Back to negotiating table over Sea King replacements

OTTAWA -- The Harper government is once again re-negotiating the contract to replace the air force's outdated Sea King helicopters, The Canadian Press has learned.

Senior officials at Sikorsky Aircraft Corp., maker of the CH-148 Cyclone helicopter, recently told financial analysts the company is bargaining with Public Works to "reach agreement on an alternative contractual solution" for the troubled program, already five years behind schedule.

"I don't want to sort of negotiate in public about what they want, but what they want is, certainly, sounds perfectly reasonable, right?" Michael Maurer, president of Sikorsky said during a question-and-answer session Sept. 27.

"They want their aircraft the way they ordered them. The issue is that this is a development program, and it really wasn't structured as a development contract. So we're both trying to navigate that and they have to follow their procurement rules and regulations."

Maurer also said that not meeting a commitment to hand over test helicopters would be good for the aircraft-maker's bottom line in the short-term.

"If we do not deliver the five (Canadian Maritime Helicopter Program) aircraft this year, then Sikorsky will of course realize operating profit growth above our guidance range," he said.

"It is important to note that excluding (Canadian Maritime Helicopter Program) deliveries, we will demonstrate our ability to get to a 14 per cent return on sales in 2012, two years ahead of the original time line for this goal, and this really demonstrates strong operational performance being achieved across all of our business units and long-term potential for Sikorsky to be a mid-teens return business."

The comment drew a sharp rebuke from the Opposition defence critic.

"It's not the Canadian taxpayer's job to ensure the best bottom line possible for Sikorsky and its owners," said the NDP's Jack Harris.

A Sikorsky spokesman did not immediately respond when asked for comment.

The $5.7-billion contract to buy 28 helicopters was signed by the Liberal government of Paul Martin in 2004, a milestone event in the two-decade fight to find a replacement for the CH-124 Sea Kings, after former prime minister Jean Chretien cancelled the first deal in 1993.

Sikorsky was required to deliver new state-of-the-art aircraft within four years, but the Harper government was forced to extend the contract in 2008 and toss in an extra $117 million after the program bogged down.

In constructing the Cyclones, the U.S. aircraft giant took a civilian helicopter design -- the S-92 -- hardening it with improvements and electronics for military use.

Canada's auditor general slammed National Defence over the Cyclone purchase two years ago, saying the department underestimated the complexity of developing the helicopter and wrongly defined it as being an "off-the-shelf" purchase.

The development programs continue today, according to a transcript of Maurer's remarks.

"The biggest remaining development challenge is mission system software, verification and validation," he said during the event, held at the Pratt and Whitney plant in Mirabel, Que., outside Montreal.

He estimated the software won't be ready until the end of the year.

As part of the 2008 contract extension, the company promised to deliver interim helicopters for training at the Canadian Forces facility in Shearwater, N.S., by November 2010.

It missed that deadline and last June the aircraft-maker failed to meet its primary goal of handing over a "fully mission capable" Cyclone, triggering contract penalties that could run as high as $88 million, cash that would be recovered through deductions to in-service maintenance support.

A spokeswoman for Public Works Minister Rona Ambrose wouldn't define what an "alternative contractual solution" means, and provided no details on the potential implications for the treasury, or the military.

"When we sign a contract with a supplier, we expect their obligations under the contract to be met," Michelle Bakos said in a statement.

"We have already applied liquidated damages under the contract; and significant additional charges have begun to accrue against the company for failure to deliver fully compliant Maritime Helicopters."

Harris said he's worried the re-negotiation was triggered by the escalating penalties and the government may be prepared to let the company off the hook.

"I think it's fair for the Canadian government to hold them to the original contract," he said.

Sikorsky officials at the Montreal event said the Canadian air force has four aircraft, being used to train maintenance technicians. Pilot training was expected to begin this fall.

More importantly, the company says seven helicopters are on the assembly line in Florida and production has started on 23 of the 28 contracted aircraft, making it extremely unlikely the Harper government would cancel the program.

"The delivery profile for the Canadian Maritime Helicopter program is uncertain," officials said.

The Sea Kings will celebrate 50 years in service next year and the troubled Cyclone program has been a source of frustration for the Conservatives, evident in June when Defence Minister Peter MacKay referred to it as "the worst procurement in the history of Canada."

There has been bad blood between the government and the company, with defence officials blatantly warning MacKay in late 2010 that they were worried Sikorsky might cut corners to meet deadlines.