The €20bn plane that may not fly

It is two years late already, but without an additional €5bn of government cash, Airbus's A400M may simply be scrapped

Behind the sunny outlook at French defence giant EADS's annual strategy meeting in Seville yesterday, the battle over the future of the A400M raged on.

There was plenty of good news from Airbus, the division of EADS which is developing the military airlifter. It not only delivered a record 498 aircraft in 2009, but by the end of December it had a backlog of 3,488 planes on order valued at $437bn (£270bn) – enough to run at full production for six years.

But Tom Enders, the chief executive of Airbus, did not shy away from the fracas over the A400M programme, which he is threatening to scrap if European governments do not stump up more cash. "Our prime mission in the coming weeks is to secure a solid financial footing for the A400M," Mr Enders said. "After nine months of intense deliberations with our government customers, it's time for decisions."

The decision is a big one. Airbus has given the A400M programme's seven "partner" governments – France, Germany, Italy, Spain, Turkey, Belgium, Luxembourg and the UK – until the end of the month to agree to share the pain of the much-delayed and increasingly expensive programme.

The new aircraft finally made its maiden flight just before Christmas, more than two years later than originally planned, although an independent audit estimates cost overruns of up to €11bn (£9.9bn). The partner nations are scheduled to buy 184 of the transporters between them. However, yet another missed deadline last spring put the supplier in breach of contract and forced a "standstill" agreement under which Airbus agreed to continue with the programme in parallel with talks about both price and delivery plans.

The deal on the table is understood to be a requirement of an extra €5bn or a reduction in the number of planes to be delivered under the existing €20bn deal. But despite months of wrangling, the negotiations have made no progress. By December, with Airbus burning through an estimated €100m every month in development costs, the supplier gave the governments until the end of January to agree a new deal or it would walk away.

The dream of the A400M was for a European heavy-lifting military aircraft, to compete with Lockheed Martin's C-130J "Super Hercules" and Boeing's C17 Globemaster – both of which are produced in the US. The plan coincided with an EADS scheme to expand Airbus's military side to put it on an equal footing with the commercial business. It looked like the ideal match of ambition. But after seven years of in-fighting, bureaucracy and delay, the supplier is threatening to cut its losses, and potential customers have been forced to buy C-130Js and C17s to fill in the gaps.

The A400M has certainly had its share of technical problems. The most significant were with the engine's full authority digital engine controls, the so-called "FADEC" software that is the interface between the engine and the rest of the aeroplane. There have also been issues over the weight of the aircraft, with some critics warning it would only be able to lift 29 tonnes, way below the 37-tonne capability in its specification and not even enough to carry a modern armoured infantry vehicle.

Airbus claims that, in the 14 hours and 10 minutes of flying time clocked up since last month's first test flight, the aircraft has not only proved it can meet its lift and range specifications, but also avoided any major pitfalls. "We are still in the development phase so it is not that everything is now completely sorted out," a spokeswoman said. "But the initial results demonstrate that the craft is flying well and so far there are no major negative surprises."

The troubles with the FADEC software have been blamed for the lion's share of the three-year delay. But it is the confused specification from the partner governments, the convoluted structure of the supplier organisations, and Airbus's rash contracting that are at the heart of the problems.

A considerable share of the blame rests with EADS itself. Not only did the company unwisely agree to a fixed-price contract, leaving it bearing all the risk associated with any new development, it also signed a fixed-price deal with its engine suppliers, which left it to take on the cost of those overruns as well. Then, on top of the precarious agreements, the company agreed to a timescale of just six-and-a-half years, barely two-thirds of the 10 to 12 years usually needed to design, build and commercialise a new plane.

"Put simply, the problems stem from what Airbus and EADS agreed to when they signed up," Peter Felstead, the editor of Jane's Defence Weekly, said. "They signed a stupid contract and all the current management readily admit it was a stupid contract."

Then there is the politics. Initially, EADS planned to use an engine from Pratt & Whitney, the US aircraft engine specialist. But it was pressurised into commissioning an entirely new design from a specified array of European companies – Britain's Rolls-Royce, Germany's MTU Aero Engines, France's Snecma and Spain's Industria de Turbo Propulsores. The move was rationalised with the argument that this would avoid any clash with US technology export regulations. But the structure of the resulting Europrop International consortium – described by the chief executive of EADS, Louis Gallois, as "the most baroque I've ever seen" – made things even more difficult.

"The set-up made the already difficult task of producing a completely new engine ten times harder," Mr Felstead said. "There are snags in any technical development, but if there is a huge layer of organisational bureaucracy then solving them is even harder."

Meanwhile, given the uncertainty over when – and now if – the A400M will come into active service, potential customers are going elsewhere. The South African government has already cancelled its order for eight of the aircraft, blaming both the delivery delays and a seven-fold rise in price. Even those still ostensibly committed to Airbus – such as the UK, whose taxpayers are already on the hook – have had to make contingency plans. Last year the Ministry of Defence bought six C-17s for use in Afghanistan because it could not wait until the Airbus's earliest delivery date of 2012.

But, even with the problems, the A400M's customers must pay up, according to Howard Wheeldon, a senior strategist at BGC Partners. "The whole programme has been politically motivated all the way through and there have been a whole heap of mistakes," he said. "But there is now an aircraft, and it would be ludicrous to turn back."

Grounded: An industry that promises too much

The Airbus A400M is not the only new aircraft bedevilled by delay and cost overruns. The French company's A380 jet – the biggest passenger airliner in the world – has also suffered from a string of setbacks, as has rival Boeing's 787 Dreamliner.

The A380, nicknamed the Superjumbo, completed its first test flight successfully in April 2005. But problems with the wings required substantial modifications. The complexity of the 330 miles of wiring in each plane also caused a series of subsequent delays.

The original plan was for the first Superjumbo to be in service in 2006, with 120 planes delivered by the end of 2009. But the schedule was hit by four separate revisions and although the first A380 was handed over to Singapore Airlines in 2007, only another 22 had been rolled out by the end of last year.

The Dreamliner has made similarly patchy progress. It only made its first flight in Seattle last month, some two years later than planned. Several early contracts have been lost to Airbus after repeated problems with the supply chain and quality control. There are still 840 orders for Dreamliners, but more than 80 have been cancelled, and Boeing took a $2.5bn (£1.5bn) charge on issues related to the programme in the third quarter of the current financial year.

But the companies supplying the new aeroplanes are not the only ones to blame for such a woeful record. At least part of the problem is unrealistic public expectation, according to Howard Wheeldon of BGC Partners. "There are always problems with new aircraft," he said. "But today's shareholder requirements and transparency requirements are so great that the suppliers can't get away with it any more."

To add to the problems, at the same time as the margin for error is being eroded, the designs themselves are becoming more technically difficult.

The A400M, the Dreamliner and the A380 may have had more than the usual number of issues, but they are much larger and more complicated than any of their predecessors. "Aircraft today bear no resemblance to what used to be," Mr Wheeldon said.