

The French and British defense ministers said July 6 that Toulouse, France-based Airbus should “bear the consequences” of the delays.

While waiting for the A400M, now due in 2013, France and Germany, with contracts for 50 and 60 planes respectively, are looking into alternatives to fill their capability gap. These include Lockheed Martin Corp.’s C-130J, Boeing Co.’s C-17 or the Antonov 124, built in Ukraine.

The U.K., with an order for 25 A400Ms, is leasing six C-17s for the Royal Air Force. France, Germany and Britain need military-transport planes for their operations in Afghanistan.

To contact the reporters on this story: Helene Fouquet in Le Castellet, France, via hfouquet@bloomberg.net; Andrea Rothman in Toulouse, France at aerothman@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net