The EADS Airbus A400M military transport aircraft was supposed to be Europe’s answer to Boeing’s C-17 Globemaster and Lockheed Martin’s C-130.  According to this article, “the A400M was supposed to be a low-risk concept”—so low-risk, in fact, that the company and its customers agreed on a fixed-price for the planes even before development had started.  (Readers of this site should know how a fixed-price development story will end—i.e., not well.)  As the article summarizes—

The program took longer and cost a great deal more than planned due to problems with the engines and software. The first flight took place in December 2009, two years behind schedule, and the first deliveries won’t be until 2012, three years late. EADS has for the last two years been burning through about $100 million of its own each month and taken total charges for the program of $3.6 billion.

As we have written about before, Airbus has been trying to convince its international customers (some of whom are also shareholders in EADS) to pay for the program’s cost growth.  The negotiations have dragged on for more than a year.  As we noted, EADS needed a resolution by February 1, 2010 so that it could book its final share of the program’s loss on its 2009 financial statements. 

The final negotiated agreement has been hammered-out. A Seattle P-I article reports that the agreement includes the following provisions—

• Increase the contract price by 2 billion euros;
• Waive monetary damages related to current delays;
• Provide an additional 1.5 billion euros in exchange for a participation in future export sales;
• Accelerate pre-delivery payments in the 2010-2014 period, with a new schedule to be finalized in the amended contract.

The first article (linked to above) reports that—

EADS will receive $2.04 billion in direct aid to offset losses that would have been reported for the 2009 earnings year. The company will also get a ten percent increase in the price of the aircraft to about $194 million each. If all of the planned sales go through this will generate another $2.7 billion in revenue to help make up for the money EADS spent on the program.

The deal did not solve all of the company’s financial problems.  Reportedly, EADS booked a €1.8 billion loss “provision” on the program, which led the company to report a FY 2009 loss of €763 million compared to a 2008 profit of €1.57 billion.  Meanwhile, this Reuters article reports that “South Africa is still waiting for a 2.9 billion rand repayment from European plane maker Airbus, which has not acknowledged a cancelled deal.”  (We wrote about the cancellation of South Africa’s A400M order here.)

The Reuters article contains this quote from the South African Defence Ministry—

’We await the response of Airbus on the cancellation of this contract so that we can facilitate the return of the money that has already been paid out in line with the agreement we have with them,’ Defence Minister Lindiwe Sisulu told journalists. ‘The recovery of the money obviously is important because it allows us to bid further for any other capacity that is available,’ she said.

Airbus refuses to acknowledge that South Africa cancelled its A400M order and has been holding on to roughly $400 million of its customer’s money for four months?  Awkward….

To conclude, the first article (linked to above) notes—

The A400M has demonstrated, once again, that defense development and acquisition is not easy. Agreeing to a fixed-price contract for a program that ended up being more difficult and complex then planned hamstrung EADS and its buyers. They were faced with a stark choice of writing off seven years of effort and billions of dollars or working out a way to keep the program alive despite stretched budgets. In the end it looked like keeping the aircraft and the 10,000 jobs related to it trumped other considerations.

Seems like a good summary of the situation to us.