FLUG REVUE March 2004: A400M subcontractors comete for workshare

A400M: A 20 BILLION EURO PROGRAMME

By Karl Schwarz

As the “most ambitious military procurement programme ever”, the A400M is of paramount importance to Airbus and hence to its biggest shareholder, EADS. “Along with the A380, this seven-nation programme is our most important aerospace project over the next few years,” said Rainer Hertrich, Co-Chairman of EADS and President of the BDLI (German aerospace industry association).

The contract signed on 27 May 2003 with the Organisation for Joint Armament Co-operation (OCCAR) is worth around Euro 20 billion – and overnight doubled the order backlog of EADS's military programmes. Already between 2003 and 2005 the A400M will generate Euro2 billion of turnover and thus contribute towards achieving a greater balance between Airbus's civil and military businesses.

Contrary to earlier thoughts about a completely “commercial approach”, with payment only on delivery, Airbus Military now receives monthly payments from OCCAR, which not only cover most of the development costs but are also downpayments for the aircraft on order. Some 15 milestones, such as the first engine test run, start of final assembly, maiden flight etc, are defined in the contract. If they are not achieved on time, OCCAR is entitled to withhold some of the money.

Germany is playing a special role in this arrangement. Unlike the other partners, it will only pay on delivery, with EADS taking on Germany's share of the development costs. According to State Secretary Karl Diller of the Ministry of Finance, this is possible because “EADS is selling the amounts it is due under the terms of the contract from the German government to appropriate credit institutions in a 'forfaiting transaction'. This approach does not create any budgetary or constitutional problems as long as – as in this case – it can be demonstrated to be cost-effective.”

The interim financing will generate about Euro680 million of extra costs, so that the final price of the Luftwaffe's 60 aircraft will be Euro8.3 billion. The system price on the A400M is stated by the German Ministry of Defence at Euro127.53 million. The United Kingdom is currently budgeting for an outlay of £2.48 billion (Euro3.65 billion) for its 25 aircraft.

As is normal on European military procurement programmes, industry likes to relate these costs to the jobs safeguarded and new jobs created in the partner countires. In the case of the A400M, depending on how one looks at it, there is talk of “40,000 jobs in Europe” (Hertrich) or “a direct employment effect of 3,300 jobs” (Ministry of Defence on the German share).

Although no detailed division of workshare in line with the number of aircraft procured has been undertaken, naturally all the participating countries are pressing for their respective industries to be recompensed appropriately in terms of jobs. In Spain, the programme is particularly important, as final assembly is to be carried out in Seville.

Airbus Military has therefore broken the programme down into “strategic workshares”, which are oriented towards the competencies that are common on the civil Airbus types. Germany, for example, builds fuselage parts and also carries out assembly of the segments and cabin furnishing in Bremen. In addition, EADS Germany supplies the composite wing skins.

As far as development is concerned, Airbus Military is falling back on the well established Airbus structures. Programme manager Adolfo Revuelta has six Aircraft Component Management Teams (ACMT) reporting to him, each of which has full responsibility for its individual areas. Thus, in the case of the wing, the main player is Airbus UK, on the fuselage it is Airbus Deutschland, EADS CASA is in charge of the engine and final assembly, Airbus France is responsible for systems and EADS's Defence Electronics division in Ulm for military systems.

The individual ACMTs also have to select the subcontractors for their workshares. This process began in 2003 with the engine and the propeller and will shortly continue with selection of a landing gear supplier (Messier-Dowty versus Liebherr). Most of the suppliers will then be decided in the course of the year.

It is not yet clear in some cases exactly which work packages will be put out to tender. The company is anxious that there should be at least two suppliers competing for each package. Generally-speaking, as in the civil area, the trend is towards the selection of integrators who contribute complete systems. The number of suppliers is not expected to exceed between 80 and 100.

Given the requirement to keep costs down, the competition will be tough. Even if Airbus Military wants to make extensive use of the technologies developed on the A380 programme, bidding is generally open to companies all over the world which have the appropriate technical competencies and the necessary financial background.

Specifically for American companies, in October 2003 EADS North America held a suppliers' conference in Washington to provide information about opportunities for participation on the programme. “EADS is firmly committed to involving significant US supplier participation in the A400M program,” says Ralph Crosby, EADS North America Chairman and CEO.

Such ventures, even if they are only aimed at putting pressure on prices, are causing uneasiness among European suppliers. In France, smaller companies are organising themselves in regional working groups, and in Germany too, according to State Secretary Hans-Georg Wagner, the Ministries of Defence and Economics in October 2003 set up a working party, whose members include the German Aerospace Industries Association (BDLI), representatives of the equipment industry and Airbus Military, to specifically address questions regarding the participation of the German equipment industry.

According to Wagner, it has been pointed out to Airbus Military “in the strongest terms” that the German workshare is expected to reflect its programme share. He also sought to play down the fact that “all subcontractors from the Eurozone have been asked by Airbus Military to submit tenders both in Dollars and Euros”, by explaining that in Airbus's civil business, tenders are always priced solely in Dollars.

Evidently customers and contractors have somewhat different ideas about “private-sector” practices on the programme. However, this should not interfere with progress on the programme, as the deadlines are tightly fixed. After the first engine run in 2006, final assembly of the first A400M will commence in the spring of 2007, so that the maiden flight can take place early in 2008. Deliveries will then begin in the autumn of 2009, exactly 77 months after programme start.

From page 15 of FLUG REVUE 3/2004

Last updated 12 February 2004

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