Denel has confirmed that it is exiting the aerostructures manufacturing business as a cost-saving measure, and is trying to mitigate job losses.
Earlier this year Denel announced it was exiting the Airbus A400M Atlas aerostructures contract in order to save up to R250 million a year, and lost its other major aerostructures work due to the company’s liquidity crisis.
On Friday, the company said the process of exiting the greater part of the aerostructures business was continuing with major steps put in place to minimise the impact on job losses within the company.
It is envisaged that 230 employees will be affected by the decision to close Denel Aerostructures (part of Denel Aeronautics). Denel will establish and maintain a recall list for the next 18 months and give favourable consideration to retrenched employees should vacancies occur within the rest of the group, the company said.
“We are working hard to keep job losses to a minimum,” said Denel Group Chief Executive, Danie du Toit. “Some of the employees will be transferred to other positions within the Denel group while voluntary severance packages have been offered.” Employees are also given the opportunity to comment on the proposals and make representations.
Du Toit, said the company is consulting widely with all relevant Stakeholders, including the Department of Employment and Labour, Metal and Engineering Industries Bargaining Council, organised labour and non-unionised employees, to elaborate the implications of the decision to wind up Denel Aerostructures.
In March 2019, Denel and Airbus reached a mutual agreement to transfer the manufacturing of aircraft parts for the A400M military airlifter out of Denel subject to fulfilling applicable legal prescripts. Both companies agreed to collaborate in other areas and committed to build, expand and strengthen their strategic industrial partnership.
Denel’s liquidity crisis also affected other parts of its aerostructures manufacturing business and other customers, including HondaJet and GKN decided to terminate their contracts and transfer their work packages to alternative suppliers.
“This would have further eroded the Denel revenue base by about R226 million with a knock-on effect on other business within the Denel Group. Denel subsequently applied to both the Departments of Public Enterprises and Finance to wind up the business of Denel Aerostructures in terms of Section 54 of the Public Finance Management Act. Formal approvals were granted in July and September 2019 with conditions that Denel consult widely with organised labour and affected employees,” the company said.
According to du Toit, the decision to wind up the company is in line with the broader long-term strategy to reposition Denel and return it to profitability.
The latest Denel annual report states that the total contract liability for GKN is capped at $10 million and for Honda at $5 million. 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.”
“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.
For the A400M 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.”
According to Denel, the winding up of the aerostructures manufacturing business will not affect other businesses conducted by Denel Aeronautics at the Kempton Park campus. This includes the support given to the Rooivalk combat helicopter, the Oryx medium transport helicopter, the C-130 Hercules transport aircraft and the export business for the Cheetah multi-role fighter aircraft and Puma helicopter and the various maintenance, repair, and overhaul (MRO) services provided to both the SA Air Force and other customers.
Some of the manufacturing skills will be retained within Denel Aeronautics and the company will explore opportunities to attract business in fields such as the manufacturing of unmanned aerial vehicles, automotive parts, rail rolling stock and tooling.
Defence expert and director at African Defence Review, Darren Olivier notes that “the casualties of State Capture continue to mount. As a result of these losses, Denel’s aerostructures business has become too unprofitable to rescue and therefore will be shut down. For the first time in decades Denel will have lost the ability to make large aircraft components.
“To put into context what a massive blow this is, Denel Aeronautics had only recently succeeded in becoming a supplier to a major airliner project, building A350-1000 pylon secondary structures for GKN Aerospace. It took years of hard work to reach that point. All now wasted.
“In 2015 Denel’s aerostructures business had also just emerged from a painful restructuring and downsizing process, emerging profitable, leaner and well-placed to win more top-tier contracts like it had with Airbus, GKN, and HondaJet. Losing those contracts was devastating.”