Thursday March 27, 04:28 PM
ROUNDUP EADS-led Airtanker consortium wins 13 bln stg UK MoD refuelling deal
LONDON (Thomson Financial) - The UK government has awarded a long-awaited 13 bln stg contract to replace the RAF's ageing air refuelling tanker fleet to a European consortium led by aerospace group EADS (Paris: NL0000235190 - news) .
The Ministry of Defence told reporters in a news conference that it had signed a 27-year Private Finance Initiative (PFI) deal with the Airtanker consortium, which also includes Rolls-Royce Group PLC, Cobham (LSE: COB.L - news) , Thales UK and VT Group (LSE: VTG.L - news) .
However the long drawn out process to complete the deal has raised questions about whether the Government will choose PFI financing as a method of funding future defence projects.
The consortium will provide a new fleet of Airbus A330-200 jets to replace the RAF's existing fleet of TriStar and VC-10 aircraft. The new jets are expected to enter service around 2011 and serve for three decades.
The contract to make the aircraft is expected to create 600 jobs, with provision of facilities at the Brize Norton Royal Air Force base and related contracts expected to directly safeguard up to a further 3,000.
A spokesman for EADS said it expects to receive around 40 pct of the sales of the contract. The figure of 13 bln stg is based on an estimate by the MoD and will vary depending on the level of consumption of the services provided under the deal, the spokesman said.
In separate statements, Rolls-Royce said the contract will be worth 700 mln stg to it, and VT Group said it expects to benefit from business worth over 1 bln stg through a combination of its 22.33 pct shareholding in the operating company Airtanker Services Ltd and direct sub-contracts with VT Group units.
A Thales UK spokeswoman said the company is expecting to receive around 285 mln stg on contract award, while the value of the contract over its 27 year timeframe to Thales (Paris: FR0000121329 - news) is expected to total around 900 mln stg.
Meanwhile, Cobham said it has contracts with EADS and AirTanker Services with a total value of some 150 mln stg.
The MoD hailed the deal as great news for the RAF and for British industry and jobs. However, ministers appeared to suggest the government might seek alternative financing arrangements for future projects, given that the deal had taken about three years to conclude since the MoD chose the EADS consortium as preferred bidder in early 2005.
The programme to renew the TriStars and VC10s had been under consideration since the early 1990s.
Airtanker raised about 2.5 bln stg for the project, which is the world's biggest defence PFI. Asked why the deal had taken so long to conclude, chief executive of Airtanker, Phil Blundell, blamed difficulties in securing finance and the complexity of the project.
He described bringing the deal to a successful conclusion in the face of turmoil in the financial markets as 'challenging'. He said the consortium had to restructure the deal after the 'collapse' of bond markets last year and that resulted in it being 'effectively financed just through debt.'
He said the contract was technically complex and the need to secure private finance made it more so.
'Added to that is the extra level of complexity of going through the external financing route,' he said.
'We have got this deal away in a very difficult market.'
Minister for Defence Equipment & Support, Baroness Ann Taylor, said the government had been working with the consortium to secure financing for the project since June 2007.
Asked whether the deal represented value for money for the British taxpayer, she said: 'This has been signed off by the Treasury as a value for money solution and I think we're happy they've seen it in that light.'
In response to another question about whether the government would finance all major future defence projects by the PFI method, Baroness Taylor said: 'There are lots of ways in which we fund programmes - sometimes by putting them out to competition, sometimes through partnerships or by leasing arrangements.
'This was appropriate in this case, but that's not to say that's the way we'll go in all projects.'
The announcement comes only weeks after EADS and partners scored a surprise victory over rival Boeing (NYSE: BA - news) in securing a major military refuelling tanker deal from the US government.
EADS chief executive Louis Gallois said the MoD's requirements were known to be highly exacting.
'This win further demonstrates the A330 as the platform of choice for the world's refuelling fleets and comes on the back of our recent success in the US market.
'This award strengthens our ongoing commitment to grow our business in the UK in the long term,' Gallois added.
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