Exiting A400M contract will save Denel R250 million


Denel’s plan to stop manufacturing components for the Airbus A400M Atlas airlifter will save the company R250 million as part of the state owned entity’s turnaround strategy.

In a presentation dated 29 March, Denel said a “managed exit with Airbus” could bring it an annualised benefit of R250 million.

Denel Aeronautics aims to wind down A400M component production over the next six to 18 months. Exiting the A400M agreement was first announced in March, but the timeframe and financial impact were not mentioned.

A spokesman for Airbus said: “The agreement to withdraw the A400M work packages is a mutual one. Airbus and Denel are discussing how best to proceed.”

Danie du Toit, Denel Group Chief Executive, said last month in view of Denel’s ongoing strategic review of its operations, the two companies agreed continued manufacturing of aircraft parts by Denel is no longer sustainable in its current form. “Denel and Airbus continue to collaborate in other areas and intend to build, expand and strengthen their strategic industrial partnership,” Denel said.

Renegotiating the A400M contract is part of Denel’s turnaround strategy to reposition the company and return it to profitability – Denel made a R1.7 billion loss in the 2017/18 financial year. Under its new strategy, the company plans to exit non-core areas of activity, divest from non-viable core business areas and focus on viable core business activities that will led to long-term sustainability; reposition the core viable business areas to leverage capital and market access; and focuss on export opportunities through strategic equity partnerships and joint ventures.

There are currently 75 A400Ms operational with various air forces around the world and all contain South African manufactured components. It is not yet clear which company will take over production of the components made by Denel for the 99 other A400Ms still on order.

The A400M programme was launched in response to needs expressed by seven European nations (Belgium, France, Germany, Luxembourg, Spain, Turkey and the United Kingdom) for a new military airlifter. Two years later Malaysia joined this group and the first flight of an A400M took place on 11 December 2009. The total Airbus A400M order book is 174 with 75 delivered and in service.

A year after the A400M was launched, South Africa announced its participation in the airlifter programme. This would see the country acquire eight A400Ms to replace its ageing C-130BZs at a reported cost of R6.5 billion. The order was placed in April 2005 with deliveries originally scheduled between 2006 and 2012.

Delays and other programme problems saw the maiden flight delayed by almost a year and an escalation in the cost of the aircraft destined for the SA Air Force (SAAF) to a reported R47 billion. This led to Cabinet cancelling the acquisition. Defence and Military Veterans Minister at the time, Lindiwe Sisulu, is reported as saying South Africa “terminated the contract with Airbus but we’ve not terminated our quest to ensure we have the necessary (airlift) capabilities”. At the same time she told the Joint Standing Committee on Defence the acquisition of strategic military air transport was a “priority”.

The offset component of the acquisition agreement was not affected by the withdrawal decision and Denel Aerostructures (as it was then known), based at the state-owned defence and technology conglomerate’s campus east of Or Tambo International Airport, continued its contracts for A400M work packages.

To date this has seen South African produced components in every one of the 75 so far in service as well as up to aircraft number 100, currently on the final assembly line.

Over the time it has been part of the A400M programme, Denel Aerostructures has been responsible for producing wing-to-fuselage fairings, top shells, vertical tail plane ribs, swords and spars, cargo deck floor ISO locks and central guide vertical restraint systems.

According to Denel’s latest annual report the Airbus contract was historically loss-making and Denel could not meet its major A400M deliverables due to liquidity challenges. One example is the delivery of 14, as against 22 contracted, wing-to-fuselage fairings in the 2017/18 financial year. Contractual commitments on the ribs, spars and swords and cargo holding system work packages were also not met.