Costs, delays scupper Airbus A400M sale to S.Africa

By Wendell Roelf

CAPE TOWN (Reuters) - South Africa cancelled a $5.2 billion contract to buy eight Airbus A400M military transport planes, rattling aerospace group EADS which is already fighting to save the troubled project from cost overruns and delays.

South African cabinet spokesman Themba Maseko called the deal an "unaffordable burden on the taxpayer" at a time when Africa's biggest economy is struggling to emerge from its first recession in 17 years and government borrowing has risen sharply.

The minister in charge of South Africa's forces, which have taken a leading role in peace-keeping operations in Africa, said the country still needed to update its transport fleet, raising the prospect Airbus's loss could benefit U.S. rivals.

"We have terminated the contract with Airbus but we've not terminated our quest to ensure we have the necessary capabilities. That is very clear," Defence Minister Lindiwe Sisulu said.

"We have as one of our priorities the acquisition of strategic military air transport capability."

Lockheed Martin, producer of the veteran C-130 airlifter, has predicted extra sales due to three- to four-year delays in the A400M, blamed on engine software problems.

The cancellation comes at a time when EADS is in the final stages of negotiating a rescue package for the 20 billion euro A400M contract it signed wkth a core group of European buyers, some of whom have also threatened to trim or cancel orders.

"Airbus Military is surprised by the South African government's announcement ... and regrets this declaration at a time when the programme is on track for a first flight by end-year," an EADS spokesman said.

Airbus will study the finacial impact, he added.

MAJOR CATALYST

Shares in Airbus parent EADS were down 0.5 percent at 1313 GMT, underperforming a sluggish European market.

Launched after almost two decades of debate over European requirements in 2003, the A400M is designed to carry troops and heavy equipment into combat zones or disaster areas.

Britain, France, Germany, Spain, Belgium, Luxembourg and Turkey ordered 180 planes in Europe's biggest single arms deal.

Export sales to South Africa and Malaysia brought the total order tally to 192, but Chile pulled back from an order.

South Africa's decision does not affect the main European contract which is considered a major catalyst to EADS finances and shares, but the group is already relying on exports to make the airplane break even after 2.3 billion euros in provisions.

European industry officials seethed at the decision which comes weeks before a long-delayed first flight that was due to repair the planemaker's credibility and serve as a springboard for a new export campaign to help recoup A400M losses.

"It came really as a surprise because usually there is some warning, but in this instance there was nothing," a source familiar with the project told Reuters.

South Africa said it would continue co-operation between national arms maker Denel and Airbus but a source on the European side warned the relationship "will not be helped".

South Africa has vowed to slash borrowing for three years to bring down a record deficit of 7.6 percent of GDP this year.

"They are clearly worried about the need for extra borrowing and so a few big ticket items are easy wins," said Peter Attard Montalto, emerging markets economist at Nomura International.

The A400M deal had caused a growing political and budget row after South Africa's arms procurement agency Armscor told parliament last month the cost had jumped to 47 billion rand from 6.4 billion when the order was placed.

The value of the deal had already risen to 17 billion rand by the time the transaction was signed.

South Africa's main opposition party, the Democratic Alliance, called for a parliamentary investigation into the deal, which took place under former President Thabo Mbeki, who was forced from office last year.