June 26 (Bloomberg) -- The U.K. signaled it’s reluctant to pay for cost overruns on the A400M military transport plane, saying talks with the European Aeronautic, Defense & Space Co. and other nations are in a “difficult” stage.

“This situation is very difficult and we want to be co- operative” with EADS, junior defense minister Quentin Davies, who has responsibility for equipment procurement, said in an interview in London. “But that absolutely cannot be at the expense of our armed forces and the British taxpayer.”

EADS has lost at least 2.3 billion euros ($3.2 billion) on the project, which is at least four years behind schedule because of a series of design and technical problems. Britain, France, Germany and four other governments are talking about how to keep the project going, though none of the governments is eager to pick up the tab for rising costs to build the plane.

“The U.K. is signaling that it is not willing to make a cash contribution to the overrun,” said Nick Cunningham, an analyst at Evolution Securities Ltd. “It also sounds like the U.K. won’t compromise on the specifications. EADS may be left with the possibility it has to finish the project at great cost. There still may be further overruns and problems.”

The defense ministry signed a fixed-price contract for the A400M aircraft in 2003. Lockheed Martin Corp. has said the U.K. and France have sought details about buying the C-130J Super Hercules, which is already in service, instead of the A400M.

Planes at Risk

The nations are reviewing their commitment to buy 180 of the A400M aircraft worth 20 billion euros after engine-design problems delayed the model’s first flight.

Customers had the right to cancel their orders beginning on April 1 after the A400M, designed to carry troops and equipment, missed its test flight. Instead, governments elected to delay a decision with the aim of negotiating a new and less costly contract. A decision must be reached by the end of July.

Extending the deadline means EADS is still committing cash with no certainty about its returns from the project. The company wants governments to shoulder more of the risk associated with developing the plane. If no agreement is reached, it would have to repay at least some of the down payments, eating into its cash.

“My mind is open,” Davies said. “I would like to find a way of this project being saved but it can’t be at the expense of the taxpayer and the armed forces and we have certain requirements that must be met. Our position is absolutely clear. Our constraints are absolute.”

Britain’s Commitment

The U.K. has ordered 25 planes worth about 100 million pounds each to meet its military requirements in Afghanistan and elsewhere. Prime Minister Gordon Brown’s government is under pressure to cut spending as the Treasury anticipates the biggest budget shortfall in the Group of Seven nations.

Airbus, which is developing the plane for EADS, is pressing ahead with modifications and testing aimed at getting the A400M flying after a series of engineering glitches. Advance payments of 5.7 billion euros have already been used up, EADS Chief Executive Officer Louis Gallois said on June 14.

Gallois said the A400M could survive cancellations by the U.K., the third-biggest customer with 25 orders, even though Britain, which has the world’s second-biggest defense budget, is a “reference” in defense-equipment purchasing.

“I don’t think it would kill the contract,” he said June 14. The plane’s biggest customers are Germany and France, with contracts for 60 and 50 planes respectively.

To contact the reporter on this story: Kitty Donaldson in London at kdonaldson1@bloomberg.net

Last Updated: June 25, 2009 19:00 EDT