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Tue, Jan 19, 2010

Analyst: Threat To Scrap A400M May Be Real

But Ditching The Program Could Have A Serious Impact The European Aerospace Industry

The recent threat from the Airbus Chief about the cancellation of the A400M Military transport aircraft program, and the subsequent meeting of the representatives of the partner countries to discuss the way forward on the extra funding, have triggered a wave of anxiety among various industry stakeholders. That analysis comes from Balaji Srimoolanathan, a Program Manager with the Frost & Sullivan Aerospace & Defence Practice. The lack of a solid outcome at the end of the meeting, which snubbed EADS by not extending an invitation to the company, has clearly outlined that a decision on this would not be instantaneous and that the industry has got to wait for multiple rounds of discussions to happen before arriving at an agreeable solution to resolve the situation.

The final agreement when arrived at could be very important, as this could impact the future of not only Airbus but also the entire European aerospace industry. The A400M completed its maiden flight in Spain last month - with the first delivery due in three years. The program, launched six years ago with an order for 180 planes from seven governments, has been plagued by problems with weight and its new engines.

If the partner countries do not agree to fund as expected, a subsequent move by Airbus to stop further development of the program could lead to severe financial hit on Airbus which could lead up to several billions of Euros in returning advance payments and many more billions in compensations and job cuts to the tune of 10000 and more across Europe. This may also further weaken the position of Airbus in the global scenario against its competitor Boeing. These could lead to further losses which may occur due to share value depreciation and affect the other projects that the company is involved in.

Srimoolanathan'a analysis on the root cause of this problem reveals that the contracts for this program signed with the seven major customers were faulty, in a sense that it does not allow any room for Airbus to accommodate any cost escalations incurred during the development into the price of the aircraft. Also, the influence of European governments on supplier selections through political conditions is seen to be backfiring at the moment. In summary, it appears to be a series of wrong decisions made not only by Airbus but also by the governments which partnered to develop the aircraft. This also reiterates the need for commercial entities such as Airbus to be left alone and free of political interferences in business decisions.

With the first meeting over and with signs of the situation softening a bit, the industry looks forward to a positive consensus over this issue by early February. Simply put, not only Airbus, but also the entire European aerospace industry and the governments have too much in stake to let Airbus ditch this program. The partner countries should ideally take this macroeconomic scenario into consideration while framing their final set of decisions on whether to support or not support this program and its future rather than trying to stick to contractual terms and conditions. It is imperative that these governments take off their customer costume and put on their partner ones at this hour of need.

FMI: www.frost.com

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