PARIS – Airbus will ask client nations to agree to a cap on financial penalties on late delivery of the A400M, as the company booked a 2016 charge of €2.2 billion ($2.3 billion) on its military airlifter program, chief executive Tom Enders said on Wednesday.
That request seeks to make good an "original sin" committed when Airbus signed an A400M contract "too short on budget and time line," he said.
In a bid to "stop the bleeding" and "de-risk the program," the Airbus board of directors yesterday authorized a letter of seven or eight topics to six of the client nations and OCCAR, the European procurement agency, Enders told journalists on a video link.
The Airbus chairman and CEO signed that letter, which went out this morning and sought to open negotiations for a settlement that would stem losses that are draining company finances, Enders said.
Airbus, meanwhile, is delivering an operational aircraft.
"I think it's important to state we are delivering right now aircraft that our customers can fly into harm's way," he said.
The 2016 financial hit stems from the aircraft builder adding a further €1.2 billion charge in the fourth quarter after booking €1 billion in the first half. Those charges, which cover clients retaining cash because of slow shipment and retrofit, add to the previous €5 billion charges booked.
Clients are holding on to cash and charging "liquidated damages" rather than paying fully when an aircraft is delivered, and this is will weigh heavily in 2017 and 2018, Airbus said in a statement with the annual results.
That cash retention reflects the failure to deliver the plane in the contracted specification, and the company will only be fully paid when the retrofit is completed.
That adds to the cost of an industrial ramp-up of the A400M, concerns which are seen as a "huge liability for the entire company," Enders said.
"Challenges remain on meeting contractual capabilities, securing sufficient export orders in time, cost reduction and commercial exposure, which could be significant," Airbus said. "Given the size of the cumulative A400M program loss, the board of directors has mandated management to re-engage with customers to cap the remaining exposure."
"The statement shows the Airbus board is very sensitive to the remaining scale of risk on A400M, and Airbus and the customers have not been in communication in 2016 as would have been expected," said Sash Tusa, analyst with Agency Partners.
Military specifications on the A400M make the plane more complex than the A350 and A380 airliners, and Airbus also committed the "incredible blunder" of agreeing to assume liability for the engines, Enders said. That is a rare responsibility in the military field as engines are usually government furnished equipment.
Much of the late delivery is due to the "immaturity" of the engine, a problem which remains to be fully solved, he said. Airbus committed in 2003 to deliver the first aircraft with full military capability, a level which is "impossible with complex military systems."
The cash retentions and penalties for late delivery were part of a €3.5 billion emergency funding agreement Airbus and the clients reached in 2010.
Airbus now seeks a solution which offers clients greater confidence in the delivery schedule and to "de-risk the financial situation forever," Enders said.
The operational challenges are delivery of the paratroopers out of both sides of the plane simultaneously, and a defensive aids subsystem, or DASS, he said. The present version is operational and can fly at low level, fitted with a DASS for basic protection, and deliver freight.
Airbus also seeks a slashing of red tape, with greater flexibility in national certification and qualification procedures.
The Direction Générale de l'Armement, the French defense-procurement office, declined comment.
Airbus expected to deliver more than 20 A400Ms this year, and delivered 17 last year, missing its target of 20 shipments.
The company is "close to back on track," Airbus chief operating officer Fabrice Bregier said.
Risk remains and Airbus seeks negotiations "to better ring-fence and cap the exposure," said chief financial officer Harald Wilhelm.
The DGA certified Feb. 18 an expected third retrofit A400M, which is at Orleans air base, a spokesman said. That completes the expected six A400Ms in the "tactical" version, more capable than a simple freight plane.
The French air force expects to receive two more units this year, two in 2018, bringing the total to 15 in the 2014-19 multiyear budget law, the service said. Following an interim fix on the propeller gear box, the A400M can now fly 650 hours, or a little more than a year's operation, before a maintenance inspection. After those 650 hours, there is an additional check envisioned every 150 hours of flight.
The French service received its first A400M in 2013. The present version allows an airdrop of three cargo pallets, and trials are underway to allow soon a drop of nine.
The six countries Enders referred to are those which have received the A400M, namely Britain, France, Germany, Malaysia, Spain and Turkey, an Airbus spokesman said. Airbus has yet to deliver the aircraft to be shared by Belgium and Luxembourg.
Airbus reported a 4 percent fall in "adjusted" operating income to €3.95 billion euros on sales which rose 3 percent to €66.58 billion.
The problems on the TP400-6 engine stem from cracks found on the propeller gearbox, which has been fixed with an interim repair from the manufacturer, Avio, and its parent, General Electric, with a long-term solution due this year.
The Airbus Group chairman is Denis Ranque, former chairman and CEO of Thales.