THE South African Air Force’s (SAAF) cancellation of a decades-long Denel maintenance contract will lose the country critical skills and may harm its ability to conduct rescue operations.
State-owned defence group Denel will retrench 538 aircraft specialists next month after attempts to agree on a new contract with the SAAF failed.
The SAAF will not say how the maintenance work, handled by Denel since 1986, will be done from April. It is an “internal matter”, it said.
To date, no tender has been issued for another service provider to take over the work. The SAAF is expected to hire some of Denel’s retrenched staff at lower pay. But a transfer of skills to move the function in-house would require that people are hired by the SAAF on the same pay and benefits.
There is already concern that SAAF pilots do not get enough opportunities to log their required flying hours due to a lack of available planes, said Willie van Eeden, aerospace sector manager at trade union Uasa, which represents most of the affected workers.
SAAF operations to be curtailed are expected to include peacekeeping missions, crime fighting, border protection, humanitarian aid and rescue operations, the training of fighter pilots and the transportation of government officials.
The government has spent millions of rands on privately chartered planes to transport officials when SAAF planes are not available.
Most concerning is the likely effect on humanitarian missions. “These retrenchments can make the difference between it taking seven hours to rescue someone, or two days,” Mr van Eeden said. The SAAF rescued many people in the recent Limpopo and Mozambique floods.
The SAAF has embarked on a skills audit, due on February 25, to determine critically important skills to be retained. This will leave limited time to negotiate a smooth handover by the end of March, particularly as the affected skills are in short supply and Denel employees are likely to move to other local or international air transport companies.
“The manner in which this matter has been dealt with by the SAAF and Denel is really deplorable,” said Mr van Eeden. “I will not be surprised if none of the current AMG employees with critical knowledge is interested in individual contracts with the SAAF.
“It is believed that their knowledge and experience will be better appreciated and remunerated by other aeronautical companies here and abroad.”
The contract, estimated at R200m a year, had to be renegotiated after the auditor-general said in 2009 that it contravened legislation because of its open-ended nature.
Talks last year for a new contract, likely at reduced skills levels because of “serious budget cuts” at the air force, came to nothing. The SAAF informed Denel informally in November that the company would not be recontracted.
Denel, which earns about 60% of its revenue from local sales, mainly to the Department of Defence, depends on government spending for its revenue.
More than half of the department’s expenditure is on pay, making it difficult for defence manufacturers like Denel to stay afloat if they do not win big export business.
Last year Denel received a R700m bailout from the government, with a first tranche paid at the end of 2012, for working capital for its loss-making Aerostructures (DAe) business. DAe is the only top-level supplier outside Europe for Airbus Military on the A400M. The government also guarantees R1.85bn of Denel’s debt.
Denel is confident DAe will turn profitable in the next two to three financial years, said CEO Riaz Saloojee.
The company is reviewing its long-term funding model in collaboration with government and has not applied “at this stage” for further government funding in the 2013/14 financial year, Mr Saloojee said.
“No additional guarantees or capital injections are foreseen, except for possible assistance on large system orders, where Denel’s balance sheet won’t be strong enough to execute such orders,” Mr Saloojee said.
The company does not expect to sell assets at this point, after restructuring led to the sale of all non-strategic assets between 2005 and 2008.
The turnaround strategy led to profit in the past two financial years after more than a decade of losses. Denel is focusing on winning new business, especially in Africa, the Middle East, Southeast Asia and South America.
Last year, it won a R3.5bn contract from Malaysia to supply armoured vehicle turrets.
* This article was first published in Sunday Times: Business Times