Consortium battles to save £13bn RAF deal after MoD threatens to scrap it

A consortium of European companies that won a £13bn RAF contract is fighting to save the deal after the Ministry of Defence threatened to scrap the project.

A consortium of European companies that won a £13bn RAF contract is fighting to save the deal after the Ministry of Defence threatened to scrap the project.

Sir Peter Spencer, the MoD's procurement chief, has written to AirTanker demanding it cut the price of its bid for a fleet of air-to-air refuelling planes by up to £230m or 1.75 per cent by tomorrow.

According to a leaked letter, Sir Peter said: "If there is failure to reach satisfactory agreement on these issues, or any suggestion that you might be seeking to move away from the agreements I am seeking, I will have no hesitation in recommending the cancellation of the programme."

Last night AirTanker, a consortium led by EADS, the parent of the civil aircraft giant Airbus, was playing down the implications of the letter. Robin Southwell, the chief executive of AirTanker, which won the deal in January over a rival group offering Boeing planes, said: "We will be replying professionally and diligently to the defence procurement agency by the end of the week."

The consortium insists it will retain the contract, which was the result of a seven-year review by the MoD. The UK wants to replace its ageing fleet of tanker planes, which include TriStar and Vickers VC-10s. In what would be its largest outsourcing programme, AirTanker would own and maintain the converted Airbus A330 planes for the RAF for 27 years.

The MoD has always made clear it cannot afford to buy new tankers off the shelf because of its finance constraints, which have been worsened by its commitments in Iraq. The leaked letter indicated Sir Peter was concerned the terms offered by EADS would not fit within a private finance initiative model and allow the ministry to keep the planes off its balance sheet.

"My judgement is that there is now little prospect of securing an acceptable PFI outcome and that further effort on both sides seems unwarranted," he said.

The award was a huge coup for AirTanker, which is trying to establish itself in the refuelling market. It has since beaten Boeing for a similar order for the Australian government and is in the running for a giant US government order.

The first AirTanker plane is due to be delivered to the RAF in 2008. Last night Marshall Aerospace, a UK aerospace company, said it had put forward an alternative bid to supply new TriStars and upgrade the existing fleet.

The Ministry of Defence declined to comment on "ongoing negotiations".