The over-budget A400 cargo plane is one of many headaches for Airbus chief Enders
By Andrea Rothman
(Bloomberg) — Airbus SAS's A400M military plane has left former paratrooper-turned-Chief Executive Officer Tom Enders fighting to deliver on a program that's over budget, behind schedule and testing the patience of seven countries.
The plane is set to perform its maiden flight in Seville, Spain, tomorrow, six years after European governments ordered 180 jets for 20 billion euros ($30 billion). The A400M was commissioned under a set-price commercial contract rather than a military deal, which Enders has called a "big mistake" because it left Airbus to pay for cost overruns and penalties.
Enders has been doing damage control since he took over in 2007. He inherited the A380 super-jumbo jet that is years behind schedule. The A400M is sapping cash and engineering resources that Airbus needs to compete with Boeing (BA) on new models of its best-selling commercial planes. And airlines are deferring deliveries amid the worst travel slump in decades.
"Enders has a huge set of tasks over the next few years," said Nick Cunningham, an analyst at London-based Evolution Securities. "He inherited the problems, he didn't create them, yet as with any incoming leadership, there's a point where you have to take ownership."
His efforts to renegotiate the contracts have been held up because the countries that ordered the A400M — among them Germany, France, the U.K. and Belgium — are at odds over the future of the program. The company has already taken 2.3 billion euros in charges against money lost on the project. Enders declined to be interviewed for this story.
Representatives met in Berlin last month and again on Dec. 2 and failed to overcome a stalemate over the contract, which Airbus parent European Aeronautics, Defence & Space Co. wants revised to absorb as much as 5 billion euros in cost overruns. Both sides are aiming for a new agreement by year-end.
Abandoning the program outright would leave EADS with about 6 billion euros in upfront payments that it would need to refund. The European partners would be without a modern military transporter to replace decades-old Transall and Hercules models, at a time when Germany, the A400M's biggest client, and other European countries engage in more military missions abroad.
EADS has denied any intention of walking away from the project. The company, based in Paris and Munich, has asked the governments for about 5 billion euros in additional funding, according to German Deputy Defense Minister Christian Schmidt.
The A400M can carry two attack helicopters or 116 soldiers. The plane is able to fly as high as 40,000 feet (12,000 meters), and is capable of low-altitude manoeuvres as well as landings on short, unprepared runways. The A400M, with a list price of about 100 million euros, also doubles as an in-air refueling vehicle.
The biggest delays stemmed from difficulties developing the engines and the software that links the engine to the plane. The turbo-propeller engine, the world's biggest, and its software were developed by a European group, a requirement made by the A400M customers. Airbus had originally sought to work with United Technology (UTX)'s Pratt & Whitney, which has years of experience in that field.
German-born Enders, 50, who still does parachute jumps in his free time, has been running Airbus since July 2007, after leading EADS together with Frenchman Louis Gallois. Gallois, 65, became the sole CEO in a reorganization, and shareholders agreed at the time to "alternate the nationalities" on the company top job, giving Enders a chance to reclaim the EADS leadership.
Enders became the fifth person in two years to run Airbus, inheriting a complex of challenges that included two-year delays and 6 billion-euro cost overruns on the A380, and the A400M with its commercial contract that Enders in January called a "recipe for disaster." The A380 and A400M programs were the brainchild of Noel Forgeard, the former EADS CEO who is now under investigation for insider trading.
The A400M, Airbus's first military project, isn't Enders's only concern. His record on fixing the A380 jumbo hasn't been without setbacks either. While Enders got one A380 out the door in 2007 and kept a promise to deliver 12 jets in 2008, the 25 A380s he targeted for 2009 delivery have dropped to about half.
An aerial tanker replacement order valued at more than $35 billion slipped from Enders's fingers when Boeing successfully lobbied for the competition to be renegotiated, with a final decision still pending.
"The A380 problems were already massive when he started, so I don't think there's anything he could have done," says Frank Skodzik, an analyst at Commerzbank with a "reduce" rating on EADS shares. "I just don't think there are many options."
Enders is under pressure to fix the A380 and A400M projects if he wants to succeed on the A350 wide-body plane that will use an unprecedented amount of composite materials to compete with Boeing's 787 Dreamliner model. Work on the first prototype began last week, when workers laid composite strips for one section.
Airbus had originally planned to deliver its first A400Ms in 2009, giving the company time to smooth out production on the A380 and prepare for the A350 development. The delays have put the three programs on collision course and left Enders with limited resources to shift from one project to another.
"The A400M is so late that Enders doesn't have engineering capacity" for the A350, said Commerzbank's Skodzik.
The governments involved, negotiating under the umbrella of pan-European military purchaser Occar, have studied scenarios such as cutting the number of planes but keeping the price.
Showing off the plane on its maiden flight this week may give Enders more clout to push for a new deal with governments. Thousands of European production jobs may be at stake, and Enders may find his own career in doubt if the A400M fails, said Rupinder Vig, an analyst at Morgan Stanley (MS) in London.
"If he can resolve the A400m in a favorable way for EADS and for shareholders, and if he can get the A380 off the problem list, I think those two things would go a long way toward saying 'Yes, he should have the job,'" Vig said. "If he can't do those things, there will be a lot of question marks around whether he is the right man to run EADS."
To contact the reporter on this story: Andrea Rothman in Paris at firstname.lastname@example.org.