Para.9.9. Airbus A340-500/600 unit delivery projections – some initial inputs/reminders

(A) Reminder from para 4 re extract from Mr Dekker’s oral evidence in April 2008

Judge	You’ve heard the Claimant’s motivation. What can you tell us? It was a valid concern. How did you regard it at that time?
Mr Dekker	We were aware of this programme and the risk. It was not being disregarded by anyone. As a management team it’s important to have different points of view. Mr Little’s view is important in this assessment but his is not the only one. His point of view was valuable. The auditors were comfortable with the outcome.

His May 2009 document input “At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate.”

(B) As you can read in the extract from the PwC forensic accountants at PwC para 8.78 on A340-500/600 quantities in the EAC which formed the part of the basis of their derived conclusions??

“PwC Observation: Based on third party information presented above (BL:solely the FI April 2007 report) and on management information obtained, the delivery of a combination of production units and spare units totalling at least of 1,285 units over the life of the programme ending FY2021 is not unreasonable.”

(C ) Mr Neill’s oral evidence in cross-examination in July 2009

Mr Neill :	I think we're losing sight of the purpose of this email. At that point in time, PwC were trying to understand how the numbers stacked up to justify us getting more than 1247 units that had been used at that time in the EAC. I must admit I didn't go back and check in detail every calculation that followed that. All I was saying was that if you took Dr Thamburaj's 40 thousand hours it would generate a significant number which, on top of the production, would easily exceed the 1247 numbers needed to amortize out the recurring costs. That's what I was trying to say in the opening paragraph. (of his email dated 29 March 2007 at document 3597)
Mr Little	No. I'm suggesting to you you're lying, because that says to anybody, a replacement. The calculation of 800 stacks together with that, it only makes sense in that context. It can't mean anything else, and they then go off and say that's how they've done their calculations, but can't even get the maths right. (overspeaking) - see Lynch QC below at (d)
Judge	Wait, please. You're suggesting he's lied in the email?
Mr Little	Yes, he's deliberately lied and given that impression.
Judge	In the email?
Mr Little	In the email relating to the 800 and he then conditions --
Judge	No….
Mr Lynch	Wait.
Judge	In the email, what you're suggesting is that he's lying to PwC.
Mr Little	He's deliberately given the impression of that 40,000 hours replacement.
Judge	I hear what you say but I want to make a note of it. I suggest that you are lying in the email. Not anywhere else, but in that email. That's what's been suggested to you, I think. That that's a lie. (See Neill continuing oral evidence in (E) below)

(D) We also have Mr Bobbi’s evidence and the thrust of Mr Lynch’s questioning, presumably on instruction on doc 3597 on 8 June 2009

Mr Lynch	We have Mr Neill's email (Doc 3597) to Mr Moore of PricewaterhouseCoopers. I know it’s a bit compressed in its typescript. Tribunal, of course there is a bigger version in the bundle, if that's a bit small to read. (Pause).
	Mr Bobbi, you can see, can't you, looking at the two substantive paragraphs -- it actually is a feature of both those paragraphs -- that Mr Neill makes it expressly clear that Magellan is simply basing its calculations for accountancy purposes on spares or replacements, he's NOT included anything to do with repairs.
And shortly later	Yes. Well, no, I think the whole point is this, it's not, Dr Thamburaj's point was not a question that they will need repairs after that period, Dr Thamburaj's point was that around 40,000 flying hours was indeed the lifespan of the unit. That after that, its lifespan was spent and should be REPLACED. That was the point.”

(E) Mr Neill’s Mr Neill	Continued Oral evidence in July 2009 If you want to assume 800 units are needed (doc 3597 / doc 3605H) then you have to assume that the WHOLE FLEET will need that kind of REPLACEMENT and that will occur if airlines operate in difficult situations or conditions where there's significant deterioration.
Mr Neill :	And the answer is, I think, that only time will tell whether Dr Thamburaj's tests, and the coupon tests that he did, is a clear representation of what will happen in service. Somewhere between 20 thousand and 100 thousand hours, it is clear that exhausts will have to be -- to undergo a major REPAIR and as I say, time will tell that.

	Going back to the reports I referred to earlier, we had a damage tolerance report that said a hundred thousand hours is the design life, when they did the damage tolerance report they built into it a scatter range of 5, because the engine time between overhauls was 20 thousand hours and therefore the belief is that nozzles and plugs could start returning or needing REPAIR from service from 20 thousand hours on, we thought 20 thousand hours was much too low a number to use for this calculation, and at the same time, given the amount of wear and tear that we knew that would occur, based on our experience, a hundred thousand hours was too great a number. So we had as it were a floor and a ceiling. We made the decision to base it on 40 thousand hours, based on the work that Dr Thamburaj did, that said that if any units are exposed to heavy use in a number of hot and high airports and marine environments, corrosive elements in the air, et cetera, et cetera, there's every likelihood that we'll start seeing heavy repairs from about 35 thousand hours on, and we chose the 40 thousand hours based on that fact, there was no other science behind the 40 thousand hours.

9.9.1

In addition to the basic logic and mathematics quantity errors set out in Para 9.2 it is inconceivable that a 7 month “Independent forensic investigation” - to ensure the accuracy and reliability of the MAC Balance Sheet etc and which states at PwC para 2.40 that Financial Control in MAC is poor whilst stating at (d) Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour.” - would then proceed to make NO reconciliation /commentary within the tasking and C$3m+ report by PwC – that is between Airbus projections numbers, that of any of the other six + external forecasters and the MAC documented “representations” set out below:

(a)	both PwC and E&Y had the AIRBUS volumes/timing in their planned delivery projections in the period from 2007 to 2009 documents – which were equal to 32 aircraft or a production rate of 10 aircraft per year(2007= 52 units,2008= 40 units,2009= 36 units : doc.3600 (a) dated 6 Feb.2007 - not referred to in the PwC report)which was widely known within Magellan since September.2006. (BL: In Jan. 2010 Airbus will publicly confirm that they actually built, as per this plan, a total of 32 A340-500/600 a/c and delivered 30))

(b)	the Q4.2006 EAC dated 21 February 2007 (1831A) with volumes/timing equal to some 833 units (2007 = 40 exhaust units , 2008 = 156 units , 2009 = 162 units , 2010 = 162 units , 2011 = 162 units , 2012 = 151 units) and therefore an assumption that the remaining 833 of the 1285 units would be delivered to Aircelle by the end of the commercial contract in FY2012 (doc.1831A – not an Exhibit in the PWC Forensic Report).This was also the basis of the initial submission by Aeronca for the MAC five year strategic plan in September 2006

This PwC Exhibit 8.3 document schedule (1831/1831A) is the representation made by MAC to E&Y in the Q4.FY2006 Estimate at Completion (EAC). As per the PwC report para 8.61 “The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.” The Estimate at Completion (EAC) process/documents are the MAC management “most reasoned view and most likely outcome” – oral evidence :Dekker” and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 gross losses exceeding C$5.2m to a miniscule $0.1m gross profit on $250m program revenues

(C)	initially MAC provided a schedule dated 16 February 2007 (doc 3605) to both PwC and E&Y with production volumes totaling 1155 units (total build to 278 a/c and 20 dev units) and 190 Spares and Repairs by FY2021.

It is noted that Mr Neill and Mr Furbay later wrote on 22 March 2007, in response to PwC Q2 (3598A), and apparently after the 1 March 2007 email/schedule (3605B-G) at D) sent below, (“Of the units which remain to be delivered – what is the split between production and spares / repair units ?” MAC Answer “1,155 production units and 190 spares/repairs as provided to you on our initial projection dated 2/16/2007.”

This is vitally important as they also recorded in response to Q3 on 22 March 2007 from PwC (3598A) “Management’s judgment does not differ from the estimate used at 31 December 2006. Please see Answer 1 above. Any alternative projections produced were at the request of PwC or E&Y and were provided for reference purposes. New information that has become available has not changed our well established and consistent estimate and is therefore not pertinent.”

This volume information was then extracted from document c) above “Best information as at 31 December 2006 - doc dated 16 Feb 2007 (3605) = 18 + 172 = 190 spares/repairs. Although sent to both PwC & E&Y this information or Exhibit or its consequential implications also does not appear in the PwC report. Furthermore, PinsentMasons, on behalf of Mr Dekker, the MAC Chief Financial Officer described some of this information in this document (C ) schedule for production and spares on 5 May 2009 as “At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate.”

(d)	the Airbus volumes/timing in the MAC 1 MARCH 2007 representation to EY & PwC (doc 3605B/G) in the period from 2007 to 2009 – was equal to 62 aircraft (2007 = 72 exhaust units, 2008 = 72 units , 2009 = 104 units; documents not Exhibit in the PwC report) .

This was equivalent to a continuing production rate of 20+ aircraft per year , when the A340 – 500/600 rate was thoroughly briefed to have halved (c- 50% ) to an approx 10 per year in Aug 2006 – see MAC 12 September staff meeting (2179) and (2117) as (a) and the MAC FY2007 budget. Mr Butyniec confirmed his knowledge of that production rate of 10 aircraft per year as making sense in the UK court (see para 5.2).

In the same schedule MAC then proceeded to INCREASE the total production build program on 1 March 2007 from 278 a/c to 291 aircraft/1164 units – see Mr Neill’s oral evidence to the UK court on 14 November 2007 below and this document 3605B-G. Unbelievably for anyone, and certainly for those within the aerospace industry, the MAC Production Plan for 2010 = 29 aircraft or 116 engine exhaust systems) sets out an actual increase in A340 production rate which was higher than ever scheduled by Airbus since the inception of A340-500/600 high rate production from 2003-2006 (averaging 20-23 a/c per year) and would not have even have been possible based on known assembly line tooling limitations. e.g A340 wing production at Broughton and certain assembly stations in Toulouse.

Furthermore there were NO active airline sales campaigns by 31 January 2007 and a dwindling Airbus order book (as per para 9.8) to support such production forecasts. Mr Neill fundamentally knew this himself, as he told the equity analysts in the Q2.2006 Earnings webcast call on 15 Aug.2006

“In Boeing’s case -- different story. The story of the quarter was the strength of the order book for the Boeing 787 that built through that period but also for the Boeing 777 as well. Boeing won the bulk of the orders for twin-aisle airplanes and had, for the first time, some success that they could boast about. We saw that at the Farnborough Airshow.” >

In fact, as Mr Neill also knew from me (and his own reading etc - which you can read in the Airbus press release) NONE of the 182 Aircraft Orders and Commitments announced by Airbus at the Farnborough Airshow in 2006 were for the A340-500/600.

Also revealing is the former President and CEO Mr R Neill (now Vice Chairman) - oral evidence on 14 November 2007


Judge	Airbus now more confident? (doc 3602. A340 -500/600 – Feb2007.153 sales orders and Teal forecast )
Mr Neill	It’s very technical – aircraft can fly anywhere.
Judge	You did not share the pessimism. Your cynicism about that pessimism has been vindicated because you have sold more?
Mr Neill	Correct.


and Mr Stafford	The fundamental is – even if pessimistic – the sales were never going to reach the 300 aircraft originally projected
Mr Neill	We had projected 1200 production nacelles sold – we have now added to that the number to be sold through spares – that takes the number up to 1500 -1600. Significantly in excess of that needed in the EAC. To the original EAC’s we have added in the line for spares – and looked at the total number that will be sold. Either way it exceeds the number.
Mr Stafford	Ignoring spares – concentrating on the number of new aircraft – has MAC ever reduced its expected number of sales from 300 aircraft
Mr Neill	Yes the pessimistic scenario
Mr Stafford	Accounts are based on pessimistic
Mr Neill	No – realistic!!
Mr Stafford	Where are accounts placed
Mr Neill	Between the two
Mr Stafford	Where is it now ?
Mr Neill	Lower than 300 - probably between 250 and 300 aircraft ( doc 3605B/C/D for 291 a/c dated 1 March 2007 disclosed June 2009)

MAC had represented in these 1 March 2007 production volumes for 2007 – 2009 (doc 3605B-G) that were DOUBLE those planned and published by Airbus more than six months earlier (doc 3600). Those MAC 16 Feb 2007 (doc 3605) and 1 March 2007 forecasts to PwC and E&Y (3605B/G) that Airbus would both sell 29 + A340 aircraft in 2007/early 2008 and then plan and be able to increase build to TREBLE the production rate from 2009 to FY2010 (127 or 116 exhausts respectively) was “consciously misleading and deceitful”.

(e)

AND then the PwC forensic team obtained access to an advance copy, in mid March 2007, of the March/April 2007 market forecast from FI. In the near term the Forecast International March/ April 2007 “HIGH CONFIDENCE” aircraft delivery volumes projected for the period 2007-2009 was now for 41 aircraft or equivalent to a production rate of 14 aircraft per year (almost 30% higher than the manufacturers, Airbus production plan at (a) ( FI = 2007=56 exhaust units , 2008=52 units , 2009=56 units with the remaining forecast for 2010 - 2015 = 304 units : doc.3616), PwC having obtained this latest FI report in mid March 2007 made it known to MAC and Mr Neill.

When PwC brought the FI April 2007 forecast of lower production volumes (now FI a/c build of 213 a/c ending in FY2016) to Mr Neill’s attention he then created a “new” Spares and Repairs volumes perspective which had never been documented or heard of before, nor was any of this written in the commercial or engineering documentation with or within Aircelle or the airlines. See his email 3597-3598A-C in which he refers to his instruction to Mr Furbay to recalculate the Spares – which would now read 800+ units (Documents not in PwC Report) . The Spares and Repairs line was then reforecast upwards from the 190 units which had been used for years within MAC (e.g. those on 16 Feb.2007 and 1 March 2007 above) - on Mr Neill’s instruction. This was initially based on Mr Neill’s instructions and then Dr Thamburaj’s email of 12 March 2007 (3618/3621) and a useful “Exhaust life of 40,000 hours” / 5000 flying hours per year.

In fact only in July 2009 did we learn that PwC requested a scenario from MAC which was similar to this concensus forecast 135 a/c (and what I had told them) and then Magellan “covered” this by Mr Neill (CEO) then suggesting in his email doc 3597/3598 just hours before the FY2006 financial statements were released to the TSE that replacement spares would be required “as the useful life of the exhaust system was approx 35,000 hours {To provide a margin of safety John Furbay’s analysis used 40000 hrs as the useful life}. This analysis shows that the likely spares requirement in the period 2007 to 2021 was in excess of 800 units (doc 3605H – 886+ units). These documents were not disclosed by PwC who instead independently calculated the “1572” units above at paragraph 9.2.

And then we have that document disclosed on 27 August 2009 headed Aeronca Aircelle A340 program – Actual/Estimated Quantities (Engine Sets) dated 14 March 2007 . This document 3605H is critical as it

(1) opens up the subject of replacement spares needs at an “assumed” 40,000 flying hours creating in excess of 400 -700 units to enable MAC to continue to use 1285 units in the amortization for the Q4/2006 EAC /FY 2006 in its submission to PwC and E&Y and

(2) shows a production volume equal to a Total aircraft build of 135 A/C at Outcome 1 with series production deliveries to Aircelle completing in FY2009. Please now look at this document.

MAC A340 forecasts - Aeronca Inc Aircelle A340 Program - Actual / Estimated Quantities
- 14 March 2007 with inflated spares prediction (PwC for "forensic" investigation - 3605H –

(MAC projections of a likely minimum of 886 “spares” (replacement parts) - based on 40,000 flying hours exhaust useful life, which was to provide a margin of safety in those estimates by Mr Neill , the current Vice Chairman- through to FY2021: of which the MAC Spares Plan for 2010 = further 81 engine exhaust systems. As you can read in

Outcome 1 : Production volumes plan– a plan based on Airbus’s actual production plan for 2007-2009 to build 32 aircraft (that is (a) 3600 above) with production completing at a total aircraft build of 135 aircraft (542 + 20 development units). This of course was what I suggested (circa 150 a/c my assessment pre termination –see docs 1437/ 2605 and then circa 135 aircraft in my W/S 226.3 by Feb/March 2007) and crucially also the market consensus – 135 aircraft - of 6 out of 7 of the other professional forecasters in 2006/early 2007 as per paragraphs 9.4 and 9.6.

The Spares and Repairs line was then reforecast on Mr Neill’s instruction to a resultant Spares total calculated of “886” Spares and Repairs (uplifted from all the prior MAC/Aeronca forecasts.

Outcome 2 : Airbus website – total aircraft sales orders – 153 aircraft (3602) and then termination.

The production demand forecast of a further 228 units by PwC/MAC failed to review the six airline customer outstanding orders - for multiple aircraft - status. I dealt with this earlier for three of the four major outstanding orders –“effectively cancelled” in paragraph 9.8.

The only other significant order had been recently placed in December 2006, by the largest A340 600 aircraft operator Lufthansa, for seven A340-600 – another airline which is audited by PwC. I knew from my own sources within Airbus Toulouse and UK that this campaign had been active for most of 2006 and Airbus were hoping to secure an order for 18+ A340 600 aircraft (& A380 option conversions) whilst strategically seeking to undermine the launch of the new Boeing 747 Intercontinental aircraft. They officially lost that sales battle on 6 December 2006 with the public announcement that Lufthansa was to be the launch customer of the Boeing 747 Intercontinental with an order for 20 aircraft and 20 options. The next day Airbus announced the final order of only 7 A340-600 aircraft with some near term delivery slots in early 2008 taking over the “suspended” A340 600 partially built aircraft. As a matter of record Lufthansa are also audited by PwC. This decision was what made me now conclude that the A340-500/600 total build prospects were now likely to fall from circa 150 – 155 A340-500/600 aircraft to 135 – 140 a/c in the first quarter of FY2007 and certainly by the time of any submissions to E&Y and PwC.

My assessment, therefore, was and remains, that the Outcome 1 production forecast (a) used by MAC on 14 March 2007 was almost exactly what I said to PwC, whilst the Spares and Repairs is grossly inflated using “Spares replacements” and ignoring the Factory Repairs (at MAC or elsewhere), when only units that are returned by the airlines and judged Beyond Economic Repair (BER) should be counted – a “norm” of 13%-15% - for Spares. Even on MAC’s “incorrect” assumption of complete replacement at 40000 flying hours the calculation has two business errors. The first, as Mr Neill agreed in his evidence, is that it should have been based on airline aircraft in service dates (not historic delivery dates from Aeronca to Aircelle). Secondly the average annual hours are 4400 flying hours per year. That is a nine year replacement cycle – 40,000/4,400 (not eight years).
When this calculation is “corrected” then the MAC predicted “maximum” Spares demand is for a further 613 units, and not 886 (or even worse the 1572 which became central in the conclusions derived by PwC).

The production termination at 135 aircraft now meant that the shortfall to the 1285 units required in the Q4 EAC was 705 units with a MAC-assumption-based on full replacement “spares” demand of 613 units by FY2021. PwC had doc.3605H from 14 March 2007 via Mr Furbay. For the avoidance of doubt this “613” number is only the necessary “corrections” as the industry (including Aircelle, the airlines directly, PwC and Mr Neill in his July 2009 oral evidence) do NOT expect to replace every exhaust in service every 8 years.) This is vitally important as PwC also stated, in direct contradiction to Mr Lynch QC cross-examination instructions, in their Question 5 in March 2007 “The engineering report prepared by Dr Thamburaj makes reference to repairs being required (not necessarily spares). What is management’s view on the distinction between spares and repairs and the implications for future revenues / costs? …. etc. See further extracts of oral evidence below and in my Final A340 report.

PwC failed to question or properly consider the implications of all the glaringly conflicting data at (a) , (b) , (c) and (d) at their disposal.

NONE of these documents or information is disclosed or included as Exhibits in the PwC report – instead PwC decide to do their own assessment with the single Forecast International April 2007 numerical forecast at its core for production supplemented by a fundamentally flawed logic and mathematical calculation for “Replacement Spares and Repairs demand”. All that before industry experience.

PwC consciously elected to use as the SOLITARY basis for their Report (see para 8.78.p.63) the FI March/April 2007 market forecast for 2007–2009/2015, which, not only did it not reflect the “market consensus -135” amongst the professional providers and the contemporaneous publications stories, but also, unprecedentedly for the industry, and improbably, FI had also positioned its “High Confidence” forecast by almost 30% above the definitive production plans of 32 aircraft for the next three years of the manufacturer, Airbus, itself. I have never in thirty years witnessed this before in any external market forecasts in the aerospace industry, nor have any of the many others with whom I have spoken in the last three years.

Additionally and centrally PwC, as recorded at PwC para 8.3, were aware from my briefings/documents and filed Grounds of Complaint within the UK court process (PD23) that the Airbus internal sales/program scenarios of a further 60 (total build 155 aircraft) and 100 aircraft (total build 195 a/c) - which naturally tend to be higher/optimistic, as they are the manufacturers - exceeded by some 15 – 50% the remaining total aircraft build forecast of 117 made by Forecast International in March 2007.

and for Spares Aerospace Industry /Aircelle and expert insights and views - Mark Bobbi - Engine Nacelles

August 2007 report (UK document 3015-3025) - Jan - March 2009 report (UK doc 3890 - 3890XX)

“In August 2007, I performed a study of the A340-500/600 for Mr. Brian Little. The results of that study are found in the referenced document 3015-3025. The essence of that report was that the A340-500/600 was a market failure, generating far less orders than anticipated in the 1990s by its maker, Airbus. In fact, total orders and options for the A340-500/600 were unlikely to exceed 130-135 which, as I am now aware, is approximately 150 /175 less than MAC’ amortization figure for the A340 NRC…….

……Therefore, I find it impossible to believe MAC’ spares/repairs forecast is based on any rational market assessment and runs completely counter to my and others career-long experience together with the detailed communications I undertook with the maintenance people in the airlines flying the -600 aircraft”

MARK BOBBI - WITNESS STATEMENT (W/S) TO UK COURT - EVIDENCE GIVEN ON 8 JUNE 2009

We also have Mr Mark Bobbi’s evidence and the thrust of Mr Lynch’s questioning ,presumably on instruction, on 8 June 2009

Mr Lynch	We have Mr Neill's email (Doc 3597) to Mr Moore of PricewaterhouseCoopers. I know it’s a bit compressed in its typescript. Tribunal, of course there is a bigger version in the bundle, if that's a bit small to read. (Pause).
	Mr Bobbi, you can see, can't you, looking at the two substantive paragraphs -- it actually is a feature of both those paragraphs -- that Mr Neill makes it expressly clear that Magellan is simply basing its calculations for accountancy purposes on spares or replacements, he's not included anything to do with repairs.
Mr Bobbi	That's right.
Mr Lynch	Good.
	And then again shortly later
Mr Lynch	But do you agree that it is certainly right that if Magellan sells a new unit, whether as part of a new aircraft or as a new replacement unit, a spare, then they would all count for EAC purposes?
Mr Bobbi	Of course.
Mr Lynch	Right. So it's plain, isn't it, that PwC did indeed examine and accepted, for accountancy purposes, the validity of incorporation of Dr Thamburaj's calculations, yes?
Mr Bobbi	That was the only information that they had.
Mr Lynch	Right. And that information would indeed, because it related to lifespan, that information would indeed provide the basis on which PwC could rightly conclude that indeed these would involve new units that would be sold, that's right, isn't it?
Mr Bobbi	No, that's not. Because a component has a "lifespan" does not mean necessarily it will be replaced by something new, it can be repaired.

Mr Lynch	Yes. Well, no, I think the whole point is this, it's not, Dr Thamburaj's point was not a question that they will need repairs after that period, Dr Thamburaj's point was that around 40,000 flying hours was indeed the lifespan of the unit. That after that, its lifespan was spent and should be replaced. That was the point. {BL Observation : Subsequent to the October 2009 Tribunal hearing (after Magellan’s legal team reluctantly agreed to disclose the complete contents of doc 3597/3598 at that tribunal hearing) to disclose the PwC Questions and Magellan answers (Mssrs Furbay and Neill) document in late March 2007 (see doc 3597-3598/3598A-3598B) before the FY2006 Financial statements were published the reader will note Question 5 posed by PwC “The engineering report prepared by Dr Thamburaj makes reference to repairs being required (not necessarily spares). What is management’s view on the distinction between spares and repairs and the implications for future revenues / costs? …. etc. PwC then proceed at PwC para 8.75 to falsely calculate a likely demand of 1572 Spares and Repairs by FY2021 – see my A340 report and website parts D & E}. And continuing Yes. Well, no, I think the whole point is this, it's not, Dr Thamburaj's point was not a question that they will need repairs after that period, Dr Thamburaj's point was that around 40,000 flying hours was indeed the lifespan of the unit. That after that, its lifespan was spent and should be replaced. That was the point.

Mr Bobbi	Well, and if that was the case, he should have informed the customers.
Mr Lynch	Well, whether or not AIRCELLE was aware of that is another matter.
Mr Bobbi	I think it's an absolutely incredibly important matter, if he believed that.

Given the intensity of Mr Lynch’s cross-examination on Spares replacements please now access 4184 / 4183 : MARK BOBBI EMAIL AND REPLY (24 JUNE 2009 FROM AIRCELLE - MAC'S CUSTOMER - RE A340/T500 EXHAUST LIFE "40,000 hour or less replacement requirement ...WE BELIEVE THE WHOLE THING IS A HOAX....."

Mr Neill’s oral evidence in July 2009

Mr Little	And this is coming off the back of what Dr Thamburaj <of MAC> has done in the middle of March 2007 for yourself, on the useful life <referring to PwC Exhibit 8.5/Part D>
Mr Neill	Correct.
Mr Little	And this refers to a spares requirement in excess of 800 units to 2007 to 2021 as opposed to the 1572 calculated by PwC?
Mr Neill	If you make the assumptions for the forecast that we've just agreed on, then the numbers will generate whatever the numbers are, and if it's 800, it's 800.
Mr Little	Okay. Oil' now –
Mr Neill	We're not building -- go ahead.
Mr Little	No, you go ahead?
Mr Neill	I was going to suggest that the 800 was likely over the life of the programme, and it was well in excess of the numbers that, at that point in time, we needed to recover all of the costs.
Mr Little	So what you're saying is you've taken the worst case scenario of 40 thousand hours and assumed that all 800 units will require to be replaced by 2021. Is that correct?
Mr Neill	If you want to assume 800 units are needed (doc 3597 / doc 3605H) then you have to assume that the whole fleet will need that kind of replacement and that will occur if airlines operate in difficult situations or conditions where there's significant deterioration.
Mr Neill :	And the answer is, I think, that only time will tell whether Dr Thamburaj's tests, and the coupon tests that he did, is a clear representation of what will happen in service. Somewhere between 20 thousand and 100 thousand hours, it is clear that exhausts will have to be -- to undergo a major repair and as I say, time will tell that. On the coupon test, if you remember from that report, it says that fatigue was not the biggest issue; the biggest issue was in fact corrosion within the honeycomb itself, which would mean some kind of structural breakdown in the exhaust and only time will prove that.
Mr Little	But Aircelle …. Chairman interrupts

Judge	You haven't told the industry anything about it?

Mr Neill	Untrue, we've completed a service manual, in 2005, I think it was, where we had to complete some calculations to describe what is called the MTBR, the meantime between unit removal. It was because we had to do that calculation and we've submitted this data to the tribunal, and to Mr Little, because we had to do these schedules, that we had Dr Thamburaj express an opinion on when we thought units would be coming back from service. Going back to the reports I referred to earlier, we had a damage tolerance report that said a hundred thousand hours is the design life, when they did the damage tolerance report they built into it a scatter range of 5, because the engine time between overhauls was 20 thousand hours and therefore the belief is that nozzles and plugs could start returning or needing repair from service from 20 thousand hours on, we thought 20 thousand hours was much too low a number to use for this calculation, and at the same time, given the amount of wear and tear that we knew that would occur, based on our experience, a hundred thousand hours was too great a number. So we had as it were a floor and a ceiling. We made the decision to base it on 40 thousand hours, based on the work that Dr Thamburaj did, that said that if any units are exposed to heavy use in a number of hot and high airports and marine environments, corrosive elements in the air, et cetera, et cetera, there's every likelihood that we'll start seeing heavy REPAIRS from about 35 thousand hours on, and we chose the 40 thousand hours based on that fact, there was no other science behind the 40 thousand hours.

Mr Little	Where is the documentation in the bundles on this, I have seen lots of comments on repairs and so on, and the unscheduled removals, but I have not seen any scheduled removals, and I have to say, I saw nothing of any work on any of this until I read the March 2007 or the March 2007 emails and paperwork in the June 2007 PwC report, ever, and nor have Aircelle. Aircelle have nothing on this scheduled replacement.

Mr Neill	The maintenance manual and the overhaul manual are quite clear in their instructions as to how to inspect, repair, and manage this -- you then have to go over to each individual airline's service record and get from them the time between overhauls when engines will come off the wing. When the engine comes off the wing, the exhaust and the plug will be taken off and inspected and the initial TBO that was planned was 20 thousand hours.

and in Mr Neill’s oral evidence on 27 July 2009

Mr Neill

Had Mr Bobbi gone to the people who were familiar with the overhaul manuals and the maintenance manuals, you would have seen the language and the words that it contains about what kind of damage can be sustained and what you do when damage exceeds the limits specified in these manuals, but I didn't see any reference to that in either of his witness statement or any of his reports. I just saw a lot of – Mr Little interrupts in a disturbed state ……...

Mr Little

Rich, that's exactly what he did do <see Bobbi report extract above>,

Equally an experienced industry person from PwC Aerospace and Defense Global Centre of Excellence in London carrying out the same relatively simple searches would have seen what Mr Bobbi and I had already seen and confirmed in the Aircelle Component Maintenance Manual for T500 Exhaust nozzle and plug – sample 3625S – refers, and had always done so, to “FACTORY REPAIRS” by the manufacturer – Aircelle in the operating airlines. A further example from Etihad who are one of the largest A340-500/600 operators – please read 4185 / 4186 and 4186A: Email from Aircelle (23 June 2009) to Etihad Airways regarding A340/T500 exhaust system life / certification "...There is no specific life limitation for the T500 exhaust system…….”

Magellan and their own advisors (PwC) recognise that “due to the unpredictability of repair work” Factory Repairs (for On Condition Maintenance components) should not be included when recovering NRC assets. They are also subject to contractual MTBUR and Guaranteed Direct Maintenance Cost (DMC) values of much less than a $1 per flying hour with Aircelle/Airbus (doc 3525).

Q9.9A: PwC criticised MAC in para 2.40 (d) for “Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour.” PwC then proceeded to set to one side all the various MAC representation documents (other than the Q4.2006 EAC) and failed to refer or Exhibit them at all. They chose instead to unilaterally extend the commercial contract period for the A340-500/600 with Aircelle from FY2012 to FY2021 for the EAC and fundamentally failed to question and integrate all the glaringly conflicting data at their disposal. That is the foundation of any reasonable audit checking and integration testing. Is it really credible that PwC’s forensic accountants failed to find most or all of this, and document this properly in their Findings of Fact? (OR did they believe it would undermine their “Findings of Fact”). Instead their report demonstrates that PwC took it upon themselves to produce a “Program EAC” from a mixture of Units and pricing information. Is is it not extraordinary that they would independently chose to do so, and end up with answer which would apparently support Mr Dimma and MAC’s needs for a program break-even - as per the “MAC presented” Q4.2006 EAC at the outset??.
It is a documented fact at para 8.75 that PwC relied solely on access to the Forecast International April 2007 numerical aircraft build forecast at Exhibit 8.4 for their A340-500/600 “production volumes” assessment and that the volumes deficit to the 1247/1285 units required for MAC amortization would be met from demand for Spares. Despite my inputs and the documents available from MAC up to 14 March 2007 they proceed (without reference to any Maintenance manuals etc etc) to then calculate a logically and numerically inflated demand of 1572 units (as per para 9.2) so as to attempt to include a proportion of those replacement spares to meet that production volumes deficit to 1247/1285 units.
9.9B: Is it most likely that PwC accountants did so in order that they could state at PwC para 8.58, in support of their derived conclusion,
“PwC Observation: Based on third party information presented above and on management information obtained, the delivery of a combination of production units and spare units totalling at least of 1,285 units over the life of the programme ending FY2021 is not unreasonable.” ????
As we all know this was false from the multiple sources of information available to PwC before and during their investigation and the actual outcomes.

<BL Observation example : This comes in to sharp focus when one looks at the information contained in these various plans for next year (FY2010). Based on these crucial March 2007 documents therefore the manufacturing volumes projected for 2010 in Magellan’s plant Aeronca Inc was now for some 116 production (reduced from 127 as at 31 Dec.2006/page 3) and 81 spares (was 8)= 197 engine units (or almost 50 aircraft sets).

As the contracted pricing was identical for production and spare engine exhaust systems the A340 program revenue projections for 2010 would be for some C$47m–C$50m with the attendant NRC and cash recoveries in the MAC strategic planning and financial budgeting/reporting processes. I believe it was predictable then, and will actually be now, some 90%+ lower i.e less than C$4m.

I included this point specifically in my 27 November 2009 letter to the MAC Directors, before their December 2009 MAC Board meeting, inviting each Director to look at these very carefully for the FY2009 financial audit by E&Y and when reviewing the FY2010 MAC budgets for approval at that December Board meeting – you will see this in part of my letter when I said:

“Part of my team role, as both a MAC Senior Officer and with functional responsibility for coordinating the MAC strategy, was to identify these major matters and have them addressed by us all within management. Mr Dekker’s comment to the Judge that I had simply a different point of view about the A340 -500.600 in August 2006/September 2006 is very far removed from the truth.

This week you will be approving the MAC budgets for 2010. Look specifically at what those MAC budgets include for the A340 production units and spares.

As you know from my MAC Board May 2006 presentation, there is a typical three year lead time from aircraft wide body sales campaign to delivery. MAC represented in March 2007 to PwC and E&Y that in 2010 some 116 units/28 production aircraft (1 March 2007: doc 3605B/D to E&Y and 3605E/G to PwC) would be built and projected a Spares build of 81 units (14 March 2007: doc 3605H/red Tab page 68) – a total manufacturing requirement in Aeronca of some 200 x A340 units in FY2010.

My view, by February 2007, was that we would be more likely to be facing the production case shown by MAC at document 3605H dated 14 March 2007 /Page 68 (total production build of 135 aircraft) whilst back in Aug /September 2006 MAC would be lucky to still be building at a rate of 10 aircraft per year by 2010 with the termination of meaningful series production of the A340-500/600 very probably imminent. Even now Mr Neill would, it would appear; based on his July 2009 evidence to the court does not admit that.

I believe instead you will read in those submitted MAC budgets for 2010 A340 production = 0 and Spares (rotables and replacements) of 8 – 10 units. This was predictable and indeed predicted by six external market forecasters, and almost everyone else with experience in the industry from mid 2006/early 2007, except those MAC Senior Officers on this the largest cash recovery/asset in the MAC Balance Sheet/Strategic Plan. I understand that the Program EAC is not just about volumes, prices and costs matter too, and those were and have been carefully considered then and now by me. See my A340.On the Record.Final.Report.”

and then again in the Actual Outcomes to date - ADDED 7 August 2010

I have also recently learned that Mr John Furbay (the Magellan/Aeronca CFO, including the A340-500/600 EAC accounting role) was dismissed by Mr Dekker and escorted off the Aeronca site by the General Manager at the end of June 2010/Q2.2010.
In the same 2007-2009/2010 calendar period as Airbus reliably predicted in their customer delivery projections documents above those 32 + 2 aircraft deliveries (136 production nacelle unit deliveries) Aeronca/Magellan delivered some 121 production

AND spares units.

This 121 also compares with Magellan submissions to E&Y and to PwC of 366+ production/spares and the use of 439 units in the CFO/Finance Program EAC used by E&Y for their Q4.2006 audit testing for the same 42-month period from January 2007.
If one were to assume that all of these actual 121 units were allocated to production since January 2007 (414 + these 121 units) this would be equivalent to a total of 535 exhaust systems or enough deliveries to Aircelle to enable an almost complete 134 A340-500/600 aircraft build. The final A340 500/600 aircraft in the Airbus Order book for airline use was completed to Iberia Airways on the 16th July 2006 – a A340-600 (MSN 1122/EC-LFS) on the eve of the Farnborough Airshow 2010.

The latest Airbus delivery projections schedule (30 June 2010) from Airbus shows that, at present, do not plan any further Assembly of A340-500/600 aircraft. This now leaves the two A340-500 (ex cancelled Kingfisher aircraft MSN886 /MSN894 at TLS - assembled in early 2008) which Airbus are continuing their endeavours to resell – my latest information is to Sonair. I expect there may be an occasional A340-500 VIP aircraft sold in the next period (largely out of exhausts inventory already within Airbus/Aircelle ) but fundamentally the mid-2006/early2007 estimate of approximately 135 A340-500/600 production deliveries and series production cessation in 2010 has come to pass. For completeness I had not foreseen the A340-500 April 2006 order cancellation in early 2008 by Kingfisher Airlines of India in August/September 2006.