CANCELLATION OF the A400M military transport aircraft project could cost Eads €5.7 billion in repayments to European governments, Europe’s leading aerospace and defence group warned yesterday.

Europe’s biggest collaborative defence project, taken as a fixed-price contract in 2003, has cost Eads more than €1.7 billion in charges and is running years late.

Eads said A400M problems had reduced group operating profits last year by €704 million.

The group said its failure to achieve the first flight of the A400M by the end of this month meant its customer Occar, the European procurement agency, had the right to terminate the contract from April 1st. Cancellation would mean the need to reimburse customer governments’ predelivery and other payments.

The A400M was agreed in 2003 with launch orders for 180 aircraft from seven European governments, led by Germany with 60 and France with 50. Deliveries were to begin in late 2009 and run to 2020 and the aircraft was set to play a role in meeting Europe and Nato’s strategic and tactical needs.

Development of the aircraft is in trouble, with Eads unable to agree a new schedule with governments. It said talks with Occar were due to start “in coming weeks”.

It warned that the revised industrial plan to complete the A400M could lead to a “significant charge” against 2009 earnings depending on negotiations with customers and suppliers. Under the latest Eads proposals, first delivery will not take place for at least three years after the first flight. But six years after the programme started, Eads is unable to set a date for that flight.

Series production work has been frozen until Eads can negotiate with governments and suppliers a way to continue the €20 billion programme. Eads said the A400M contract could only be terminated “with a unanimous mandate of all launch nations”.

Eads chief executive Louis Gallois said: “We think it is very unlikely there will be a unanimous consent to cancellation at the end of March.” Germany and France wanted to negotiate, and Spain was likely to be of the same view.

The UK had not stated its position, he said. – ( Financial Timesservice)