Analysis: European defense contracts

European Parliament votes for single defense market law The European Parliament took a giant step toward its goal of creating a common market for defense goods in the 27-nation European Union: It approved a first reading of a law mandating the creation of this common defense market.
The European Union already has a consolidated economic market, free of trade barriers. However, major European nations seldom sign deals with companies in other EU nations to manufacture their defense equipment, preferring to use their own high-tech and defense firms. Last year only 13 percent of tenders for defense contracts announced by EU member states were open to bids from EU countries.

In order to consolidate an ever more financially stretched EU defense market, the European Commission and European Defense Agency are hoping to facilitate trade by reducing red tape.

Earlier legislation contained a loophole that allowed countries to bypass publishing their tenders for contracts throughout the European Union to protect national security. But this loophole was abused so much that one country even claimed its tender for socks for its soldiers was too confidential to be posted. Under the new legislation, confidential information will be secure with fellow EU countries.

The EU and EDA hope the new law will foster economies of scale and more cooperation in research and development, strengthening the EU defense market as a whole. The legislation is expected to be enacted into law by the end of March.

EADS A400M, financial worries worsen Airbus, a subsidiary of the European Aeronautic Defense and Space Co., is facing a new series of delays on its long-troubled A400M heavy military transport aircraft.

The A400M heavy air-lifter is already years behind schedule, and its delays have thrown strategic deployment plans of several European nations into chaos, forcing them to rush to buy U.S. and other existing air transports off the shelf to replace their old air transport fleets that are reaching the end of their life cycles.

The A400M's engines were due to finally begin testing last month after long delays and technical difficulties.

However, the Financial Times Germany reported last week that the A400M now faces a new series of problems: The aircraft is considerably overweight and under strength.

It is supposed to be able to carry 32 tons of equipment but appears capable of handling only 29 to 30 tons of cargo, and the aircraft itself is 12 tons heavier than it was supposed to be. The aircraft has an exceptionally heavy metal structure, further impairing its cargo payload-carrying performance.

The report said EADS-Airbus would have to redesign the aircraft to improve its payload-carrying performance.

Seven European countries already have ordered in advance 180 A400Ms worth $26.5 billion before the production lines even started rolling. EADS has already received around $2.7 billion in advance payments.

In an effort to retain its increasingly impatient and unhappy customers, EADS-Airbus has offered to supply them with models of its A330 civilian airliner as an interim air transport, Defense News reported. Britain's Royal Air Force has opted to lease several A330s rather than buy them outright, EADS said. France is believed to be leaning toward this interim solution too.

Britain, France and the five other European nations that have ordered the A400M are pressing EADS to guarantee a new binding schedule to deliver the aircraft. But EADS wants to charge them much more money, saying it had underestimated the costs of the program.

EADS refuses to guarantee a new delivery schedule until the prototype A400M finally flies. After that, it claims it can complete delivery of all the 180 ordered aircraft within three years, but many aviation analysts regard this as another wildly unrealistic timetable.

The prototype aircraft already has made its first flight.

The ambitious design of the A400M is now being scaled down. EADS claims that after they are delivered, it will be able to upgrade their performance.

To cut costs, EADS also appears to have pulled out of buying a U.S. defense company late last year that would have cost it $12 billion. The identity of the company EADS wanted to acquire has not been released.

EADS also wants Italy, Germany, Spain and Britain to buy a third batch of Eurofighter Typhoon air superiority combat aircraft. Failure to do so would cause a costly interruption in production for the second time, for which EADS would penalize those "big four" launch-customers, as it did before.

However, the British government's financial squeeze may prevent it from purchasing the 88 Typhoons that EADS expected it to buy in its third wave of acquisitions.