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Airbus seeks new talks with European nations over A400M costs

[February 22, 2017] By Tim Hepher and Cyril Altmeyer

PARIS (Reuters) - Airbus called for new talks with European governments to ease "heavy penalties" for delays to its A400M military aircraft, after taking a fresh 1.2 billion euro ($1.3 billion) charge for Europe's largest defense project.

Chief Executive Tom Enders told reporters Airbus was paying for the "original sin" of striking an unrealistic deal when the plane was launched in 2003.

Airbus said fresh problems with engine gearboxes and delays in supplying the troop and armored vehicle carrier's defensive capabilities had led to further severe penalties and cash being held back by governments.

"We cannot go on like that. This is unacceptable and puts a huge burden on Airbus and we need to do something about it," Enders said.

The agency representing seven NATO buyers - Belgium, France, Germany, Luxembourg, Spain, UK and Turkey - was not available for comment. But officials in Germany, the largest A400M buyer which has been most critical of the project, expressed little immediate appetite to help Airbus cope with the new problems.

"That's entirely their own doing," said one military official who asked not to be named.

The appeal comes seven years after Airbus won a 3.5 billion euro($3.7 billion) bailout for the project, having argued that politicians had forced it to choose problematic new European engines over a more viable Canadian alternative.

Hailed at the time as an innovative, fixed-price deal, the contract foundered over problems with the West's largest turboprop engines and an over-ambitious schedule for ground-hugging navigation and other military capabilities.

Tobias Lindner, a Green lawmaker and member of the German parliament’s budget committee, urged the government to press for "a new and resilient" agreement but without reducing penalties for Airbus.

Enders, who is said to privately regret not cancelling the project before the bailout in 2010, declined to say if Airbus would threaten to stop building the plane. He described the new penalties as "inappropriate" given that the A400M was already deployed in Africa and elsewhere.

'HANDS IN POCKETS'

Airbus shares fell about 1 percent. The latest penalties bring total A400M writedowns towards 7 billion euros.

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A waiter walks past an Airbus A400M military transport plane is parked at the Airbus assembly plant during an event in the Andalusian capital of Seville, southern Spain, December 1, 2016. REUTERS/Marcelo del Pozo

Raymond James analyst Harry Breach wrote that Airbus needed to reassure investors the stream of charges was nearing an end.

Several others questioned how easily Airbus would be able to strike a new A400M deal in the midst of budget austerity, French and German elections and political distractions in a group of nations dealing with Brexit and Europe's border with Syria.

"I am not sure that the states will agree to put their hands in their pockets once again," said Chloe Lemarie, director of aerospace and defense research at Mainfirst Bank in Paris.

The A400M overshadowed a narrower-than-expected drop in 2016 core earnings as Airbus delivered a record 688 jetliners.

Core operating income fell 4 percent to 3.955 billion euros on revenues up 3 percent. Analysts had expected a 7 percent drop in core profit due to weaker pricing of old models.

Airbus said bottlenecks in the supply chain for its A350 jet had improved, but called for a "huge effort" from engine maker Pratt & Whitney <UTX.N> to ease delays in A320neo output.

It predicted more than 700 jetliner deliveries in 2017.

It did not give a formal target for orders but executives say they will lag deliveries for the first time since 2009 as the aircraft market slows.

($1 = 0.9515 euros)

(Additional erporting by Andrea Shalal, Sabine Siebold; Editing by Keith Weir and Elaine Hardcastle)

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