In a move termed a “complete surprise” to Airbus, South Africa’s government announced on November 5, 2009 that it had cancelled its multi-billion dollar contract to purchase eight Airbus A400M military transport aircraft.  Readers of this website might be less surprised, as we have been reporting on allegations of procurement “irregularities” in connection with the acquisition, as well as the recent emphasis on cost containment by aerospace/defense programs. The South African government’s announcement involved both of those matters.

In our prior report (link above), we noted that allegations had surfaced in South Africa regarding potential “irregular expenditures” in connection with the A400M “tender process”.  According to this report, the current armscor contract “threatened to blow up into another arms deal saga” because of the lack of “due tender processes.”  But that is not the official reason for the cancellation.

The official reason for the cancellation is a schedule delay of four to five years, coupled with a forecasted cost growth of at least 25 percent, according to the official statement of South African Minister of Defence and Military Veterans Lindiwe Sisulu.

According to various sources, the original contract called for delivery of 8 aircraft between 2010 and 2012 for a cost of approximately 17.65 billion rand (roughly US $2.5 billion, or US $308 million per plane).  The South African government stated that the current cost estimate was now 47 billion rand (US $6.1 billion, $763 million per plane).

South African industries had a piece of the A400M action, with Denel Saab Aerostructures in particular expecting future revenues of 13 billion rand over the next 15 years, according to Defense Industry Daily.  However, the same article stated that “Denel Saab Aerostructures doesn’t see the cancellation having much effect on their business in the short term.”

The official South African announcement stated that it has been withholding progress payments to Airbus because of missed contract milestones, and further noted that it expects a 2.9 billion rand refund of payments previously made.

It is not clear what effect, if any, the cancellation will have on the overall A400M program, which has reported 186 international orders.  Certainly, it cannot be seen as inspiring confidence in countries currently “on the bubble” with respect to A400M orders. For instance, Chile has expressed previous interest in acquiring three aircraft, but has yet to execute a contract.  One wonders if they will, given the current status of the program.

Meanwhile, one report quotes an “industry source” as saying that “a Lockheed Martin sales team was recently in SA [South Africa] and was overheard to say there was a local requirement for five of the latest C130J variant of the aircraft.  SA currently operate eight of the early B-models.”

Program execution is never easy. Poor program execution is unacceptable, however, and companies that fail to achieve operational excellence will pay a steep price.