Europe's new military transport plane, the Airbus A400M, made its first test flight on Friday as buyers resumed talks on how to keep the delayed 20 billion euro ($29.5 billion) project airborne.

The A400M was commissioned by seven European NATO countries to support combat operations in rugged zones like Afghanistan or to assist in humanitarian relief operations.

But an estimated 5 billion euro cost overrun has placed Europe's biggest defense project in doubt, forcing Airbus to hold negotiations with buyers over who should pick up the tab for delays.

The flight was two years behind schedule but delays will be extended to 3-4 years to allow time for production to stabilize, with first deliveries not seen before late 2012.

Airbus has sold 180 aircraft to Britain, France, Germany, Spain, Belgium, Luxembourg and Turkey. An extra four are earmarked for Malaysia, but South Africa has canceled an order.

A proposed compromise backed by several buyers could translate at least part of the cost overshoot into a higher price per plane by allowing Airbus to deliver fewer planes, officials said.

The remaining 40 planes would need new funds but not for another decade or so, skirting round the financial crisis.

STAND-OFF

Airbus Military Chief Executive Domingo Urena said EADS was ready to pay remaining development costs if buyers absorbed the excess production costs by adjusting price escalation clauses.

He confirmed in a joint French and German newspaper interview that buyers faced a choice of taking the same number of planes at higher cost or fewer planes for the same cost, adding only Turkey had hiked its total spending

The discussion confirms the emergence of a possible price compromise detailed by Reuters last month.

But the largest buyer Germany opposes the plan and wants EADS to absorb most of the pain itself because it wants guarantees on getting all its planes and believes a price hike would reward failure, according to a person close to the talks.

Analysts have said a successful first flight would boost the chances that politicians will strike a deal on the A400M.

EADS has provisioned 2.4 billion euros for losses so far and a spokesman said it had nothing to add pending the talks.

Urena said Airbus would need to export another 180 planes on top of the core European contract to make money on the A400M, nicknamed grizzly for its sturdy design.

Airbus sees a market for 300-500 such aircraft.

The A400M had marked a European bid to get away from chronic cost overruns in defense by locking Airbus into a fixed deal. EADS now says this is the wrong way to go about complex military deals where national priorities can play an unpredictable part.

It blames the delays on engine problems but has admitted under-estimating the complexity of building the transporter at a time when it was preoccupied with the A380 superjumbo, the world's largest airliner which was also late and over-budget.

For a related graphic, please go to http://graphics.thomsonreuters.com/RNGS/DEC/A400M.jpg

(Editing by David Cowell)

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