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SPECIAL REPORT-The incredible saga of Europe's A400M

* Troop plane makes public debut at Berlin show this week

* Germany made last-minute threat to kill A400M rescue deal

* Airbus chief held secret talks with Spanish king

* Britain won special treatment to keep it in the project

* Despite deal, inflation could add another 3 billion euros

By Tim Hepher and Sabine Siebold

BERLIN, June 8 (Reuters) - The first shot to be fired at Europe’s 21st century army plane came not from the barrel of a gun but a safety inspector’s clipboard. In 2008, weeks after the first A400M troop transporter rolled off a gleaming new assembly plant in Seville, a group of inspectors travelled to southern Germany to scrutinise an important component for the plane’s huge turbo-prop engines.

The inspectors were from the European Aviation Safety Agency (EASA), an EU body responsible for certifying aircraft; they wanted to conduct a routine check of plans for the engine software. The A400M’s maiden flight was already six months overdue, but in an industry which often measures delays in years, that was nothing much to worry about.

Soon after arriving in Munich, though, the inspectors discovered that MTU Aero Engines, the company behind the engine software, was so far behind schedule that there was no point even holding a meeting, according to people involved in the project.

This week, after almost three decades of squabbles over what the A400M should do, where it should be built, how much each plane should cost, the software catastrophe and uncertainty over 10,000 jobs, the 20 billion euro ($24 billion) troop carrier will finally woo crowds of plane-lovers during its first public display at the Berlin Air Show.

The software and paperwork problems cost Airbus more than a year and nearly crashed the entire project. A spokesman for MTU says the delay was caused by a decision to go for civil certification, which was outside MTU’s control. EASA declined comment.

An even bigger crisis, over a huge funding shortfall, this year forced cash-strapped European governments to back a 3.5 billion euro bailout. “We hate you, but we don’t want you dead,” an exhausted government negotiator told Airbus officials before a deal was finally struck in March. (Because of the sensitivity of the matter, most people connected to the programme spoke on condition that they not be named.)

Even as the A400M takes to the skies over Germany, officials from the seven European nations behind the project -- Belgium, Britain, France, Germany, Luxembourg, Spain and Turkey -- are wrestling with a new problem.

Just 12 weeks after the rescue agreement, officials are locked in another struggle over the impact of inflation clauses on the project’s final price. One senior official says the disputed sums could pile on another 3 billion euros. Meantime, buyers such as Britain, Germany and Spain are contemplating budget cuts that may yet impact orders.

At a moment when Europe should be celebrating the launch of its biggest collaborative defence project -- a plane that will massively boost the continent’s expeditionary reach and ability to wage war or supply aid -- it’s wondering yet again if it can even afford its new plane. “It should have been an ideal European programme,” said Alexandra Ashbourne-Walmsley, associate fellow of the Royal United Services Institute, a London-based defence think tank. Instead, “it is about the growth of Europe but also Europe’s folly.”

UP FROM THE ASHES

The only markings on the grey outer skin of the A400M in Berlin this week will be the national flags of buyer countries -- a hint at the complicated politics and bureaucracy that have continually flawed Europe’s efforts in defence cooperation.

Arguments over who is to blame for letting Europe’s biggest single defence contract degenerate into such a mess that it threatened Airbus’s future are unlikely to end with the long-awaited first public fly-past. Much of the mismanagement and inefficiencies are laid out in a leaked 2009 audit.

A Reuters investigation into the A400M reveals that having meddled in designs, governments had little idea how their down-payments of 6 billion euros were being spent until little more than 6 months ago. Talks to rescue the project and shore up Airbus parent EADS EAD.PA were marked by a clash of egos, royal intervention, blackmail and, perhaps most of all, a destructive nationalism that continues to divide Europe even when it is meant to be united.

“We are still miles away from an efficient and effective European defence procurement,” concedes Airbus Chief Executive Tom Enders. “If significant issues arise, if the stakes are high, national decision-making prevails and overrules European bodies.”

‘WE DO CIVIL AIRCRAFT’

It wasn’t meant to be like this. The idea for a new troop plane was born in the Cold War 1980s to meet the pressing demand in Europe for greater mobility and lifting power. Its designers -- both political and actual -- came from a generation of leaders who deliberately tied once-rival wartime aircraft factories into a unified peacetime industrial venture.

Designs for the plane, originally called Future Large Aircraft, were fleshed out in the 1990s to fill a gap between the Lockheed Martin LMT.N C-130 Hercules tactical transporter and the Boeing BA.N C-17, a large strategic transporter jet. Politically it marked a step away from dependence on the United States and pushed a vision of pan-European defence, extending important but smaller gains in fighter jets. Importantly, it would also provide thousands of industrial jobs.

By the mid-1990s, following several false starts, the countries backing the project called in Europe’s commercial plane maker Airbus, made up of interests representing France, Germany, Spain and the UK. Could Europe’s answer to Boeing build the new troop carrier?

Airbus boss Jean Pierson took one look at the plans and exploded. The politicians were telling him that the new plane would deliver a great leap forward in European defence capabilities. But Pierson saw something different: an unwelcome new ingredient in a carefully refined industrial recipe that had made Airbus jetliners a serious rival to Boeing. “Never! I don’t want to hear about this plane,” Pierson told the board. “We do civil aircraft.”

Pierson was yanked back into line by the consortium’s shareholders and in 2003, long after he had retired to his fishing boat, seven NATO allies placed a final order for 180 A400Ms. The planes would be built in Spain and would cost just over 100 million euros each. France would get the first plane in 2009.

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