Definitive agreement for the financing of the A400M

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Aeronáutica Andaluza nº14
Enero - Marzo 2010
1 Enero 2010

The countries purchasing the A400M and the European aeronautical consortium EADS have reached a final agreement to salvage the programme for the military airlifter to be assembled in Seville, which comprises an important part of the work being carried out by companies in the Andalusian aeronautical sector. The nations involved in the project will contribute a total of 3.5 billion euros to meet the cost over-runs of the aircraft, in exchange for additional guarantees of repayment through future exports to other countries.

The companies of the Andalusian aeronautical sector are now breathing a little easier. After various months of intense and complicated negotiations, the seven countries ordering the A400M have finally reached an agreement with the European aeronautical Consortium EADS for the financing of the cost overruns of the military airlifter, calculated at around 11 billion euros.

The nations involved in the programme, Spain, France, Germany, the UK, Belgium, Luxembourg and Turkey, will inject a total of 3.5 billion euros to address the economic problems of the project deriving from technical difficulties and delays arising during the development of the aircraft, mainly in relation to the engines, which endangered this European defence project and forced the various nations and the company to negotiate a mixed deal consisting of financial aid and guarantees.

This is significantly less than the amount initially claimed by EADS of 5.3 billion euros, but the group has considered it enough to re-launch a programme which is now suffering a three-year delay. The definitive rescue of the A400M includes a total of 2 billion euros in direct aid, a 10% increase in the initial price agreed upon for the 180 aircraft ordered by the participating countries, which were initially priced at 20 billion euros.

Another 1.5 billion eurosthe remainder of the total of 3.5 billion euroswill be granted in the form of guarantees to be repaid through future exports to other countries, the aeronautical company announced, which considers that there is now “a solid base for the successful development of the A400M programme” to be assembled in the facilities of Airbus Military at San Pablo, Seville, and which will involve a large number of the companies in the Andalusian aeronautical sector.

The agreement also contemplates a waiver by the seven countries of possible claims for delays and revision of the loss provision for the programme in 2009 to 1.8 billion euros. The CEO of EADS, Louis Gallois, has indicated that he “deeply appreciates” the support of the seven countries participating in the programme and highlighted that thanks to the agreement reached between the parties the project is now back on track. “Although the Group has to take an additional significant provision, this stabilises the programme,” he highlighted. This final agreement, which must be approved and ratified by the respective governments and parliaments, was announced in early March in Berlin during the meeting of the Defence Ministers of the countries purchasing the A400M, where renewed negotiations were carried out with EADS to achieve the definitive reactivation of the project. Nonetheless, and despite all the efforts made, there are still certain matters which need to be resolved in the coming weeks. For example, the United Kingdom disagrees with the other nations as to how the cost should be shared and insists on the return of the money.

Tough negotiations

The definitive agreement to salvage the A400M has involved various months of intense negotiations and meetings between EADS and the countries participating in the project.

The European company has been putting on the pressure in recent months, insisting on the need for a greater effort by partner nations to assume the cost over-runs of the aircraft and seeking answers to their proposals as soon as possible in order to clear up the future of the A400M prior to summer. The pressure on both sides even led EADS to threaten Germany, France and Spain, the main promoters of the A400M, with paralysis of the Talarion aerospace project. This European endeavour in the field of unmanned aerial vehicles (UAVs) is considered to be of key importance to the Spanish aeronautical industry as it will signify the greatest Spanish participation in an international aeronautical project (33%) Its viability is largely dependent upon whether EADS will install the UAV excellence centre in our country, together with a testing and training centre for these types of aircraft.

The tense negotiations finally resulted after various weeks in the emergence of a proposal which is to the satisfaction of the aeronautical consortium and the countries purchasing the A400M. An initial agreement was reached in late February at the meeting held by the Defence Ministers at Palma de Mallorca on the occasion of Spain’s assumption of the presidency of the European Union. The representatives of the various countries then spoke of a “significant advance” in the negotiations with EADS and that the agreement was now in its final stages. The Spanish Defence Minister, Carme Chacón, announced an agreement in principle between the partner nations and the company to salvage the A400M. "The countries involved in the project have made clear their commitment and willingness to reach an agreement as soon as possible. The A400M programme is a success for the European aeronautical industry,” she highlighted.

Andalusian support

This news was received with satisfaction in Andalusia and by the companies of the region's aeronautical sector. The Minister of Innovation, Science and Enterprise of the Andalusian Regional Government, Martin Soler, welcomed the definitive agreement reached between the parties and highlighted that this agreement “enables the launch of the A400M programme”, which in terms of employment in the aeronautical industry “means that Andalusia, through the Seville-Cadiz axis, will consolidate itself as the third most important aeronautical cluster in Europe, together with Toulouse (France) and Hamburg (Germany).” Soler assured that the project “provides very important support for the Andalusian aeronautical industry, which has made a qualitative leap in terms of intelligence and knowledge to specialise in new materials, engineering and software, and is no longer a region with an aeronautical industry traditionally associated with sheet metal.” The Andalusian aeronautical industry also indicated its satisfaction following the agreement reached, in particular the 30-strong group of companies which participate directly in the development of the A400M, an indication of the work capacity and technology which the firms in the sector currently have.

The agreement was also considered to be a success by the representatives of the workers on the Final Assembly Lion (FAL), EADS at a Spanish level and the trade unions, who nonetheless were waiting to see how the extra costs of the programme will be covered and above all whether it will involve a possible restructuring of the plant and even reduction of jobs. The FAL for the A400M has involved an investment of nearly 400 million euros in Andalusia, and currently generates direct subcontracting for a value of 180 million euros in the Andalusian auxiliary industry. This could reach 600 million euros according to forecasts for the programme, which in terms of direct employment corresponds to 260 direct and stable jobs in the industry. The FAL in San Pablo, Seville, will directly employ more than 450 workers when it is fully functioning, in addition to the more than 1,000 employees who are currently working at its facilities.

Loss of 763 million euros in 2009 due to the A400M

In 2009 EADS posted a loss of 763 million euros as opposed to the 1.572 billion euro profit in the preceding financial year, due to the provisions for delays in new programmes, in particular the A400M, which recorded losses of 1.8 billion euros. It had a turnover of 42.822 billion euros, 1% less than the 43.265 billion euros of the previous year, while the EBITDA (Earnings before Tax, Interest, Depreciation and Amortisation) reached 1.446 billion euros, a decrease of 67% with respect to 2008. The majority of the 42.822 billion euro turnover corresponded to the aircraft division Airbus and its affiliate Airbus Military, with a total of 28.067 billion euros, 3% less than the previous year. In terms of deliveries, Airbus delivered a record total of 498 aircraft as opposed to 483 in 2008, although this delivery was contrasted by a deterioration in prices, especially for the delivery of the A330, and the effects of the dollar-euro exchange rate.

The company registered 310 new commercial orders over the course of the year, and cancellations remained steady at a total of 39 aircraft. 10 units of the giant A380 were also delivered in 2009 and development continues on the new A350 commercial airliner, which still has a two-year deadline for delivery of the first aircraft.