Spain Announces Deal To Rescue A400M

February 24, 2010

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Partners in the delayed A400M military transporter plane have reached an agreement in principle to pump billions of euros into the project, in a bail-out preserving 10,000 jobs.

Spanish defence minister Carme Chacon said the long-awaited deal between the partner nations and planemaker Airbus's parent EADS would be fleshed out on Thursday, although Germany, the biggest potential contributor, said EADS had not yet formally replied to the offer.

A source familiar with the matter had said late on Tuesday that EADS and the government buyers had reached the "basis of an agreement" for a EUR€3.5 billion euro bail-out expected to be announced on the sidelines of a meeting this week of European defence ministers.

Spiralling costs and delays have threatened the project and left EADS facing a potential EUR€5.2 billion (USD$7 billion) loss, prompting it to campaign for aid to keep alive hopes of having a European-made air transport fleet and saving defence jobs.

"I am able to tell you with great satisfaction that we have reached an agreement in principle between the seven countries participating in the A400M programme and the EADS company," Chacon told reporters at the start of a meeting of European Union defence ministers on the island of Majorca.

"Markets are terrified they (EADS) will say 'yes' and terrified they will say 'no'," said Howard Wheeldon, senior strategist and defence expert at BGC Brokers in London.

Defence sources said statements were being drafted and preparations made for a Thursday news conference on behalf of Belgium, Britain, France, Germany, Luxembourg, Spain and Turkey. But after months of tortuous negotiations and false deadlines there were no guarantees against a further slippage in talks.

"We have still not received a written answer from the company on the final A400M offer," a German defence ministry spokesman said.

FINANCIAL SUPPORT

Under the deal, buyers would raise the price of each plane by 10 percent by pumping in the equivalent of EUR€2 billion to help stem losses on the A400M.

Several nations are expected to deliver this in the form of temporary cuts in the number of planes on order, rather than new cash. Other planes would stay in budget limbo until next decade.

A further EUR€1.5 billion would be made available as financial support in such a way that EADS should be able to set this against losses and cap its provisions for losses below EUR€2 billion, the source familiar with the matter said.

The EUR€20-billion A400M project span out of control due to problems in building the West's largest turbo-prop engines.

The EUR€3.5 billion bail-out -- with a third due to be provided by Germany -- leaves EADS with A400M losses of EUR€1.7 billion on top of EUR€2.4 billion it has already written off.

Wheeldon, one of the project's critics in the past, said the deal was the best either taxpayers or EADS could expect.

"Having got this far it would be an enormous waste to throw in the towel. Taxpayers must put a brave face on it and accept that it is the right thing to do," he said.

However, he said EADS would be under pressure to perform better on the project and there could be "no looking backwards".

Chacon said details of the EUR€1.5 billion tranche of financial support would be finalised on Thursday.

Last week EADS founding shareholder Daimler, warned it may have to adjust its 2009 results depending on the size of any EADS provisions, after reporting a big loss.

EADS and the A400M partner nations are expected to hold further technical talks on a disputed inflation clause after the main agreement.

(Reuters)