Denel CEO Talib Sadik says the group aims to break even by 2012

Cape Town ­ State arms manufacturer Denel’s Euro137m contract to supply parts to Airbus for its A400M aircraft will not be affected if SA cancels its order to buy eight A400M transport planes for the South African Air Force, says Denel Group CEO Talib Sadik.

The government is understood to be reviewing the contract because of cost rises that could see it pay up to R47bn instead of the R17bn agreed to in 2005.

Sadik said at a briefing of Parliament’s public enterprises committee on Denel’s annual report yesterday that Denel had a separate contract with Airbus, “though Airbus have the right to say whether they want to cancel it or not. But our understanding is that they would like to continue the relationship with us.”

He said there were opportunities for Denel to increase its supply of parts to Airbus as it was looking for cost reductions on the A400M and Denel could take advantage of this.

Denel was in talks with the state for a cash injection of R1,7bn to strengthen its balance sheet, but in the meantime had been given state guarantees to meet its liquidity requirements. Guarantees received by end-March amounted to R1,3bn. Since then, Denel had been given R550m.

Sadik said Denel aimed to break even by 2012 on the assumption of the turnaround plans for Denel Aerostructures and Denel Dynamics.

However, the global financial crisis would intensify competition in developing markets and deepen the need for alliances and partnerships.

Denel would have to focus on growing niche areas and improving efficiencies.

“Lower budgets are increasing systems’ life requirement, driving growth for upgrading and services. The military is increasingly outsourcing maintenance to drive efficiency and to focus on the front line,” Sadik said.

“Reduced budgets coupled with lower threat levels and a dearth of breakthrough technology have resulted in lower new systems sales.”

Sadik said that Denel’s order book at end-July totalled R17,8bn, including confirmed contracts. This compared with the R3,7bn at end- April 2006.

The company had succeeded in increasing local sales as a percentage of total sales ­ a key pillar of its turnaround strategy ­ from 47% in 2005-06 to 64% in 2008-09.

Democratic Alliance defence spokesman David Maynier has proposed a motion in the National Assembly calling for the establishment of a special multiparty ad hoc committee to investigate the Airbus A400M deal.

He said the public needed to know why there was no tender process for the acquisition of the eight transport aircraft; the real cost of the eight aircraft, given the claim by Airbus that the R47bn price tag was exaggerated; why there was a failure to provide for maintenance costs of the aircraft; and whose interests were really served by the Airbus A400M deal.

“The fact is that we cannot go through another strategic defence package-style arms deal scandal that rolled on for years and was eventually covered up,” Maynier said.

With acknowledgements to Linda Ensor and Business Day.