Denel’s much-vaunted contract to design and build fuselage sections for the new Airbus A400M military transport plane will lose the company money unless fresh orders are forthcoming, says exiting chief executive Shaun Liebenberg.
The high cost of gearing up to build the fuselage sections and a level of complexity for which Denel was unprepared have complicated the project from the outset.
Government is to spend more than R8-billion on eight A400Ms in a controversial deal that was not put out to tender and was driven by the ministries of transport and public enterprises rather than the South African National Defence Force (SANDF).
The main reason for this approach, according to government officials at the time, was that buying the planes was a ‘unique opportunity†to help Denel by guaranteeing work for its aerostructures division.
Instead it seems the parastatal has spent heavily to prepare for the project, despite virtually non-existent cash resources and with no clarity on orders beyond the launch.
Liebenberg is reluctant to discuss precise figures, citing commercial confidentiality, but his remarks make it clear that revenues from this contract would not cover Denel’s initial investment unless Airbus Military is able to convince more buyers of the merits of the aircraft.
That may take time and a series of delays in the expected launch date has not helped the company make progress on sales.
Apart from the South African consignment, Airbus has firm orders for 180 A400Ms in its European home market and four for Malaysia.
When the deal was first agreed in late 2004, it caused serious jitters at Denel. Government put Liebenberg’s predecessor, Victor Moche, under intense pressure to sign off quickly on the design and manufacturing deal before a Christmas deadline set by Airbus, despite his concerns that the pricing of the contract was a losing proposition for Denel.
The launch delays at Airbus have provided Denel with breathing space after a technically troubled beginning. ‘The delays take a bit of pressure off us,†Liebenberg says. ‘We were not ready to take on this project.â€
Potentially mitigating the losses, he says, are the new capabilities Denel has gained in the process. ‘If we come through the next six to 12 months we will be one of the few players in the wing-to-fuselage [component] market,†he says.
Airbus insists that 320 of the aircraft could be sold in the next 20 years. ‘There is no competitor to the A400M,†a company spokesperson says.
As for Denel’s losses on the project, the spokesperson says that prime contractors and suppliers in aviation can generally expect to break even during the launch phase and would make a profit once the aircraft was in serial production.
Of more serious concern to Liebenberg than the A400M programme, however, is securing the final R1,7billion tranche of R5,2billion in recapitalisation funds that Denel has requested from the government.
‘We need that money this financial year,†he told the Mail & Guardian. ‘The government has just put in R3,5-billion and they need to protect that investment.â€