Apart from voluntarily exiting the Airbus A400M components contracts to cut costs, Denel Aeronautics has lost its contracts with GKN and HondaJet due to its liquidity crisis.
This is according to the Denel annual report for 2018/19, which was released on 4 October. It noted that Denel Aeronautics recorded revenue of R833 million for the year, down from R1.107 billion the year before, and made a loss of R696 million, compared with R120 million the year before.
Denel’s liquidity crisis affected both its GKN and Honda work packages (Denel Aeronautics makes winglets for the HondaJet) “such that the severity of the delays could no longer be accommodated and derisked. Both customers have formally notified DAe of their intention to terminate their contractual agreements with DAe due to default by DAe and transfer their work packages to alternative suppliers.”
Subsequently, both customers terminated their contracts and finalised their damages claims against Denel Aeronautics. “It is worth mentioning that as per the contract, the total contract liability for GKN is capped at $10 million and for Honda at $5 million,” the annual report stated.
Denel said the loss of these contracts “will result in further erosion of the revenue base and with the related reputational damage of poor delivery performance, DAe will not be able to grow the revenue base in the short to medium term to sustainable levels. With the revenue base eroded, DAe will incur losses of circa R226 million per year (current base cost) over the next five years.”
In February this year, Airbus and Denel agreed to a mutual termination of the A400M component manufacturing contracts subject to Denel procuring requisite approvals from the South African Government. Subsequently, Denel and Airbus concluded a Memorandum of Understanding (MOU) in April 2019 agreeing the transfer of A400M work packages to Airbus preferred suppliers in Europe subject to requisite approvals and compliance with the Public Finance Management Act (PFMA). The Minister of Finance approved the exit on 11 July 2019 and the Minister of Public Enterprises gave approval on 9 September.
Despite Denel being liable for the transfer costs as per existing contracts, it was agreed that Denel’s capped liability for the cost of the transfer will be €12 million (R196 million) against a total transfer cost of €20 million. “It was further agreed by the parties that it is not Airbus’ intention to call on the Parent Company Guarantee of €101 million and letter of comfort capped at €2 million for the A400M work package contracts during the transfer period unless DAe defaults on its obligation of the transfer.”
The decision to stop making A400M components was made as a cost saving measure in line with Denel’s turnaround strategy, with Denel estimating it could save R250 million a year. The A400M contract has been historically loss-making and in recent years Denel has struggled to deliver due to liquidity challenges.
In its annual report, Denel said the exit and winding up of its aerostructures business and related manufacturing capabilities will see Denel liable for costs in the form of restructuring in accordance with the Labour Relations Act (LRA); supporting the handover of design authority to Airbus, facility rehabilitation as per the lease agreement for the facilities, and asset impairment amounting to circa R262 million.
“GKN and Honda may invoke additional contract liabilities for transfer to the value of $15 million (R217 million) in lieu of early termination of the contracts. This will however be renegotiated with both GKN and Honda to limit Denel’s exposure similar to the negotiated Airbus position,” Denel stated.
The 2018/19 financial year was not all bad for Denel Aeronautics. It said that despite the business challenges in the execution of major contracts, relationships with key customers remained strong. The division continued to ensure availability of aircraft to the South African Air Force as its primary customer and other defence forces on the African continent and beyond. Denel managed to deliver nine Oryx and two Rooivalk helicopters, the backbone of the rotary wing aircraft assets. It also completed the first phase of the Rooivalk cannon reliability improvement study in conjunction with other Denel divisions and subsidiaries (Denel Vehicle Systems and Denel Land Systems).
In partnership with Safran Helicopters Engines South Africa, Denel secured additional non-EASA (European Union Aviation Safety Agency) military engines from the African continent for maintenance, repair and overhaul.