A400M Cost Overrun Set at 10%
PARIS - An agreement by customer nations to provide 3.5 billion euros ($4.8 billion) of financial support for the A400M represents a 10 percent cost overrun on the airlifter program, with Britain expected to cancel two or three aircraft, French Defense Minister Hervé Morin said March 8.
The prospective cut in orders by London is smaller than expected, with previous estimates going to six fewer units than the original 25 planes purchased, because of the cost overrun. As part of the overall pact, Britain is expected to cancel "two or three aircraft," Morin told a press conference on the A400M agreement reached March 5. Those prospective cancellations came under the agreement which limits the maximum cancellations to 10, he said.
No other country has signaled an intention to cancel, he said.
A 10 percent overrun was "extremely reasonable," given that many arms programs run over budget, Morin said, citing the Eurofighter Typhoon and Joint Strike Fighter programs.
That 10 percent figure comprises the funding that each of the seven clients will contribute on a pro rata basis based on the number of aircraft ordered, he said. For France, the extra cost will be 550 million euros, based on the 5.5 billion euros budgeted for acquisition, he said. The overall base figure for France rises to 7 billion euros when the development costs are included, he said.
Under the agreement reached March 8, the countries will accept a 2 billion euro increase over the contract price and contribute 1.5 billion euros in export levy facilities. The 10 percent overrun funded by the customers compares with EADS' own estimate of around 25 percent excess on the program budget.
EADS had asked the customers to pay 24.39 billion euros, that is 5.2 billion extra on the original contract price of 19.19 billion agreed in 2003, according to a report by PricewaterhouseCooper prepared for the contract agency OCCAR. EADS is due to report a 2009 net and operating loss when it publishes results March 9.
Under the agreement reached, the customers waived 1.2 billion euros of penalties for delays and will speed up pre-delivery payments between 2010 and 2014 to ensure a "minimum treasury" for EADS. The exact amount of those payments remained to be negotiated, along with a clause covering cost inflation on materials for industry, said the procurement chief, Laurent Collet-Billon of the Direction Générale pour l'Armement (DGA).
France would contribute 400 million euros of the total 1.5 billion of export levy facilities, Morin said. The countries would be repaid from future export sales, which Morin estimated at 300 units over the next 20 years. The export levy facilities fall outside the contract terms.
EADS Chief Executive Louis Gallois said last June before the Paris Airshow the company was making the A400M at a loss and would only make money on export orders.
The overall agreement also provides for a staged delivery of capabilities, with an initial operating capability of the basic transport mission, followed by air drop, aerial refuelling and finally low-level flight and automatic terrain following, with a year needed for each new capability.
France will get its first aircraft delivered in 2013, seven units by 2014, 35 in 2020 and the last in 2024. As a stop-gap measure, France will buy eight Casa CN235 light transport aircraft and extend the life of Transall planes to 2018. The cost of buying a mix of C-130Js and C-17s as interim solutions would have been 15 percent more costly than buying the A400M aircraft at the higher price, Morin said.
Belgium, Britain, Germany, France, Luxembourg, Spain and Turkey ordered 180 of the A400M in 2003 under a fixed-price commercial contract with Airbus covering development and production.