Update - mil-spec debate rages on:
Monday June 4, 7:00 am Eastern Time
FEATURE-Airbus urges commercial approach on govts
By Bradley Perrett, European aerospace & defence correspondent
TOULOUSE, France, June 4 (Reuters) - European plane maker Airbus had a bright idea in the mid-1990s -- to supply transport planes to European defence ministries by dealing with them exactly as it deals with airlines.
As in any airliner contract, the buyers would simply agree with Airbus on a price and specification for the A400M planes, with penalties for anyone who broke the contract. Unlike the usual military procurement mess, it should be efficient.
There was only one problem -- governments are not airlines.
They are addicted to political interference in defence procurement, routinely demanding domestic jobs in return for equipment purchases.
``One has to be realistic,'' said Airbus Military executive David Jennings. ``We are in a situation where there is an expectation of an industrial return (jobs) in this programme.''
So Airbus Military, the Airbus affiliate proposing to build the A400M, has the challenge of minimising the inefficiency of work-sharing while trying to get the countries to act like rational business customers.
``We are trying to be as commercial as possible,'' said Jennings, the firm's head of marketing.
``You are never going to achieve perfection,'' he told Reuters in an interview, but Airbus had got the A400M project close to the efficiency of one of its airliner programmes.
After years of negotiations, the company expects to see defence ministers from Germany, France, Spain, Britain, Turkey, Italy, Belgium, Portugal and Luxembourg formally commit themselves this month to buying 223 A400Ms.
HOW NOT TO DO IT
Military procurement is traditionally plagued with inefficiency, which often seems to get worse when several countries try to save money by buying equipment together.
Firstly, the militaries compulsively gold-plate their specifications, demanding that little bit of extra performance that costs the earth.
Secondly, finance ministries hate committing themselves many years ahead, so the programmes proceed in stages, each of which becomes an opportunity for cancellation, costly delay or a disruptive fiddle with the specification.
And in multi-national European projects, each government has jobs at the forefront of its mind, especially jobs in the glamorous aerospace sector. So work gets shared around without much regard to who can do it most cheaply.
No airline would buy aircraft under such circumstances. But, then again, none has to do so.
``Airbus already has a system which produces transport aeroplanes efficiently,'' Jennings said.
The A400M, which would compete against the Lockheed Martin (NYSE:LMT - news) C-130 and Boeing (NYSE:BA - news) C-17, is supposed to adopt that commercial system.
NO NONSENSE -- WELL, NOT MUCH
So the A400M specification is not gold-plated. Recognising that they do not need much more than a flying truck, the defence ministries have resisted the temptation to add on unnecessary features, and the plane's chief characteristic is cost efficiency -- rather like a commercial airliner.
Then the contract, due to follow this month's government deal, will immediately commit the buyers to pay and the manufacturer to deliver. If a country wants to reduce its order, it will have to pay contractual compensation.
But Airbus Military has been unable to escape the other habit of old-style military procurement -- work-sharing. Following ancient European custom, A400M manufacturing work will be shared between countries in proportion to the number of planes bought.
Here Airbus has an advantage in its own origins as a make-work project for the aerospace industries of Germany, France, Britain and Spain. Having spent 30 years distributing its civil aircraft projects among partner countries, Airbus is getting pretty good at it, competing successfully in the airliner market against U.S. rival Boeing Co (NYSE:BA - news).
The commercial approach of Airbus Military seems to have had a near-death experience last year when, according to industry sources, the governments decided that they, not the manufacturer, would choose an engine for the plane.
Airbus had arranged a competition between engine companies, which came down to a choice between a German-built powerplant from Britain's Rolls-Royce Plc (quote from Yahoo! UK & Ireland: RR.L) and a traditionally multi-national affair from Snecma [SNEC.UL] in France, Germany's MTU and Italy's FiatAvio .
Government pressure forced the bidders to come up with a joint solution which Airbus Military says turned out to be technically superior to either of the earlier proposals but was available at much the same price. So it was chosen.
According to one official close to the project, each of the two original bids had drawbacks. The Rolls engine had only marginally enough power while the multi-national one was considered complex and perhaps technically risky.
PROFITS
European Aeronautic Defence & Space Co NV owns 80 percent of Airbus; the British defence contractor BAE Systems Plc (quote from Yahoo! UK & Ireland: BA.L) holds the rest.
Jennings said Airbus's stake in Airbus Military would depend on how many planes the Airbus countries buy. Germany, France, Spain and Britain currently plan to buy 175 A400Ms, giving Airbus 78.5 percent of Airbus Military.
Other shares will be held by Flabel in Belgium, Turkish Aerospace Industries and Italy's Finmeccanica .
The value of a military procurement programme is an elastic concept, since it depends on what costs are counted.
With a unit price of ``around $80 million'', development and production of 223 A400Ms would cost $18 billion.
The air forces will buy spares worth maybe $4 billion more while initial support from Airbus may cost something similar, putting the initial programme value at $26 billion.
Beyond that, the commercial scope depends on how much the militaries contract out. Airbus Military estimates that each A400M will cost the customer $201 million over several decades of service life, for a maximum programme value of $45 billion.
The firm will not say how profitable the A400M will be, but it seems its value for shareholders is mostly long-term.
Analysts sense thin margins in the low unit price, which is well under twice the cost of Lockheed's C-130, even though that U.S. plane is more than half as big and must have covered most of its development costs long ago.
Moreover, Airbus Military has agreed to put up 1.5 billion euros of the 5.0 billion euro (US$4.3 billion) development budget in anticipation of its relatively distant export profits.
But when they come, those export profits could be great.
When Lockheed exports the C-130, it goes through the Defense Department and can make only the statutorily regulated profits available in a domestic sale, about 12 percent.
As the A400M plan is currently structured, Airbus Military would be free to sell the plane under whatever commercial terms it can negotiate -- just like an airliner.
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