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08 Jul 04. The Ft reported that UK defence procurement officials appear to have suspended their threat to recommend cancelling a £13bn ($24bn) Royal Air Force programme for in-air refuelling tankers.

EADS, the Franco-German defence group that is the preferred contractor on the project, has been told it can submit another revised plan for the project this week. Sir Peter Spencer, the chief of UK defence procurement, recently wrote to Gordon Page, chairman of the EADS-led AirTanker consortium, saying the company had until today to submit a new financial model. According to people who have seen the new letter, Sir Peter also wrote that “as a mark of good faith”, the agency would also consider other non-financial changes EADS proposes.

The tone of the new letter appears in marked contrast to correspondence Sir Peter sent to EADS last month, in which he threatened to “recommend cancellation straight away” unless AirTanker met a detailed list of demands and drastically revamped its contract proposal.

The dispute between the MoD and EADS centred on the complex structure of the deal, in which the ministry wants to operate the tankers as an outsourcing programme. In his June letter, Sir Peter questioned whether AirTanker was committed to the PFI structure, implying EADS was trying to force the ministry into owning the aircraft themselves. (See BATTLESPACE ALERT Vol.6 ISSUE 15, June 22nd 2004, MoD TO CAN EADS FSTA BID? MARSHALL MAKES UNSOLICITED BID?)

But in the new letter, Sir Peter indicated he was satisfied EADS and its partners were “committed to PFI”, which could remove one of the key hurdles to an agreement. EADS declined to comment on the revised proposal it will submit today. The company sent the defence procurement agency its previous proposal, a last-ditch attempt to save the programme, two weeks ago, which appears to have appeased the agency and met many of Sir Peter’s demands.

Two other consortia – one centred on Irish aircraft leasing group Omega Air and the other led by British aerospace group Marshall – have submitted bids to the MoD in recent weeks in case the EADS negotiations fail.

“When [other groups] fell off the field of play, they took a clean look at what happened and decided they’d continue to monitor the situation,” said one industry executive who has seen the new proposal.

“If [the EADS proposal] failed to get away, they wanted to be in a position to present the MoD with something deliverable and affordable.”

The new proposal centres on Omega Air, a Dublin-based aircraft leasing company owned by Ulick McEvaddy, an Irish entrepreneur. Omega has converted Boeing 707s into refuelling aircraft for the US Navy, which has leased them during training exercises. Industry sources said Mr McEvaddy was in the process of purchasing 20 DC-10s, and had already begun converting them for use as tankers. The bid, which proposes the RAF should sign a seven-year leasing contract and use the aircraft only when it needs them, is intended only as an interim solution for the ministry, which needs to replace its aging fleet of existing VC-10 and Tristar tankers. The Omega group has received no response from MoD officials, who have insisted they are in exclusive talks with EA DS about the RAF tanker programme. “It’s a proposal that’s there if this fails,” an industry executive said.

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