The Wall Street Journal-20080115-Airbus-s Military Project Misfires- Amid Overall Record -07- A400M-s Delays Show Perils of a New Arena
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Airbus's Military Project Misfires; Amid Overall Record '07, A400M's Delays Show Perils of a New Arena
When Airbus announces its 2007 sales tomorrow, it can boast of a record year for commercial-jetliner orders and deliveries, and progress in overcoming troubles with its A380 superjumbo. But the company stands to pay dearly for snags on another high-profile project: the A400M military-transport plane.
The A400M, Airbus's first big foray into military airlift, is already at least six months late. That forced Airbus parent European Aeronautic Defence & Space Co. to take a charge of almost 1.4 billion euros ($2 billion) on the program in its third-quarter results in November.
EADS Chief Executive Louis Gallois warned more delays could follow the plane's first flight in the summer. Chief Financial Officer Hans Peter Ring said the company will have a loss on the first 180 planes.
When Airbus started work on the A400M almost a decade ago, it promised to apply its expertise in handling the cost-obsessed customers and brutal competition of commercial aviation to the world of defense procurement. Instead, Airbus stumbled on problems that have long dogged military contractors: politics, technology and weak project management.
The A400M is Europe's bid to create an all-purpose airlifter that countries around the world badly need. The four-engine propeller plane, which can carry troops, equipment or humanitarian aid, fills a big gap between two existing U.S. planes: Lockheed Martin Corp.'s smaller C-130 and Boeing Co.'s much larger, jet-powered C-17. Goldman Sachs estimated in a research report in September that the A400M could grab around one-third of the market for military-transport planes over the next 20 years, translating into orders for some 500 planes valued at as much as $60 billion.
But Airbus's expertise in commercial jets wasn't so easy to transfer to defense contracting, Mr. Ring conceded. "The logic was wrong," he said, because the engines and military systems "were more complex than expected."
In May 2003, seven European countries agreed to buy 180 A400Ms for roughly 20 billion euros, suggesting a price of around 110 million euros a plane. Airbus promised to deliver the first plane in 2009. But the A400M, which had been under design in various forms for years, had a difficult birth. Before 2003, Germany wavered over whether it could afford the plane. To land the order and break into the potentially lucrative defense business, Airbus committed to developing the aircraft on a tight schedule for a fixed budget, agreeing to swallow any cost overruns.
Executives dismissed the risk, saying they already had delivered hugely demanding jetliners according to strict contracts and would use the same management skills on the A400M.
Now with the threat of more delays, European defense officials are holding Airbus to its word. "We have a contract that is quite well- written and quite solid," said Gen. Nazzareno Cardinali, director of Europe's military-procurement agency, known by its French acronym, Occar. "We are reminding Airbus that they must stick to the contract."
One of the first problems the project hit wasn't technical, but political. In April 2003, Airbus then-Chief Executive Noel Forgeard selected a turbine-powered propeller engine from Pratt & Whitney, a unit of U.S. industrial titan United Technologies Corp. Mr. Forgeard said Pratt's bid was 20% below a competing bid from Europrop International GmbH, a consortium of Britain's Rolls-Royce PLC, France's Safran SA, Germany's MTU Aero Engines and Spain's Industria de Turbo Propulsores.
Pratt's plan was to modify an existing engine, while Europrop proposed developing a bigger one from scratch. The largest and most complex turboprop engine ever built, it would be able to lift more than Pratt's engine but would be tougher to develop. Several European governments, including France's and Germany's, said they would buy A400Ms only if equipped with Europrop engines. So Airbus extended its decision deadline, Europrop cut its price, and Mr. Forgeard announced a "satisfactory outcome."
In mid-2006, when Airbus admitted it had crippling problems building the massive A380 jetliner, EADS investigated whether similar problems lurked in the A400M project. They found several.
The plane's sophisticated new body and wings are coming together well, Airbus says, but equipment attached to the airframe presented big headaches. Installing complex military electronics and defensive systems used to protect the largely unarmed A400M from attacks has been difficult.
EADS chief Mr. Gallois, himself a veteran of the engine business, says because Europe hadn't developed an entirely new turboprop in decades, engineers had to relearn the technology.
Officials at Europrop said their work was partly delayed by shifting requirements. As defense ministries piled more equipment onto the A400M, its planned weight rose, lifting engine-power requirements.
Europrop also had management troubles common among Europe's unwieldy multicountry defense programs, which face conflicting demands from various capitals. The group didn't devote sufficient staffing to the project or monitor progress closely enough, people familiar with the program say.
Justine Steele, a Europrop spokeswoman, said, "Technical issues with certain components have been identified during the testing phase. They either have already been corrected, or modifications are being implemented."
EADS's Mr. Gallois says that although the engine was "a political choice forced on EADS," the company will stick with the A400M contract. "It's not an excuse to say we are not happy now," he said.
Europrop also had management troubles common among Europe's unwieldy multicountry defense programs, which face conflicting demands from various capitals. The group didn't devote sufficient staffing to the project or monitor progress closely enough, people familiar with the program say.
