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02 Nov 04. The FT reported that the UK MoD has warned a consortium led by Airbus parent EADS that it risks losing a £13bn ($21.8bn) deal to equip the Royal Air Force with a fleet of refuelling aircraft – perhaps as early as next month – unless it quickly agrees to contract changes.

According to letters sent by defence procurement officials and obtained by the Financial Times, Sir Peter Spencer, the UK’s chief military acquisition officer, has begun “fall-back studies” to find an alternative to the Airbus deal. In one letter, Sir Peter told officials in the EADS consortium AirTanker that competing proposals would be “pursued vigorously” unless a contract was agreed soon.

The RAF contract is central to the effort by EADS to pry open the tanker market, once monopolised by Boeing. The promise of a UK contract was the first for the A330 as a tanker, and in April, Australia shocked Boeing by picking the A330 over the 767 for its tanker programme.

Officials at the Pentagon – which will need an estimated 500 tankers in the coming decade – have said the UK and Australia victories have made EADS competent to challenge Boeing if its scandal-plagued US tanker programme is reopened. A failure to secure a UK contract, however, could derail such progress.

Sir Peter wrote in his letter to AirTanker chairman Gordon Page: “A number of the detailed issues that we originally set out last January . . . have yet to be satisfactorily resolved . . . . At [year end] I may recommend cancellation of the programme, continuation of negotiations, or announcement of AirTanker as PB [preferred bidder], depending on the extent to which we have reached agreement on the outstanding issues. Whether and how quickly you gain a PB recommendation is therefore up to you.” Although the letters are dated early September, people familiar with the negotiations said on Tuesday that the dispute continued and had risen to senior levels at the MoD and the Treasury, which are locked in a standoff over whether to give in to some of AirTanker’s terms.

The protracted, and sometimes bitter, negotiations have been embarrassing for EADS ever since it won the competition against Boeing in January. In June Sir Peter wrote to EADS saying their contract terms were unreasonable and threatening cancellation unless concessions were met. The new letters are more conciliatory and acknowledge EADS has improved its offer. But they make clear that several proposed EADS terms are unacceptable. The terms in dispute largely relate to accounting rules that ensure AirTanker, rather than the MoD, owns the aircraft. The MoD hopes to lease the aircraft from AirTanker, and pay only for the time used.

Comment: EADS PR Supremo Andrew Jeacock responded with a statement saying:
“In response to the coverage in the FT this morning we believe it important to state that: We believe that the tenor of recent press comments do not accurately reflect the true state of the negotiations. We are actively engaged on a daily basis with our customer during the ongoing negotiation phase. We are working together and progress is being made. The negotiations are in accordance with the parameters and criteria established by the DPA. The capability of the aircraft and service being offered by the AirTanker consortium remain unchanged and compelling. As we have said before, we remain confident and optimistic about our proposal and the prospects of concluding a successful deal to the benefit of the RAF, MOD, UK taxpayer and the consortium partners.

What this statement does not say is the current state of negotiations with EADS’s bankers for this PFI requirement. Sources close to BATTLESPACE suggest that these negotiations are at an early stage and could not be concluded to meet the MoD’s new requirements and it may be the bankers who pull the eventual plug, taking the Australian deal with it.

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