Since the implementation of Denel’s turnaround strategy and the exit of the aerostructures business, Denel Aeronautics has become a leaner and more focussed company, with maintenance, repair and overhaul (MRO) and systems integration now its core capabilities.
In 2017 Denel Aviation and Denel Aerostructures merged to become Denel Aeronautics. As part of the company’s turnaround strategy, Denel in 2019 was given approval to exit the aerostructures business as it was no longer sustainable – in 2019 Denel said exiting the Airbus A400M Atlas aerostructures contract would save up to R250 million a year. The company had already lost its winglet contract with an American-based light business jet manufacturer and the supply of pylons for the Airbus A350 due to the Group’s liquidity crisis.
According to Denel Aeronautics CEO Mike Kgobe, the consolidation of Aerostructures and Aviation has resulted in significant savings, as instead of having two management structures and two of everything, the new business is smaller and leaner and takes up less physical space, reducing overheads (premises at Kempton Park are leased from the Airports Company of South Africa). Over the next year Kgobe wants to ensure the company’s footprint is optimised “to a sustainable level”.
Kgobe told defenceWeb that the decision to exit the aerostructures businesses made sense even before COVID-19 as Aerostructures sat with overcapacity and was struggling to compete with competitors closer to the main client or who could do the work more cheaply, or who were buying aircraft from the client. “The manufacturing business is high volume and highly competitive. The bulk of your cost base has to be brought in from the northern hemisphere in the form of material, and you need high turnover for profitability,” Kgobe said. “It’s a cutthroat business that requires volume.”
Denel is currently in the final stages of winding up the aerostructures business, although Denel Aerostructures still exists as a legal entity. The exit process unfortunately resulted in job losses, with some 177 jobs cut, but this is fewer than the 230 positions initially estimated as some staff were able to be redeployed to other Denel divisions.
A focus on MRO
Denel Aeronautics has retained some aerostructures facilities, with manufacturing capabilities (particularly machining and composites) geared towards MRO support. Indeed, Kgobe said the business has been right-sized to be an aircraft MRO and systems integrator, primarily supporting the Rooivalk and Oryx helicopters as well as C-130 Hercules transport aircraft (Denel Aeronautics is still the only Lockheed Martin accredited MRO centre in Africa). The company is also an accredited MRO centre for Airbus Helicopters models including the Puma and Super Puma.
In 2017 Denel was cleared to acquire Turbomeca Africa and this has seen it retain engine MRO capabilities, which are geared towards supporting the South African Air Force’s (SAAF’s) Oryx, Rooivalk and A109 aircraft.
Denel Aeronautics has several large contracts with the SAAF to support its aircraft. According to a June presentation to Parliament, a three-year Oryx support programme, running until April 2021, is worth R1.2 billion. Similarly, the company is providing support for the Rooivalk helicopter over three years ending April 2021, with a R1 billion value for this programme. C-130 Hercules support is worth R350 million over three years (until April 2021). Denel Aeronautics is also providing Hawk jet trainer ground support and test equipment under a three-year programme until March 2021, worth R18 million.
Although the main focus is now on supporting the SAAF, Denel Aeronautics is also looking at opportunities elsewhere in Africa, particularly regarding Puma/Super Puma and C-130 aircraft maintenance. Kgobe said there are quite a few opportunities the company has been looking at, including deploying technicians around the world – in the very recent past it has done just that in Asia.
Apart from the reduced footprint with the consolidation of Aerostructures and Turbomeca Africa, Denel Aeronautics is also looking at reducing the amount of stock it keeps and liquidating excess stock. Other initiatives include looking at other revenue opportunities for the Denel Technical Academy, which recently concluded an export contract.
Denel Aeronautics is taking measures to manage the Group’s liquidity crisis. “Our interim Group CEO, one of the first thing he did was to devolve authority to divisions – they are responsible for their own destiny,” Kgobe said. “We take care of our own business needs. This has put us back in charge of our destiny – revenue that comes into Aeronautics stays in Aeronautics.”
Kgobe told defenceWeb this is not an ideal situation but it starts to separate out problem areas and allows some divisions to pay salaries if they can. “In the interim, those businesses that can sustain themselves are. We can’t guarantee salaries but we are managing salaries and other creditors with the resources we have. We are able to direct resources where there’s an urgent need.”
According to the most recent Denel annual report, for the 2018/19 financial year Aeronautics made a consolidated loss of R696 million (inclusive of Aerostructures), compared with a R120 million loss in 2017/18. The company has spent hundreds of millions of rands exiting contracts but this will result in large savings going forward.
“It’s hard to say when Aeronautics will become profitable again,” Kgobe said. “Based on what we see, our projection is we will be in a better position than we were last year. We are seeing some movement in terms of some of the projects we have – in the past year we were in a standstill.”
One project that is moving steadily is the sale of 12 ex-SAAF Cheetah jets to Draken International in the United States. In 2010, Denel sold 12 Cheetahs to Ecuador’s Air Force and this included a five-year support contract. When this support contract ended, Denel began accepting interest in the remaining airframes and in 2017 sold the remaining 12 serviceable airframes to Draken International, which will use them for adversary training on behalf of the US Air Force.
Denel Aeronautics is currently returning the aircraft to service, before sending them to the United States for reassembly and final acceptance. “Based on our current planning, we plan to conclude on deliveries by the end of March 2021,” Kgobe told defenceWeb.
He added that the COVID-19 pandemic has been disruptive for Denel Aeronautics, especially as the hard lockdowns earlier this year caused supply chain blockages in Europe and the United States. This caused delays in some projects, and capabilities in supporting the SAAF had to be scaled down. Only under South Africa’s Level 3 lockdown regulations did the situation improve.
“COVID has affected us. We’re worried about second waves in Europe and lockdowns – our supply chains are affected,” Kgobe said.
As part of its efforts to mitigate the pandemic, Denel Aeronautics was involved in ventilator production and should the need arise, the company will be able to pick up the project again.