PARIS--The South African government Thursday said it was cancelling its order for eight Airbus A400M planes, a big blow to the problem-plagued military airlifter program.
Airbus said that it "very much regrets" the South African government's decision, the first cancellation for the program that is already running more than three years late and is incurring billions of euros in extra costs for Airbus's parent company, European Aeronautic Defence & Space Co.
"It certainly isn't the death knell for the A400M program," said CM-CIC analyst Harald Liberge-Dondoux. "But clearly the cost of the plane is rising steeply, and this could discourage other potential export customers."
Airbus, EADS and their customers are currently renegotiating the terms of the 2003 contract that launched the A400M program, which EADS officials have acknowledged can't be profitable for decades. They have set a deadline of reaching an agreement by year end, and defense ministers from the seven European governments that have ordered planes are scheduled to meet this month to review progress.
Airbus officials said they remain confident that the A400M will make its first flight before the end of the year. That's an important milestone for EADS, as it would receive a large sum of cash from its customers.
EADS already has set aside €2.3 billion ($3.4 billion) in provisions for the A400M program, which has been plagued with problems chiefly related to the engine-management software. Analysts expect that it will have to take an additional financial hit of several hundred million euros in its second-half accounts.
South Africa ordered the planes in 2005 to replace its aging fleet of C-130 Hercules airlifters, saying it wanted to use the four turboprop-engined planes for peacekeeping, disaster relief and military missions. At that time, the government estimated the cost of the eight-plane order at €837 million.
The cancellation "came totally out of the blue," Airbus spokesman Stefan Schaffrath said in a telephone interview. The surprise was all the greater "at a time when the program is making very good progress toward a first flight before the end of the year," he said.
Airbus "is studying the possible financial impact of this announcement," Mr. Schaffrath said.
Officials familiar with the situation said the South African government had given no indication that it was thinking about cancelling its contract. They noted that the two sides had been talking about increasing the amount of work that South African companies had been allocated on the A400M program, as compensation for the extra costs.
South African government spokesman Themba Maseko said South Africa wouldn't incur any penalties because of the delays in the delivery deadlines stipulated in the contract, and added that Airbus will have to repay advances of 2.9 billion rand (about $380 million) under the terms of its contract.
Robb M. Stewart in Johannesburg contributed to this article.
Write to David Pearson at david.pearson@dowjones.com
Source : http://online.wsj.com/article/SB10001424052748704013004574517443004127638.html
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