Final reply to Mr Rae letter dated 24 October 2011

1

Final reply to Mr Rae letter dated 24 October 2011 preliminary response ndash my email dated 28 Oct

In your letter you state the six relevant facts are the following - 1 Dr Thamburajrsquos research was relied on by Magellan in order to assist it in arriving at an informed

projection of potential commercial demand for replacement parts The facts are that Dr Thamburaj produced two numbers (266 and 300 for life reduction factors) from which he then derived a view of an A340 plug and nozzle ldquoactual liferdquo in that units could be coming back for repair between 33333 and 37593 flying hours or between 66 and 75 years These 266300 numbers were then applied to the instructions from Mr Neill in mid March 2007 to base his work on a Trent 500 product design certification life of 100000 flying hours and a 5000 average flying hrs per year 1A Mr Lynch QC and you have consistently stated up to 2010 that it was my constituentsrsquo knowledge and assessment up to and including his termination that is relevant to his ldquoreasonable beliefrdquo for the ET role and judgment it will make Part of that ET role given all the evidence includes the fact that Magellan presented the long-standing forecast of 190 Spares and Repairs Forecast up to and including the emails to EampY and PwC on 1 March 2007 during the EampY audit testing process Mr Dekker and Mr Lynch QC finally disclosed those emailsdocuments to the ET on 8 June 2009 That same 190 Spares and Repairs was falsely asserted to PwC by Mr Neill in the initial sentences of his email on 29 March 2007 as the ldquobalancerdquo figure to recover 1247 units in the A340EAC amortization Furthermore you also created a document with your client and disclosed it to my constituent on 5 May 2009 showing the Q42006 EAC production volumes and 166 (+ 6 + 18) for the same total 190 Spares and Repairs in which you stated

and then finally Mr Lynch QC in his cross ndashexamination of Mr Bobbi (aerospace consultant) on 8 June 2009 (p50-lines 4-9) Mr Lynch QC So on any view even in August 2007 a year after relevant events on your evidence Magellanrsquos view of 190

would not be unreasonable because itrsquos right in the middle or lower middle of your range as at August 2007 correct

Mr Bobbi Yes

I now fully expect that the ET will have understood from the evidence I have read that Dr Thamburajrsquos input was not available until 12 March 2007 and as such represented an enormous increase in the volume of Spares and Repairs to 886+ by FY2021 ltfrom 190gt hellip both of which were not known or available for proper assessment by Mr Little That and the MAC financial reporting in FY2006 is the basis for underpinning his reasonable belief in August Sept 2006 on Magellan prior and future conduct Recently you have changed to assert in correspondence with me since December 2010 that the ET has a much broader role than legally accurate and now has a role in which it has insufficient evidence knowledge or practical experience ndash Para8 Affidavit (p5) Although it is not necessary for the ET the actual outcomes since comprehensively demonstrate the industry airlines and my constituentrsquos expectations were accurate They are of course relevant to other regulatory bodies and jurisdictions I also now know since Friday 4 November 2011 from someone directly involved at Aeronca at that time the exact basis of how the 1285 units for A340 amortization was determined lt1200 300 aircraft production +

20 development+65 spares QECURotable Spares=Mr Littlersquos category 1amp2 in his letter to you both dated 30 September 2009gt

2

He recognises Aeroncarsquos schedule with the 190 T500 Spares and Repairs forecast lt the 65 spares above and their prediction based on design certification life and other projects experience of 125 units (10 for

Repairs returned to Aeronca for Factory Repair but judged Beyond Economic Repair (BER) and justifying spare replacements

after analysis by Aeronca team = Mr Littlersquos category 3gt This was provided from within the Aeronca senior team as an input to the prediction of spares and replacement spares and was their long-standing forecast

A Mr Gilbert and Mr Furbay at Aeronca concluded they could only incorporate the spares they could be reasonably certain of in the number determined for project amortization on A340 at the time Factory repairs would be subject to third party competition would be unpredictable and any NRC recovery in the pricing could only come at a significant commercial disadvantage by tens of thousands of dollars Hence the 1285 units determined for T500 amortisation by MagellanAeronca in their accounting

Though not relevant to you he also comments on A380 and how the sum of 2400 units for amortisation was determined Apparently the accounting policy was then to exclude all spares Though he cannot be certain he recalls that he was told by the General Manager of MALUSA that this policy 2400 had been decided in Toronto HO (Mr Neill Mr Edwards or the Board) at some point in 2002 or 2003 as the A340 was by then facing a fall in projected revenues and their T500 development and unit costs were rising

1B Despite the evidence Mr Lynch QC and you had and have wrongly challenged my constituents ldquoreasonable beliefrdquo based on subsequent events beginning at the first ET hearing in November 2007

Firstly this occurred only under very specific circumstances when PwC asked Magellan to consider the impact of the 135 aircraft build (542 units) series production cessation in 2010 scenario conveyed by Mr Little in his interview with PwC in Belfast Secondly it followed Mr Neillrsquos first documented interview with PwC on 7 March 2007 when Dr Thamburaj was asked to produce a view given specific assumptions by Mr Neill Mr Dekker met PwC then too

The direct result of which was that Mr Furbay at Aeronca was instructed by Mr Neill to produce a Spares schedule which now stated ldquo Aeronca estimates based upon exhaust system life of 40000 hoursrdquo It was now inflated from the long-standing 190 units to a minimum of 886+ units Mr Furbay created it on 14 March 2007 His email to PwC on 29 March 2007 was quite clear most importantly in its interpretation by Mr Lynch QC during his cross examination of Mr Bobbi on 8 June 2009 I extract some of this and replicate it at Points 11-14 (page 10) for example Page 65 states

Mr Lynch QC ldquoWe have Mr Neillrsquos email to Mr Moore of PricewaterhouseCoopers I know itrsquos a bit compressed in its typescript Tribunal of course there is a bigger version in the bundle if thatrsquos a bit small to read (Pause) ltdoc 3597hellip in referring to doc3605H ndashAeronca estimates based on 40K lifegt

Mr Bobbi you can see canrsquot you looking at the two substantive paragraphs ndash it actually is a feature of both of those paragraphs ndash that Mr Neill makes it expressly clear that Magellan is simply basing its calculations for accountancy purposes on spares or replacements hersquos not included anything to do with repairsrdquo

Pages 72 and 73 line 1-3 states Mr Lynch QC ldquoRight So itrsquos plain isnrsquot it that PwC did indeed examine and accepted for accountancy purposes the validity of

Dr Thamburajrsquos calculations yesrdquo Mr Bobbi ldquoNo thatrsquos not Because a component has a ldquolifespanrdquo does not mean necessarily it will be replaced by

something new it can be repairedrdquo Mr Lynch QC ldquoYes Well no I think the whole point is this itrsquos not Dr Thamburajrsquos point was not a question that they will

need repairs after that period Dr Thamburajrsquos point was around 40000 flying hours was indeed the lifespan of the unit That after that itrsquos lifespan was spent and should be replaced That was the pointrdquo

3

My constituent and I believe Mr Lynch QC falsely pursued this Spareslifespan point despite Mr Littlersquos multiple attempts to explain that you were both wrong and should address your instructions by properly checking Mr Lynchrsquos assertions These I fully understand are amongst the primary reasons why PwC declared in their 20 June 2007 letter enclosing their Final report that ldquoFinancial Control in MAC and MALUK in relation to the areas we have examined is poor and specifically at point (d) ldquoPoor control over individual projects from an accounting perspective Project sales volumes revenues and costs are not reviewed with sufficient frequency or rigourrdquo see AIU comments in Daily Telegraph at page 3

1C Mr Lynch QC then asserts that PwC represents a reliable challenge to Mr Littlersquos reasonable belief and credibility based on a PwC ldquoreputationrdquo and conduct in their ldquoIndependent Forensic investigationrdquo during seven months to 24 August 2007

I warned PwC about Spares amp full replacements at the outset of their investigation - click here As is evident in PwCrsquos question 5 on 21 March 2007 to Mr Neill PwC fully understood that (a) ldquoThe engineering report prepared by Dr Thamburaj makes reference to repairs being required (not necessarily spares)rdquo which they restate (b) at paragraph 872 of their Report ldquoIt is of note that the internal report also makes reference to the requirement for repairs in its conclusions and not explicitly to the need for spare or replacement unitsrdquo whilst confirming that it is appropriate that only new spare units should be included in the 1247 units in the amortization process in the MAC A340 Estimate to Complete As Mr Little has consistently stated PwC then proceeded to create an alternative view (completely contrary to professional audit practice and procedures) in a process of ldquoForensic deceitrdquo in their calculation of a 1572 potential demand for Spares and Repairs by FY2021 That was completely false and not just the belated acknowledgment of an immaterial slip as Mr Lynch QC submits In fact at least six points are relevant as Mr Little sets out in his A340 quantities analysis at p 2 - 4 of this document 1 PwC basic mathematics errors 2 PwC logic ndash failed to use aircraft in service dates

ltused the supplier Tier 2 actual deliveries from Magellangt 3 PwC use wrong average annual flying hours

(apparently relying instead on Magellan management ldquohearsayrdquo) When points 1 2 and 3 are calculated properly (whilst continuing to assume the erroneous 40000 flying hours before repairs (ampBER repairs) together with the absurd PwCFI total production unit build forecast (4) equivalent to 221 A340-500600 aircraft -882- before production cessation in FY2015) about 650 units or MORE THAN 50 LESS hellip rather than the 1572 PwC had calculated

4 PwC used only ONE production build forecast (consciously ignoring the customer production plan 6 other third party forecasts A340-600 cancellations from airline customers which PwC audit general and specialist press publications and MAC Board approved 30 March 2007 Management Discussion and Analysis at page 14 (MDampAAIFp12) which states The Corporation relies on customers

delivery projections as well as external market forecasts to determine the number of units over which to amortize non-recurring costs Should deliveries not reach the number projected any unamortized balance that remains would then need to be charged to cost of revenues which could have a material adverse impact on the Corporation

now falls to 500 Sparesreplacements and Repairs by FY2021rather than the 1572 PwC calculated I told ndash click- PwC that they should obtain 23 external market forecasts (at least 7 available) incTeal in PwC London At the outset I told PwC about the Emirates cancellation of 18 A340 600 in late 2006 ndash click ndash PwC audit Emirates

lt11 Nov2011 Actuals ndash A340 production ceased at 131 ac (524 units) ndash down from BL est= 540135ac to PwC Airbus Press release with formal confirmation of A340 termination and EADS Q32011 resultsgt

4

5 Detail technical data for BETA21S materials - Magellan state they provided two of Dr Thamburajrsquos reports to PwC and EampY I had not seen or heard of these before and I agreed with the view Mr Neill expressed on 27 July 2009 (p96) hellip ldquoI have no clear recollection of actually giving them the documents I would not have seen the value of itrdquohellip may further reduce the 500 by FY2021

As per my ws para2263 my view was a further 132 SparesBER replacements by FY2021 Mr Bobbi estimated 82-112 lt11 Nov2011 Actuals ndash MAC have shipped 10 sparesreplacement units from Jan2007 to date Neill fcst =194 Airline figures show 70-84 units are expected to begin to exceed 40000 flying hrs in 2012 (Neill fcst=+70 cum 264) 14 November 2011 The European Aviation Safety Agency Deputy Certification Director has sent the following

----- Forwarded Message -----

From Copigneaux Frederic ltfredericcopigneauxeasaeuropaeugt

To JIM SHANNON ltjimshannon1btopenworldcomgt

Sent Monday 14 November 2011 1130

Subject RE RE Re Your letter dated 11 August 2011

Dear Mr Shannon

Thank you very much for your email I have also received directly parts of this email directly

from Mr Little

The situation is presently as follows

1 Magellan has so far not sent us any form 44 nor contacted us directly I understand

from your mail that they have no further technical information to give to us and that

they will not contact us by means of a form 44

2 We have in between proceeded with additional technical investigations with Airbus

which have liaised with Aircelle The conclusions of these investigations are

Quote

ldquoThe Trent 500 Exhaust System has been certified for a fatigue life capability of 20Kcycle

(equivalent to 100K flight hours for average A340-500600 mission type) It shall be noted

that the results provided at the time of certification showed the effect on ductility and on

structural strength capability associated with thermal cycle exposure representative of

A340-500600 specified thermal environment The material allowable used to size the

exhaust system was based on these results

Airbus has no tangible data or fact that may question the full life capability of the Exhaust

System

Therefore Airbus confirms that there is no reduction of the original A340-500600 exhaust

design life of 100000 Fhrdquo

Unquote

Following the present state of the case taking into account

the previous investigations

the lack of in service events related to this exhaust system

the above quoted statement from Airbus which is not challenged by any fact

5

and the lack of further technical communication by Magellan or other parties

we stick to the conclusion reached earlier this year that there is no safety issue nor any

maintenance related issue with the A340-500600 exhaust system and that no further

action is needed from the Agency

This conclusion was already communicated to you on 1st August 2011 (letter D53751) and

further confirmed on 15th September 2011 (letter D54474)

We would therefore close the case but it could be reopened if new safety related

information is brought to our attention

We do have regular continued airworthiness review meetings with Airbus on all their

programmes and safety related issues are brought to our knowledge during those meetings

This is an obligation set by CE regulation 17022003 (part 21A3A) onto the type certificate

holder (Airbus) and the complete implementation of this obligation is duly and continuously

checked by EASA in the frame of its on-going surveillance of the Airbus design organisation

approval

I remain at your disposal for any additional information

Best regards Meilleures salutations Mit freundlichen Gruumlszligen

Freacutedeacuteric Copigneaux From JIM SHANNON [mailtojimshannon1btopenworldcom] Sent 14 November 2011 1139 To Copigneaux Frederic Cc Brian Little Subject Fw RE Re Your letter dated 11 August 2011 Dear Frederic I met with my constituents on Friday afternoon During which we agreed certain actions As a result Mr Little has subsequently sent me the two emails in the trail below and copied you The contents should be self-explanatory I have also spoken to him this morning and gained his agreement that you or your staff can speak directly with him at the contact details below Telephone 0044 28427 88054 Fax 0044 28427 88054 Mobile 0044 789 4445920 Skype whitechurch176 You will also be aware that I wrote in an 29 September 2011 email to Mr Dimma (copy you) requesting that Magellan provide any further technical information available andor file a Form 44 to enable EASA to contact them directly They have recently advised me that there is no further technical information which needs to be disclosed or considered by your EASA subject matter expert to enable EASA to conclude its finding of facts in relation to the product certification andor safety of the T500 plug and nozzle When your investigation has been completed can you please ensure that you do advise me of the outcome to reassure everyone that the Aircraft Maintenance documentation is valid and there are no substantive problems with the use of BETA21S in the T500 (or on A380 A318) which would require the widespread replacement of plugs and nozzles with new OEM parts for aircraft in service I particularly note this could be a real issue at Lufthansa in Germany in the next year Many thanks for your and EASArsquos professional and proactive regulatory approach on these matters and I look forward to hearing your final conclusionsrdquo

6

Website extract Extract from PwC written evidence to the House of Lords Economic Affairs Committee on Auditors ndash at para 24 ldquoProfessional scepticism is fundamental to what auditors do It is defined in auditing standards as ldquoan attitude that includes a questioning mind being alert to conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidencerdquo and at para 25 It is the job of the auditor as established by internationally agreed auditing standards to challenge managementrsquos assertions and ensure that they are backed with evidence that is appropriate supportable and capable of independent verification It is not the auditorrsquos job to develop alternative views and then try to persuade management to adopt them in preference to theirsrdquo FRCAPB ndash ldquoAudit is essential to public and investor confidence in companieshellip The application of an appropriate degree of professional scepticism is a crucial skill for auditors Unless auditors are prepared to challenge managementrsquos assertions they will not act as a deterrence to fraud nor be able to confirm with confidence that a companyrsquos financial statements give a true and fair viewrdquo As the Daily Telegraph reported on the 26 July 2011 following the Annual Audit Inspection Report to the UK Business Secretary

of State Dr Cable MP - ldquoBiggest audit firms hit by scathing regulatorrsquos verdictrdquo - ldquoNot enough scepticism a failure to robustly challenge management and a propensity to encourage salesmanship of non-audit services These are just three of the recurrent rebukes detailed in the Audit Inspection Unitrsquos (AIU) assessment of the six largest audit firmshelliphellip All the auditors were guilty of failing to check financial statements and management assumptions with enough analysis and rigour according to the AIU PwC ndash the worldrsquos largest auditor ndash was censured for a catalogue of failings like its rivals most notably for problems with its assessment of goodwill at two FTSE 100 companies weakness in the majority of its reviewed audit in relation to auditing of revenue and issues with work led by an increasing number of audit directors rather than partners PwC was also criticised for its handling of international bank subsidiaries in the UK particularly on provisions made against loan booksrdquo

For these multiple reasons as I have made you aware an investigation is currently been undertaken by the UK accounting regulators of certain individual ICAEW members Mr Tracey etc and ICAEW member firms ndash PwC UK and EampY UK Following receipt of clarification of the correct route my complaint letter and files for Breach of Ethics (bad faith) can now be provided to the Canadian Institute of Chartered Accountants (CICA etc) this month for individual members (Mr Dekker Mr Gowan Mr Linsdell Ms Kinnaird Ms Fabina and the CICA member firm EampY Canada) assuming Mr Littlersquos imminent checks and approval I have recommended to Mr Little that we should include the three non Protected Disclosure accounting items in North America which he raised with PwC Canada and EampY Canada in February 2007 as per his website Part F ndash EampY and GE414 again in his letter to MAC Directors on 27 November 2009 My parliamentary aide has also recently established that CICA do not recognise the Chair of MAC Audit Committee Mr Dimma as a qualified accountant or CICA member despite Mr Lynchrsquos recent assertion in the Final Submissions that he is a ldquodoyen of audit controls in Canadardquo

Furthermore neither Stephanie Leblanc nor Stephen Moore who apparently produced the A340 report at PwC under Mr Traceyrsquos leadership were certified registered by the forensic accountants at the CICAIFA They and PwC also failed to apply the minimum CICAIFA standard practices for investigative and forensic engagements

7

2 Magellan has never suggested that the research raised safety issues within EASArsquos remit nor that it related to an area which was subject of regulatory control

Neither Magellan nor Mr Little suggested that any of their research raised safety issues on the A340-500600 I know that had Mr Little believed it to be a safety case then he would have pursued the matter directly with the CAA long before my recommendation that we should do so in January 2011

Whilst EASArsquos remit obviously includes safety it also includes Design certification which is subject to their regulatory control See the CAA letter and EASA letters extracts at page 6 If the exhaust system could not achieve the design certification life without replacement by a new spare on a widespread basis then the aircraft maintenance programme document (MPD) would NOT when exceeding those specified certain conditions read ldquoreturn to factory for analysis and repairrdquo If EASA Airbus and Aircelle had no realistic expectation of economic repair AND the unit would be replaced by a new OEM part from Magellan it would have had a time or flying hours lifespan limit It is therefore most certainly a regulatory matter for Airbus and EASA

2A Extract from EASA website on Product certification Article 4 of the Basic Regulation (Regulation (EC) No 2162008) requires the European Aviation Safety Agency to take the responsibility for the design approval of products parts and appliances designed manufactured or used by personsorganisations under the regulatory oversight of EU Member States (including Norway Iceland Liechtenstein and Switzerland) except for those excluded by its Annex II or by its Article 12 (products engaged in military customs police or similar services)

2B Email from Gilles COQUELIN T500 Nacelle Customer Support Engineering Leader Customer Support Engineering - Customer Support Division -Aircelle - SAFRAN Group on 23 June 2009 to Etihad Airways

ldquoThere is no specific life limitation for the T500 exhaust system

The exhaust system as the whole Nacelle is certified for 20 OOOFC If you need further information please do not hesitate to contact merdquo lt EASA Airbus certification ndash 20000 FCycles = 160K+fhrsgt

2C Oral evidence on 8 June 2009 (p73)

Mr Bobbi No thats 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 its not Dr Thamburajs point was not a question

that they will need repairs after that period Dr Thamburajs point was that around 40000 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 its an absolutely incredibly important matter if he believed that

As a direct result of Mr Lynchrsquos position and spares lifespan approach on 8 June 2009 Mr Bobbi pursued the assertion with 4184 4183 MARK BOBBI EMAIL AND REPLY (24 JUNE 2009 FROM AIRCELLE - MACS CUSTOMER - RE A340T500 EXHAUST LIFE 40000 hour or less replacement requirement WE BELIEVE THE WHOLE THING IS A HOAX

8

In January 2011 I recommended to my constituent that in light of what I had read and the ET (2010) regulations I would engage

with the CAA As you know I wrote to them on 24 January 2011 The correspondence exchanges include this

CAA letter from Group Director of Safety Regulation ndash letter dated 8 April 2011 ldquoThe CAA is not aware of any life limit imposed on the RR Trent 500 thrust reverser system or the constituent components Neither EASA nor CAA has issued Airworthiness Directives on the Trent thrust reverser system The thrust reverser system is included in the aircraft maintenance programme and will be the subject of periodic inspections for condition and operation This will detect the presence of wear in components and the need to replace them In addition thrust reverser system defects reported by pilots will be investigated and system rectification carried out as necessary Where work cannot be accomplished on the aircraft the components may be transferred to a workshop to allow the work to be done The determination of the required spares to support the Airbus fleet is a matter for Airbus and the companies involved in supporting the type eg Magellan The authorities would not usually be involved in any of these deliberations as they are a commercial matter for the individual companies In this case unless the in service experience on type indicates that a problem exists which changes the way in which the thrust reverser systemrsquos airworthiness is maintained a known or identified failure the establishment of an expected replacement time of 30000 to 40000 flying hours is purely a commercial decision taken by them It is in any case also subject to the involvement and agreement of Airbus as the primary manufacturer and holder of the type certificate

The suggestion that there may be a problem with the titanium alloy used in the reverser which may underpin the Magellan decision is something that should have been discussed with Airbus and EASA to determine if the information had any bearing upon the continued certification of the aircraft

I hope that this information helps and that you appreciate the limited role that the CAA can play in such matters due to the current EU legislative positionrdquo

which then led to the involvement of EASA on 16 June 2011 EASA letter from Certification Deputy Director ndash letter dated 1 August 2011 ldquoThis investigation is now complete and we are pleased to report that no-in service issues have been reported related to the titanium material of the exhaust nozzle In addition this part is not subject to any mandatory life limit airworthiness directive nor any time or cycle limitation in the aircraft maintenance programme document (MPD) There are no particular concerns with the in-service experience of this partrdquo

I know that EASA moved initially in late June 2011 to confirm that there were no safety issues and to check the current status with actual flying hours and in service experience on Trent 500 nacelle exhaust systems with Airbus and the airline operators EASA letter from Certification Deputy Director ndash letter dated 15 September 2011 ldquoAs you indicated yourself ltmy letter dated 11 August 2011gt the material in your letter does not contain new technical elements which would lead us to revising our opinion on the case as indicated in our previous letter on the subject We also acknowledge that you and your constituent had come to the same conclusion I have nevertheless forwarded your letter and its enclosures to our expert who dealt with the case in the first instance in order for him to further investigate as appropriaterdquo

This EASA letter of 1 August 2011 confirmed the completion of that investigation and their interim conclusions EASA also however made it clear that they wanted to consider any further technical information and to that end I provided all the information that my constituent had left with me on 1 July 2011 That included all the Magellan documents

You will have read that their subject matter expert is now considering those technical documents lt including those Magellan and you provided to the public courtgt as part of the process to enable them to complete their investigation You have not provided any further information or contact details despite EASArsquos request via me so we must reasonably assume that all the appropriate information in Magellanrsquos knowledge or possession has been provided Their 14 Nov 2011 email at p 4 amp 5 is germane

9

3 Magellan agrees that the parts are ldquoon condition maintenance itemsrdquo That of course in no way gainsays the validity of Dr Thamburajrsquos research nor the use of it by Magellan in arriving at an informed estimate of potential demand for replacement parts nor the presentation of Magellanrsquos case

Mr Lynch QC has presented Magellanrsquos case as one of new spares (not repaired items or spares where judged beyond economic repair) on the basis of his reading of Mr Neillrsquos email to Mr Bobbi In re-examination of Mr Neill he knew that to be wrong Despite that both Mr Lynch QC and you have wrongly persisted in both challenging Mr Littlersquos belief and Mr Bobbirsquos knowledge and research on an unarguable and invalid premise in attempting to advance your clientrsquos case This has come with a consequent impact on the length of the hearings and Mr Littlersquos prolonged health issueshellipBSB (b)

4 It is clear from your letter of 19 October 2011 that you provided EASA with the relevant documentation including Dr Thamburajrsquos research EASA has never raised any concerns whatsoever about that material

To my knowledge I confirmed in my email dated 28 October 2011 that EASA had all the relevant technical information subject to any further information you or Mr Dimma may provide from Magellan You are correct to say that EASA (and I understand Airbus Aircelle) have never raised any concerns However I understand EASA wishes to review the Magellan documentation etc and that is why the EASA Deputy Certification Director wishes to assure themselves of that in the expert subject matter review currently underway

CAA letter in April ldquoThe suggestion that there may be a problem with the titanium alloy used in the reverser which may underpin the Magellan decision is something that should have been discussed with Airbus and EASA to determine if the information had any bearing upon the continued certification of the aircraft

The only parties to register any concerns about BETA21S material application in the A340 are (a) Magellan (Mr Neill Dr Thamburaj - in his email dated 12 March 2007 in which it states ldquoDuctility reduction in thin sheets of BETA21S due to temperature exposure has been investigated only in 2004 (pl see Reference Met Trans) and it is very unlikely that the original designers considered all the oxygen diffusion and embrittlement effects in their life estimates In their design calculations the loads were probably well below the fatigue threshold and therefore the service life limit was originally estimated to be the entire 20 years of service at 5000h per year (equating to 100000h) However looking at the condition of service exposed parts and the calculations we have reported reality may be quite different amounting to about a third of the 100000 h life expectancy

If the repair opportunity would come to us we should seriously consider the coating option as well to reduce the degradation in service (pl see attached reference)rdquo helliphelliphelliphelliphelliphelliphelliphelliphelliphellip I return to this at page 7

(b) PwC reported (from Mr Neill at Magellan) PwC para 870 ndash ldquo Ultimately a decision was taken to use a lighter material (BETA21) to the detriment of the estimated life of the part Weight restrictions were a major concern and BETA21 was the preferred choice in order to manufacture the product The shorter estimated life of the exhaust system gives rise to a requirement for spares and repairs in the futurerdquo (c ) Magellanrsquos Mr Neill in his email to PwC on 29 March 2007 on Factory Repairs ldquoSome other factors to consider are Titanium Beta 21S is a difficult alloy to work with and hence it will be difficult for overhaul bases to repair these components and so we will likely see more returned to the factory for repairs than you would see with an inconel steel exhaust

Although PwC (and EampY) were apparently provided with two Technical reports from Dr Thamburaj they are not referenced in their Report As Mr Neill said in his evidence on 27 July 2009 (p96) ldquoI have no clear recollection of actually giving them the documents I would not have seen the value of itrdquo

10

Notably as I stated in my email dated 28 October 2011 given that there are now some 70 exhaust systems which will pass the 40000 flying hours in service commencing in January 2012 it is natural and timely for EASA to wish to have their subject matter expert thoroughly check the analysis and all the available information Mr Little sources at Flight advise the forecast to be for some 70 - 84 T500 units due to higher flying hours in the Lufthansa - 600 fleet in part due to Boeing 747-8I delay into service The EASA email dated 14 November 2011 replicated at pages 4 amp 5 is clearly germane and relevant 5 EASA has made clear to you that there are no matters which it needs to investigate Magellan wholly agrees

See my comment earlier and to assert this your client must be satisfied that all the technical information is now available to EASA EASA have NOT said that there are no matters to investigate What they have said is that their preliminary research indicates that there are no concerns as they state in their letters BUT they are continuing to complete their investigation by their subject matter expert of all the technical documents They and I wish to be assured that their interim conclusions remain valid or alternatively that the relevant documentation is amended on the product certification maintenance

I conveyed the latest information on that in my email to you dated 28 October 2011 in which I advised that I now understand from the actual airline records that there will be some 1718 A340 -500600 aircraft (70 units) which are predicted to begin to exceed 40000 flying hours in service in the period January 2012 ndash December 2012 The 14 March 2007 forecast of 81 Spares 2010 was wrong and I fully expect the 90 units forecast for 2011 will also be wrong ltMr Little has now updated me from his various sources that there have been no shipments from July 2010 ndash November 2011

I commented in my 28 October 2011 email to Mr Dimma you on MAC FY2012 budgets in relation to the 70 in service units gt

Last Friday afternoon a former Senior Engineer at Aeronca emailed me Having read a document on Mr Littlersquos website which they encountered in a google search wwwfortfieldcomcasefilesmr-shannon-mp-CAA24jan2011pdf File Format PDFAdobe Acrobat - Quick View 24 Jan 2011 ndash relation to A340 Trent 500 Exhaust systems service life they proceeded to read Dr Thamburajrsquos email on 12 March 2007 which referred to ldquoIf the repair opportunity would come to us we should seriously consider the coating option as

well to reduce the degradation in service (pl see attached reference)rdquo helliphelliphelliphelliphelliphelliphelliphelliphelliphellip As a matter of record he wishes to remain anonymous to Magellan however he wants to ensure that the Aeronca engineering work is and was not professionally compromised so I replicate this hellip ldquoTo my knowledge corrosion was never a concern with Beta 21S Core erosion was a concern with all of the heat cycles and the very thin gauge Beta 21S foil material To counter this our original engineers added an electroless nickle coating process to the honeycomb - at a cost of several thousand dollars per engine set - as I recall This greatly extended the service life of that nozzle and plug The following website describes what electroless nickel coating does httpwwwiftworldwidecomsolutionselectroless_nickelhtm I would be astonished if Rich Neill should choose to deny he was unaware of this coating It was one of the many reasons for a substantial projected increase in our costs over our bid I believe it formed part of a 2005 pricing settlement with Aircelle led by Paul Gilbert I cannot say with conviction whether Raj in Toronto was aware of this from other Aeronca engineering staff I do know we never discussed it From that email on 12 March 2007 to Rich it does seem though that Raj was never aware or directly involved with us in the actual design certification and reports on the T500 exhaust system with Aircellerdquo

I put the following question via the Magellan solicitors on 8 November 2011 ldquoCan you put this question of the ldquoCoatingrdquo application to Mr Neill Aeronca experts and confirm whether it is indeed accurate that a protective coating as Dr Thamburaj referenced on 12 March 2007 was and is already applied to the T500 exhaust units in service by return Their immediate response was that they were respectfully not going to reply to that email a prior email

11

This senior Engineer was and is known to Mr Little He has since advised that a Pennsylvanian company provided some titanium coating in accordance with AMS2404 on the T500 etc As a result I have sent these updatescontact information to EASA to discussconsider as part of concluding their investigation 6 In the above circumstances it would of course be inappropriate for Magellan to complete what

was called a ldquoForm 44rdquo because such action would only be appropriate if there were safety issues that EASA needed to consider

From your responses I conclude that there is no further technical information which the subject matter expert needs to consider in completing their investigation on the regulatory aspects of the product certification of the A340 -500600 exhaust system

The product and design EASA certification of the exhaust plug and nozzle system by EASAAirbus and Aircelle as advanced by Mr Lynch QC (see page 10 overleaf etc) on replacement new units based on Mr Neillrsquos email to PwC on 29 March 2007 predicated on the 14 March 2007 MAC forecast schedule to exceed the 1285 units for amortization is the central point Given Mr Lynchrsquos sustaining of this position for months he is either misleading everyone or acting on client instructions to cover up the misleading representations by MAC to PwC EampY etc with its implications on the regulatory aspect with EASA

It was an unfortunate choice of phrase that you remain bemused by what you regard as the protracted correspondence on this issue I now provide this final summary (pages 1-11) and detail document (pages 10 -41) ndash which includes transcripts and other contemporaneous documents to underpin points made)

If after reflection Mr Lynch QC and you now accept that you are both wrong in the argument and false position advanced apparently on the basis of Mr Neillrsquos email dated 29 March 2007 and your clientrsquos instructions to date on A340 replacement spares (rather than repairs) then perhaps I should provide this final opportunity for an apology to my constituent from you both You should recognise that this was a contributory part to Mr Littlersquos mental breakdown and PTSD diagnosis and treatment during the last two years

If that is not forthcoming then I have recommended that Mr Little now submit this as part of his formal complaint to the Bar Standards Board and copy the ET for information together with what I understand are likely to be their letter with the imminent findings and final conclusions from the EASA investigation carried out with Airbus and others I hope you will have the wisdom and grace to then accept that EASA are subject matter experts and will have properly reviewed all the relevant documentation for EASA and Airbus product certification of the T500 engine nacelle plug and nozzle components in their email replicated dated 14 November 2011 at pages 4 amp 5

Yours faithfully

Jim Shannon MP for Strangford Brian Little (approved and sent in his absence)

14 November 2011

12

Background supporting detail

JUNE 2009Transcript of court hearing on 8 June at p62-72 Mr Lynch QC to Mr Bobbi X ndashexam

Information item 1 sets out the frequencyconsistency of Mr Lynchrsquos mindsetline of questioning

11 Line 19 ndash 25 Mr Lynch QC ldquoWhat I suggest to you is this that although within that context he once uses the word ldquorepairrdquo towards the very end of the email what I suggest to you is that on a fair reading of that email itrsquos plain that what Dr Thamburaj is saying is that the durability or lifespan of those units is 40000 flying hours Thatrsquos right thatrsquos a fair viewrdquo

12 and on page 63 _Line 3+ states

Mr Lynch QC ldquoExactly good and that relates to replacement doesnrsquot it spares rather than repairs If thatrsquos the lifespan of the unit then once the lifespan is over itrsquos a question of a replacement other than repairs thatrsquos right isnrsquot itrdquo

Mr Bobbi Not necessarily Mr Lynch QC ldquoWell but that would be the obvious inference to draw wouldnrsquot it from what Dr

Thamburaj is saying The obvious inference to draw is that that is the service limit thatrsquos the lifespan of the unit and obviously if the lifespan is that then one needs a new unit when the lifespan is spent Thatrsquos the obviously sensible reading of Dr Thamburajrsquos email thatrsquos right isnrsquot itrdquo

Mr Bobbi He is still confusing spares and repairs Mr Lynch QC ldquoI donrsquot think he is and thatrsquos my point If we look again at his email isnrsquot it perfectly

obvious that what Dr Thamburaj is saying is that that is the lifespan of the unit thatrsquos exactly what he saysrdquo

13 and on Page 65 Line 5+ states

Mr Lynch QC ldquoWe have Mr Neillrsquos email to Mr Moore of PricewaterhouseCoopers I know itrsquos a bit compressed in its typescript Tribunal of course there is a bigger version in the bundle if thatrsquos a bit small to read (Pause) ltdoc 3597hellip in referring to doc3605H ndashAeronca estimates based on 40K lifegt Mr Bobbi you can see canrsquot you looking at the two substantive paragraphs ndash it actually is a feature of both of those paragraphs ndash that Mr Neill makes it expressly clear that Magellan is simply basing its calculations for accountancy purposes on spares or replacements hersquos not included anything to do with repairsrdquo 14 and on Pages 72 line 10+ 73 states Mr Lynch QC ldquoRight So itrsquos plain isnrsquot it that PwC did indeed examine and accepted for accountancy

purposes the validity of Dr Thamburajrsquos calculations yesrdquo Mr Bobbi ldquoNo thatrsquos not Because a component has a ldquolifespanrdquo does not mean necessarily it will be

replaced by something new it can be repairedrdquo Mr Lynch QC ldquoYes Well no I think the whole point is this itrsquos not Dr Thamburajrsquos point was not a

question that they will need repairs after that period Dr Thamburajrsquos point was around 40000 flying hours was indeed the lifespan of the unit That after that itrsquos lifespan was spent and should be replaced That was the pointrdquo

13

As you can read Mr Lynch QC conduct in his questioning is asserting the exact case of my constituent in that Mr Neill was LYING to PwC within his 29 March 2007 email (below) on the need for replacement spares when referring to the 14 March forecast produced on his instruction for 800+ spares (below)

14

That 14 March 2007 (below) was not disclosed until the end of August 2009 - AFTER Mr Neill gave his evidence

15

1B JULY 2009 Deputy Chairman and former CEO Mr Neill then gave further evidence on 27 July 2009 which can be read at this transcript ltextracts latergt following which

1C AUGUSTSEPTEMBER 2009 the MACRespondentsrsquo UK solicitors are ldquoOn the recordrdquo stating

in PinsentMasons letter extract dated 27 August 2009

ldquoIn regard to the likely need for spare exhaust parts the Respondents case has always been (and remains) that Dr Thamburajrsquos work gave rise to a calculation of the likely life span of the parts This allowed an estimate to be made as to the likely demand of such parts Dr Thamburajrsquos work concerned this and not some regulatory mandatory requirement that the parts be replaced after 40000 flying hours Indeed Mr Neill made this expressly clear in his email to Mr Furbay at pages 35978

And then in PinsentMasons letter extract - 14 September 2009 ndash

ldquoAs you well know our view is that Magellanrsquos position on the likely predicted need for spares (based on Dr Thamburajrsquos research) is clear and consistentrdquo

And then in PinsentMasons letter extract ndash 29 September 2009

ldquoThe Respondentsrsquo views as to the need for potential spares and replacements has not changedrdquo

And then in PinsentMasons letter extract ndash 6 October 2009

ldquoThat case is and was that Dr Thamburajrsquos research allowed MAC to make commercial predictions as to the likely need for replacements

1E 30 SEPTEMBER 2009 Given all the evidence and the continuing position stated in correspondence I wrote in an unprecedented action directly to Mr Lynch QC as a litigant-in-person on 30 September 2009 ndash see subject 2 on pages 5 ndash 10 and specifically the warning on page 8helliplt see Section41gt

1F 1 JULY 2011 Furthermore in my email on 14 September 2011 to the CAAEASA (copy Mr Dimma) I have reproduced the relevant paragraphstext below in the Magellan Final Submissions by Mr Lynch QC on 1 July 2011 to the UK Employment Tribunal

ldquoSince I wrote my letter to you on 11 August 2011 it has been necessary for my parliamentary aide and I to read the completed Final Submissions from Magellan counsel to the UK Employment Tribunal

Although the technical figures are clearly not a direct matter for that court I do think it is important that I record what their submission to this public court on their scientific calculation and spares need is so that those with the competence and actual experience within EASA Airbus Aircelle and TIMET can meaningfully contribute to the completion of your industry and science-based investigation Which of course as you have indicated in your letter dated 1 August 2011 would include the aircraft programme maintenance documents which currently refer to On Condition Maintenance checks and Repairs (not replacement) for all of these components or any known or anticipated problems with the BETA21S titanium materials used in these A340 engine exhaust system components

16

Paragraph 169

ldquohelliphelliphellip Magellan (Dr Thamburaj) hellip calculated a likely number of flying hours that could be associated with the need for replacement units of a nozzle (see pages 3617-3621 for Dr Thamburajrsquos Report and Commentary) rdquo

Paragraph 170

ldquoIt should be stressed that Dr Thamburajrsquos Report and the Reportrsquos calculations and the Respondents case is not premised on there being any kind of regulatory rule requiring replacement of parts after the flying hours referred to by Dr Thamburaj As Mr Neill said the Report and MACrsquos calculations were based on the commercial predictions for the likely need to supply parts No objective and fair reading of Dr Thamburajrsquos Report or Mr Neillrsquos email of March 2007 at page 3597 (Doc 2) could be confused on that point Further the Respondents have never suggested that there are any kind of rules requiring replacement nor was that ever suggested to Mr Bobbirdquo

Paragraph 171

ldquoIn sum Dr Thamburajrsquos research and MACrsquos view (which was confirmed and supported by PwC) was that a realistic commercial prediction of likely demand for new units that should include a particular rate of needed spares (not repairs see again p3597) Doc 2 and referring to Doc 3 Mr Neill made expressly clear in his Memorandum of 29th March 2007 to PWC (page 3597) that MAC only included the likely demand for spares not repairs in his calculationsrdquo 3605H Doc3

Paragraph 172

ldquohellip into account the scientific predictions of Dr Thamburaj as to the likely number of flying hours that might give rise to a need for replacement units given the nature of the material (Titanium Beta 21) used in the partsrdquo

1G Extract from my letter dated 5 April 2011 to the Bar Standards Board - at (2)

Further to my letter dated 29 March 2011 As planned we met with my constituent last Friday

afternoon Mr Little is still not 100 following a multi discipline specialist medical review on 16 March

2011 He has told us that he will now remain under mental health care for the remainder of 2011

In light of that we will suspend assisting him complete a formal complaint against Mr Adrian Lynch QC to

the BSB for

(1) the barrister involvement in documents and the court documents disclosure process

(2) ldquoThe Barrsquos Code of Conduct (rule 708 (a) makes it clear that a barrister when conducting proceedings in court is personally responsible for the presentation of his case He must not adduce evidence obtained otherwise than from or through the clients or devise facts which will assist in advancing the lay clientrsquos case and must not make a submission which he does not consider to be properly arguable (Rule 708 (9f) of the Barrsquos Code)rdquo hellipetc

17

Information item 2 Dr Thamburajrsquos March 2007 email and report - PwC Exhibit 85 (doc 3517-3521gt

2A For information Dr Thamburaj is the Manager of Advanced Engineering Services at MAC and was neither interviewed by PwC during their independent forensic investigation nor either member of the UK legal team

Correctly Dr Thamburaj in MAC never uses the word ldquospare and or replacementrdquo in his email or brief report On the contrary -- and consistent with the EASA-approved Aircelle Component Maintenance manuals -- he states hellip repairs throughouthellipeg

His Email - ldquoIf the repair opportunity would come to ushelliphelliprdquo

In his Report ndash

ldquohellipThis will mean that the components will be coming back for repair within 8 years as a minimum if the usage is 5000 hyearrdquo and ldquo Actual life limit would be between 33333h to 37593 h which means that repairs would be required after 66 - 75 years at the leastrdquo

2B Extract from EASA website on Product certification

Article 4 of the Basic Regulation (Regulation (EC) No 2162008) requires the European Aviation Safety Agency to take the responsibility for the design approval of products parts and appliances designed manufactured or used by personsorganisations under the regulatory oversight of EU Member States (including Norway Iceland Liechtenstein and Switzerland) except for those excluded by its Annex II or by its Article 12 (products engaged in military customs police or similar services)

2C Email from Gilles COQUELIN T500 Nacelle Customer Support Engineering Leader Customer Support Engineering - Customer Support Division -Aircelle - SAFRAN Group on 23 June 2009 to Etihad Airways

ldquoThere is no specific life limitation for the T500 exhaust system The exhaust system as the whole Nacelle is certified for 20 OOOFC If you need further information please do not hesitate to contact merdquo lt EASA Airbus certification ndash 20000 Flight Cycles = 160K+flying hoursgt

2DPwC report paragraphs 872 and 874875

ldquoIt is of note that the internal report also makes reference to the requirement for repairs in its conclusion and not explicitly to the need for spares or replacement units Management acknowledges the unpredictability of repair work and has appropriately chosen not to consider repairs in its EAC analysis Management believes that given the estimated life of the exhaust system there will be a combination of spare units and repair work Further management asserts that the requirement for spare units will support and exceed the total number of units projected in the EACrdquohellip assertion by Mr Neill

Whilst there are also fundamental aerospace industry failures by PwC to review Spares and Repairs available information (MACrsquos customer Aircelle concludes ndash ldquohoaxrdquo ndash website Part E etc) what is equally disconcerting is that one would reasonably expect ldquoforensic accountantsrdquo from PwC NOT to make basic logic and mathematics errors in a C$3m+ report in calculating a demand of 1572 spares and repairs by FY2021 I set this out as part of a separate document with six different points about PwC Paragraphs 874 875 which can be read by opening this link As I said in part of my 2007 witness statement at Para 2244 ldquoIn the circumstances I consider the mathematical spares calculation included in the report to be at best misguidedrdquo

18

Information Point 3 Mr Neill ndash Former MAC President and CEO evidence 31 NOVEMBER 2007 Extracts from Mr Neillrsquos oral evidence on 14 November 2007 (p435+) 31A Mr Neill hellip There was time to include within the EACs spares ndash started doing that in the last years Judge Originally did not take into account spares

Mr Neill Yes ltNot true ndash his 29 March 2007 email (3597) disclosed in Dec 2008 refers to 190 Spares in 2006

(a) at the beginning of this email Mr Neill states ldquoThe answers to the questions provided to you in the prior Email related to the EAC number of 1247 units that had been used in the projections of profitability and the recovery of the NRC amounts invested in the program In mid 2006 the requirement indicated 1155 units would be produced as original equipment

hence the balance of 190 would be produced as Sparesrdquo 1247 less 1155 = balance of 92not the forecast of 190

Aeronca also provided a forecast of 190 Spares on 16 Feb2007 and 1 March 2007 to EampY and PwCgt

31B and on p438

Mr Neill We had projected 1200 nacelles sold ndash we have now added to that ndash the number to be sold through spares ndash that takes the number up to 1500-1600 Significantly in excess of needed

To the original EACs we have added in the line for spares ndash and looked at the total number that will be sold Either way ndash it exceeds the number

lt Note In this November 2007 evidence Mr Neill is suggesting a 300 - 400 Spares forecast (1500-1600 less 1200) Following a Court Order in December 2008 MAC disclosed Mr Neillrsquos 29 March 2007 email (3597)which referred to a 14 March 2007 analysis (totalling 1500-1600 units 3605H) which was finally disclosed in August 2009 In particular I would ask that you to please note again (a) above and

(b) then the 14 March 2007 upper forecast uses a aircraft production build of 562 units135 production aircraft ndash similar to my view to PwC in January 2007- with the Neill-inflated 800 + Spares

and Beyond Economic Repairs (BER) up from the Aeronca 2006 Spares and BER forecast of 190 When cross-examined about this 800+ from the original forecast of 190 Spares in July 2009 (p86) Mr Little Why would the Aeronca business team continue to forecast a total of 190 thatrsquos the 172 plus

18 spares and repairs in document 3605 which is March 2007 if they knew about hot life limitation andor the assumptions yoursquove mentioned earlier from engineering Why have

they continued to take what would be a fairly classical On Condition estimates view based on the 80 100 thousand flight hours or 10 thousand 15 thousand flight Cycles why would THEY not have corrected this

Mr Neill I think ndash again you would have to ask them that my understanding is that this forecast for spares and repairs was based on not only the engineering work that was done on the Trent

500 exhaust system but the after-market business be it spare parts spare products or repairs contained a fair degree of experience and knowledge from other programmes that Aeronca was involved in You will recall that Aeronca have a steady business on another nozzle and plug on the hellip 80 ndash 90 units a year on that and I assume that got built into this forecast

Mr Little But Mr Neill this number here (190) is an average of 10 ndash 12 units per year which would be

a fairly classic ranging and scaling view for the product If it was truly the replacement levels yoursquore talking about this number should be well into the 80 ndash 100 units each year I mean thatrsquos not a marginal difference thatrsquos a phenomenal difference a difference of two to three hundred million revenue itsrsquo not small lt

19

and on this subject matter with Mr Neill on 27 July 2009 (p88) Mr Little All of what we have just discussed is fairly basic to the aerospace industry in terms of

strategy quality planning why would Aeronca not have made those changes in their

forecasts (16 February 2007 and 1 March 2007) as phenomenal as they are like a ten times increase in volumehellip these documents itrsquos basic

Mr Neill The issue as I understand it is the recovery of the amount invested in non-recurring and

what is the minimum number you have to achieve to be able to recover the amounts invested

I think Aeronca were preparing these charts on the basis of what is reasonable to justify the claims that they would get the money back that they had invested in the programme either through contract negotiations with Aircelle or through the sale of additional units spares and repairs It was on that basis that they prepared these charts

Mr Little But the documents that the auditors were given were showing some 800 units over five

years and those are the management documents we would have been making the representations on It just doesnrsquot make sense I suppose thatrsquos a statement

Judge Is there anything else you can add to that Mr Neill Mr Neill Oh are you saying the other documents I assume yoursquore referring to the EAC is that

correct

Mr Little Yes and the 3605A document you saw a minute or two ago yes Mr Neill Well the 3605A document I think Irsquove explained or tried to explain that this is a number

that you have to achieve to get the right recovery of the investment On the EAC they have taken a number of from what I can see of additional units of 793 assuming this is the last

EAC that we looked at which includes spares and repairs and the likes So I donrsquot see a

whole lot of contradiction Mr Little (Pause) this is the number one balance sheet item hellip Right Irsquom going to leave it there

and go to the next one Judge All right

31C and continued on 14 November 2007 (p440)

Mr Stafford Volume 52006 ndash the sub certification for Q22006 ndash see 2 items here ndash ldquoA340 ndash Aeronca to discussrdquo On an important document ndash the issue of NRC ndash clearly formal concerns expressed by him

Mr Neill Yes

Mr Stafford You would have been clear that it was NRCs that he was referring to

Mr Neill Yes

Mr Stafford Given that you had a discussion on the 8th ndash and he signs certificate with qualification ndash

must have been clear that BL not entirely comfortable

20

Mr Neill Correct But his experience with airframe ndash more with engine and spares ndash parts wear out and are replaced more frequently than wings- so a difference in our experiences

ltSee Brian Little CV ndash ShortsBombardier had a nacelles business employing 800 people with some 100+ engineers In the 1990rsquos they were in the Joint Venture International Nacelle Systems with what is now part of Aircelle - Magellanrsquos customer for the A340 Additionally I have experience of the ldquocomplete aircraft marketingsales ndash delivery ndash support cycle with Shorts and Bombardier aircraft products Furthermore I spent several weeks within Boeing on the Boeing 7J7 and ldquoBoeing 777rdquo market research sales

processes whilst on a secondment from Shorts in 1989 The former President and CEO Mr Neill in his written evidence to the UK court (RAN20) stated that Brian ldquowas an experienced operator in the aerospace industry with excellent links with key figures (such as Ken Brundell ndash should be Brundle at Bombardierndash and indeed many others) hellipand (RAN22)

ldquoIt was clear to me that the Claimant had lots of experience and knowledge of the

industry He had a good technical understanding of the issues a good grasp of contractual issues (which led me to believe he would be a strong negotiator) and a sound strategic approachrdquo gt

31D and also on p440 Mr Stafford The meeting on 8th August 2006 ndash you agree that Mr Little raised the concerns ndash you

agree that he explained what about You did not share anything about Mr Little the reduction of service life

Mr Neill I showed him a copy of the work done regarding the expected life of the plane ndash there was some certainty based on the research carried out in Canada

lt not true as the Dr Thamburaj email report was NOT produced until 12 March 2007 as Mr Neill

would confirm in his subsequent evidence two years later on 27 July 2009 (p95)

Mr Neill hellip The only document that Irsquom aware of that has been released is an email I sent to Dr Thamburaj asking him on the basis of these tests wersquore ndash we intend to use 40 thousand hours as the number to feed into the meantime between unit removal forecast that we were giving to Aircelle is that a reasonable number to use and can you substantiate it And he responded saying yes based on everything that he saw the worst case scenario was that a plug that had been subjected to ndash the exhaust that had been subject to heavy use and a lot of damage inferences especially corrosion may

incur trouble at about 33500 or 37300 hours so on the basis of that we went ahead with the 40000 hour number

Mr Little And so the first time the calculation was actually done off the 33 ndash 37 thousand hours was actually that email that Raj did in March 2007

Mr Neill I believe so but I donrsquot know for sure

Mr Little Okay Mr Neill That was when I asked himgt

Note Later at 32C that strangely although the technical calc range was 33K- 37K flying hours Mr

Neill states that the inspection checks would not take place until the engine overhauls at 40Khours

21

32 BY JULY 2009 Extracts from Part DE in website and in Mr Neillrsquos evidence on 27 July 2009

32A Page 53 Line 18-25 and P54line 1-11

Mr Little Are you suggesting therefore that there is not really any certainty on any hot life limits

requiring the airlines to change the product at 40 thousand hours

Mr Neill I think we have to go back to how this product was designed it was designed with a hundred thousand hour projected life there was then a damage control report damage control report which said this is the amount of damage that this product can sustain in

service and very specific limits were laid down for the length of the cracks the number of dents and the like and on top of that the maintenance manual were prepared by Aeronca and approved by Aircelle and Airbus and that said that the time between engine overhauls is 20 thousand hours when you remove the engine for service you should inspect the exhaust system and the nozzle to see if it is

capable of continuing for the next service period If the damage that is sustained is minor then it can be refitted and used again If the damage

exceeds the limits that were defined in the damage report then the nozzle should be returned to the manufacturer for repairhellip etc

32B Page 61 Line 3 ndash 9

Mr Neill This assumes the 40 thousand hours and assumes the same flying rates and all that

kind of stuff but it is correct that products which have been in service that were first

introduced into service before 2005 which were used on a regular basis would be in need of repair or replacement sometime in the next five six seven years

32C

Mr Little

Mr Neill Mr Little Mr Neill

Mr Little

Mr Neill

Mr Little

Page 65 Line 18-25 and Page 66 Line 1ndash25 and Pages 676869 and Page 70 line 1-7

Even then you had to make sure the figures added up to ensure the recovery of the NRC of 40 million in the MAC Balance Sheet so in March 2007 you then conjured up these enormous volumes of replacement spares didnrsquot you

Absolutely not Why did you not then correct this or any of this stuff that their understanding was in fact that this was an On Condition product and not effectively a hot life replacement I have not gone back to check the Pricewaterhouse report but I think they use the term service life not mandatory life And to me service life definition applies here because

that a common term thatrsquos used in the maintenance repair world But Aircelle told me and airlines not directly but indirectly that in fact this is a service

life policy ON Condition and they know of no specific life limit and thatrsquos when theyrsquore telling the airlineshellip Mr Neill interrupts hellip to tell the airlines anything

But Aircelle hellip Judge interrupts

Judge You havent told the industry anything about it

Mr Neill Untrue weve 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 weve submitted this data to the tribunal and to Mr Little because we had to do these schedules that we had

22

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 theres every likelihood that well 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 airlines 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

Mr Little Irsquom not suggesting theyrsquore not getting reviewedhellip but none of that makes sense to the rest of the industry Can I also say Timet are in -- interrupts

Mr Neill What do you think on condition actually means it means - that is the required has

been operated for a certain period of time you take it off (After) and look at it and if there are cracks dents any sign of damage or corrosion in any sense you make a decision at that point is the condition that therersquos good enough to be returned to service or does it

need a repair or does it need a replacement Mr Little I donrsquot disagree with that at all Mr Neill Thatrsquos what it means

Mr Little I donrsquot disagree with that at all

Judge We know where the issue is Do you need to pursue that any further Mr Little Well the critical thing is that -- When the production level falls away these

replacements the replacements are the only hinge in the Financial EAC and become the basis of justifying how you and Magellan recover the 40 million NRC is that right Thatrsquos

what this EAC says Mr Neill That is not entirely true either because the as you well know there were a whole bunch

of negotiations going on with Aircelle regarding the very same non ndashrecurring cost which were settled post you leaving the company and a substantial contribution was made by

23

Aircelle to the NRCsrsquohellip the balance of that NRC will be then amortised out over the remaining production and the spares and repairs ndash of this programme

Mr Little And what is that what is that remaining value and the remaining volumes assumptions at

the end of 2008 Mr Neill hellip Mr Dekker would have supplied that when he was on the stand I donrsquot have that ndash Mr

Little interrupts Mr Little He didnrsquot ndash Mr Neill interrupts

Mr Neill It must be in the area of 15 ndash 20 million Mr Little Right well I Mr Neill interrupts

Mr Neill Itrsquos ndash that is an estimate that is not what was on the actual books

Mr Little From my reading of the accounts I reckon it will be about 20 million because 10 million was written off because of accounting policy but I was interested in what were the volumes you were still assuming because 800 units at $30000 per set we were never going to recover that 40 million on that basis

ltNote part extract from Mr Littlersquos website at Part G commencing (BL Observation The reader should note my written evidence (Website Part B para 205) which states ldquo In a conversation at Farnborough Airshow in July 2006 with Mr Butyniec held after he had met Aircelle representatives to try and progress the commercial negotiations on the application of the pricing escalation formula he said he too was concerned about MACAeronca ever recovering its NRC investment on the A340-500600rdquo Mr Butyniec andor the Respondents counsel Mr Lynch QC never challenged this evidence in court Mr Butyniec had explained that he was skeptical (perhaps even cynical) about pressing for the arbitration route in Europe ndash they had not done so in their prior March 2005 amended commercial settlement (see history in Part D Exhibit 81 document) which brought into existence this escalation formula I was the only Magellan person with prior experience of European arbitration via ShortsBombardier and it was really only Mr Furbay (Aeronca CFO) and myself who were convinced we needed to do this to get a proper overall pricing settlement for FY2006 etc and appropriate and relevant price escalation arrangements for the future I was also conscious of the limitations of the current escalation formulae in the medium- long term for a MAC perspective (the 031 fixed limit for BETA21 materials escalation Prior to the MAC Board meeting on 8 August 2006 the MAC Directors were provided with a Gross Margin analysis document which showed that the ldquoOperational Efficienciesrdquo across the MAC units reporting to Mr Butyniec were some (C$7460K) below the approved FY2006 budget Whilst price changesincreases across MAC were a net C$1856K ahead of the FY2006 budget for the Aeronca business (A340 amp A380) some C$1036K in price increases had not yet been definitively secured In part and as a result of these deteriorating FY2006 results Mr Butyniec produced his Best and Final Offer (BAFO) commercial letter proposal for settlement immediately following the MAC Board on 1114 August 2006 with the approval of Mr Dekker Mr Neill and Mr Edwards ndash see website Part D (c ) CD2 extracts with the relevant contemporaneous documents and sent it to Aircelle It was not discussed or approved at the MAC Board in the minutes or whilst I attended it throughout In the event Magellan filed for Arbitration but before those proceedings commenced they renegotiated with Aircelle and MAC reported in Q32008 (3481) ldquoAs noted in Note 5 ldquoInventoriesrdquo in the Corporationrsquos 2007 (BL and 2006) audited financial statements due to the long term nature of the Corporationrsquos contracts the Corporation may be in negotiation with its customers over amendments to pricing or other terms During the third quarter of 2008 the Corporation concluded its negotiations in respect to one such long-term contract with a European customer and as a result recorded one-time retroactive price adjustments totaling $104 million which was a direct increase to both of the Corporationrsquos revenue and EBITDA in the third quarter of 2008rdquo These price changes would have been for both the A340-500600 AND A380 programmes as the planned arbitration was on the pricing for both of these products My information from reliable Safran and Magellan sources is that this was settled by Aircelle before any Arbitration hearings commenced with Mr Don Boitson and Mr John Furbay Magellan reported this settlement price adjustment in their Earnings webcast call in Q32008 (against the NRC Amortisation in FY2008 financial statements) hellip etc on website wwwfortfieldcom Part F

24

And then in the final Market analyst question (p14) Mr Claude Proulx ndash BMO Capital Markets Analyst

Itrsquos Claude Proulx from BMO Just some clarification on the CDN104 million pricing adjustment If we were to just for the sake of having better understanding of your past results to analyze current results where would that money ndash when should - sorry ndash when should you have booked revenues in terms of quarter ndash on a quarterly basis Is there any way for you to give some indication

John Dekker - Magellan Aerospace ndash VP Let me take an action on that and look to see what sort of detail we can provide and we will post that

Mr Claude Proulx ndash BMO Capital Markets ndash Analyst Okay Thatrsquos all thanksrdquo

I know that during the course of FY2006 Magellan budgetedEACQ42005 to ship 64 A340-500600 units and actually delivered 81 whilst in FY2007EAC Q42006 budgeted for 40 units and actually delivered 45 unitshellipfor a combined total of 126 units over that 20062007 year period In FY2008 48 production and spares units were delivered by MAC 25 during Q1Q22008 Subsequently with the A340 airline series production programme now nearing an end only 17 A340-500600 exhaust system units were produced by AeroncaMagellan in FY2009 With the A380 effectively at a standstill in supplier deliveries in the first half of FY2008 (due to the assembly problems at Airbus in 20062007) I cannot compute or understand why the retroactive pricing for A340 in the first half of FY2008 for 25 units would equate to C$5500K hellip if attributed to only A340 this would be a price uplift of C$220K (or approximately doubling) for every unit delivered by Aeronca in 2008 As regards the C$4900K published by MAC for FY2006 and FY2007 what is certain is that even if all of it was attributed to the 126 units delivered in these two years then less than 50 of that C$4900K sum would have been obtained on the basis of the approved final counter offer to Aircelle from Mssrs Butyniec Edwards and Dekker without MAC Board Audit Committee Approval on 12 ndash 14 August 2006 And that 50 + reduction is before any portion of that C$4900K is actually recognised for the ldquojustifiablerdquo price increases due for the A380 deliveries despatched in FY2006 FY2007 from Aeronca prior to and since my termination It would seem from my knowledge experience and logic (recognising that this settlement would also include that for the A380) that the commercial terms of this further Aircelle ldquosettlementrdquo agreement has NOT been constructed (as most stakeholders including the professional stock market analysts expected) on a ldquonormal stepped increase pricing basis for the actual units delivered each yearrdquo as per any normal arbitration of the escalation formula but to substantively meet the financial and accounting needs of Magellan in reducing further its ldquoover-statedrdquo A340-500600 asset valuation on the Balance Sheet I set this out in a spreadsheet showing the Q42006 EAC the C$104m retroactive revenues and the Deferred Development costs recorded in the MAC audited Annual Reports as expensed for all projects in FY2008 and FY2009 helliphelliphellip and concludes If part of this C$104m was set off against A340 Deferred Development Costs then of the circa C$40m ldquoMAC asset valuerdquo at December 2006 approximately C$10m will have been reduced through ldquoinventory accounting standards changes per 3031rdquo see lt also note below Dekker in Q12008 webcast First of all the fact that we had to take that charge against retained earnings does not mean that those were not valuable costs and not anticipated costs Those were costs that we had anticipated when the programs were originally bid and we will still get recovery of those costs going forward gt which permitted the write-off of the A340 escalating labour-learning costs accepted by EampYPwC AND the majority of that C$10m + in amortization of deferred development costs via those ldquoaccounting-ledrdquo retroactive price adjustments in Q3 and pricingterms in Q42008 with Aircelle will also have been ldquowritten-offldquo

Despite both of these substantive MAC Balance Sheet reductions I continue to believe from the evidence as you have read earlier in Website part D Exhibit 83 that as at today from the documentsinformation available I believe the MAC Balance Sheet continues to be over-stated by in excess of C$10m on an equivalent basis a ldquomaterialrdquo value I also found it insightful to read the document at A340 pricing ndash ldquomanagementrsquos assertionrdquo ndash PwC para862b ndash maths wronguntruthful

25

32D Page 102 Line 5 ndash 14 Mr Neill Yes Well the answer comes in how much or how you believe in the work done by Dr

Thamburaj What he says is that at some point the honeycomb structure in this product

will suffer because of the wear and tear through service use at which point in time there will be major repairs needed and I mean if all the aeroplanes stay in their fleet to the full engineering design life the belief is that every one of these exhaust blocks will come through the shop for a major repair or a replacement

32E Page 103 Line 5 ndash 14

Mr Little This is a real airworthiness issue Irsquom worried about that as well Mr Neill Brian let me make a comment here Brian says itrsquos an airworthiness issue it is in the

sense that the product is managed on an On Condition basis and through that

management they will have some visibility of how well the product is performing or not performing in service And the hellip people will then be able to advise Aeronca on the

reality of whether there will be a need for replacement or nothellip 32F page 104 Line 4 ndash 17 Mr Little Can we go to 4183 84 and also 86A back to 85 4184 and 4186 to 85 Mr Neill Okay

Mr Little So on 4184 Mr Bobbi you referred to earlier asked a straightforward question is there

a hot lifehellip and the man says basically we have no knowledge wersquore the vendor we believe the whole thing is a hoax hellip Mr Neill interrupts

Mr Neill Let me say this We have never said there was a 40000 or a service life limitation

and that this was a life limited component wersquove said from day one this is a

component that has been managed on an On Condition basis and the overhaul and maintenance manual that we wrote and was approved by Airbus and Aircelle reflect that thinking

So for Mark Bobbi to go round the world talking to airlines suggesting that we are

perpetuating a life limit of 40000 hours I think is offensive and can cause damage to

Aeroncarsquos reputation in the work place ndash Mr Little Of course it does Rich Thatrsquos your position (his QC) Mr Lynch Itrsquos not Page 108 Lines 1314

Mr Lynch QC ldquo But I never suggested it was regulatory Irsquom talking about a service limitrdquo gt

ltPlease note again Mr Lynchrsquos assertions at Page 9 Points 11 ndash 13 and then at

ldquo14 and on Pages 72 and 73 line 1-3 states

Line 10 - 13 Mr Lynch QC ldquoRight So itrsquos plain isnrsquot it that PwC did indeed examine and accepted for accountancy purposes the validity of Dr Thamburajrsquos calculations yesrdquo

Mr Bobbi ldquoNo thatrsquos not Because a component has a ldquolifespanrdquo does not mean necessarily it will be replaced by something new it can be repairedrdquo

26

Mr Lynch QC ldquoYes Well no I think the whole point is this itrsquos not Dr Thamburajrsquos point was not a question that they will need repairs after that period Dr Thamburajrsquos point was around 40000 flying hours was indeed the lifespan of the unit That after that itrsquos lifespan was spent and should be replaced That was the pointrdquo

and then continuing on 27 July 2009 at Page 109+ Mr Little Mr Lynch I said to you on the 8th hellip

Judge Look we are rehearsing the matters now yoursquoll have to make submissions on the position yoursquoll have to submit to us if thatrsquos what you want to do that the respondent was at one point asserting that there was a 40000 hours limit on it and that they were asserting that there was a regulatory conditionhellip Mr Lynch interrupts

Mr Lynch And itrsquos certainly right that Mr Little did say to me this is a very very serious regulatory aspect and do you understand

Mr Little I specifically wanted you to affirm and you did Mr Lynch Thatrsquos not the point I donrsquot know the regulations that apply to the industry the point of

importance is I was simply putting Dr Thamburajrsquos research to Mr Bobbi Dr Thamburaj certainly doesnrsquot suggest a regulatory mandatory 40 thousand hour limit I was talking about the service the predictions as to likely service durability Thatrsquos what I was trying to put

Judge So there we go There will have to be submissions if you want to make that point Itrsquos not Mr Neillrsquos evidence that there is a 40 thousand limit

Mr Little Which would be my understanding Judge Absolutely so what yoursquore suggesting is that Mr Lynch was putting a false point

and wersquoll have to make a finding on that whether or not he without knowing the position

was putting a point falsely to Mr Bobbi which you assert he was ltreferring to points Mr Lynch QC 11 and 14 re service life and spare replacements as at Page 3gt 32G Page 105 Line 10-25 and Page 106 Line 1-5

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 didnt see any reference to that in either of his

witness statement or any of his reports I just saw a lot of ndash Mr Little interrupts in a disturbed state helliphellip

Mr Little Rich thats exactly what he did do ltsee Bobbi report extract abovegt and he asked the

people in Singapore and some others to go through the manuals and they all got the stuff

out and said we have to do checks at 40 thousand hours etc but theres nothing in here that would indicate that theres likely to be anything of that substance Hang on I have a fundamental problem with this this is really really really important Your cross-examination of him Mr Lynch was replacement ltdoc 3597gt this is what it says he took out of that and he up to then had been very careful about what he

said to airlines and everybody else and I warned you ltMAC and legal teamgt about this that this is a major issuehelliphellip Tribunal adjournment for a few minutes

Note as Mr Bobbi and I had already seen and determined the Aircelle Component Maintenance Manual for T500 Exhaust nozzle and plug ndash sample 3625S ndash refers and had always done so to ldquoFACTORY REPAIRSrdquo by the manufacturer ndash Aircelle in the operating airlines Magellan and their own advisors

27

(PwC) recognise that ldquodue to the unpredictability of repair workrdquo 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 AircelleAirbus (doc 3525) In part this accounting treatment is because other companies such as the global number 1 supplier of engine nacellesexhaust systems Goodrich (also audited by E amp Y) provide a Repair amp Overhaul service for the A340Trent 500 engine Exhaust plug and nozzle to the airlines A summary table of the flight cycles and flying hours to December 2010 on the A340-500600 aircraft in service can be viewed here (doc 4240B-1)

ltBL Observation ndash You will also note that the Magellan FDampT report in 2003 provided for the A340-500600 Aircraft Type certification of the nacelle to AircelleAirbus and thence to EASACAA refers to a fatigue design life goal of 20000 flight cycles with an approximate 8 hours flight timefatigue mission ndash or circa 160000 flight hours Please note that Aircelle (part of the Safran Group) as Magellanrsquos customer for the A340-500600 exhaust system were asked by me in late 2009 (and again in late July 2010) whether they wished to add any further comments on the factual accuracy or omissions in his A340 Report No additional comments were made No changes have been made to the Maintenance plans or documentation in the airlines possession Professor Ghonem a global expert on BETA21S material also commented to Mr Little on some of the assumptions made in the Magellan ldquotechnical reportrdquo disclosed at Exhibit 85 and referred to his October 2004 researchgt

32H Page 114 Line 17 ndash 25 to Page 116 line 22 The ldquoindependent forensicrdquo PwC Final Draft Investigative Report into Areas of Concern Raised by Mr Brian Little Executive Summary circulated to the Board of Directors at MAC ndash relied on above in the Magellan Aerospace May 2007 earnings statement - at PwC paragraph 240 (doc 605606) recorded

ldquoFinancial Control within MAC and MALUK in relation to the areas we have examined is poor and needs to be improved this is particularly acute given that MAC is a public company

Examples of poor financial control that we identified during our work include 1 Accounting adjustments made with insufficient supporting analysis and documentation 2 Inadequate understanding or documentation of balance sheet provisions and insufficient

documentation of the decision to release certain provisions 3 A lack of awareness of the program accounting requirements under either Canadian or UK

GAAPhellip 4 Poor control over individual projects from an accounting perspective Project sales volumes

revenues and costs are not reviewed with sufficient frequency or rigourrdquo Doc 3597 and here it is Mr Neill writes an email on 29 March 2007 to PwC the day before MAC Board Meeting and FY2006 annual results are published in response to their verbal questions from the previous evening helliphellip

ldquohellipto produce a forecast of spares required based on the Engineering work completed by Dr Thamburaj which concluded that the useful life of the exhaust system was approx 35000 hours [to provide a margin

28

of safety John Furbayrsquos analysis used 40000 hrs as the useful life This analysis showed that the likely spares requirement was in excess of 800 units over the period 2007 to 2021helliphellip

ldquoTo attempt to explain the terminology ldquoSpares and Repairsrdquo ldquo generally if an exhaust achieves its predicted and recommended life it will be taken out of service and a new one will replace ithelliphelliphellip

ldquoWe find it difficult to predict the business that would arise from these Repairs and hence we would choose to ignore this in any EAC analysis being done But the business is there and will happenrdquo

Referring to doc 3605H for Spares and Repairs produced on Mr Neillrsquos instruction on 14 March 2007 when PwC asked for a scenario similar to my view of 135 ac series build and cessation in 2009 Neither this document or any information in it was included in the PwC reports

29

32H Page 114 Line 17 ndash 25 to Page 116 line 22 Mr Little ltDoc 3597gt But the question essentially is this then implies to anybody like a PwC

ltand certainly the position taken by their Magellan QC Mr Lynch above at Page 1 11 ndash 14gtthat after 40 thousand hours itrsquos going to take them out of service and a new one is going to replace it Thatrsquos what that language implies

Mr Neill Well first of all I donrsquot entirely agree with you The recommended life is a way of describing a service life for a period of service and I think Irsquod go further here to talk about these decisions about replace or repair that has to be made by the overhaul centre and I would assume that that decision is made and when that decision is made and that becomes the recommended life of the component Let me also say that in the engine and overhaul business it is traditional that when the whole nozzle unit is returned to service that a detailed report is written on its condition and on

the basis of that condition the airworthiness authorities approve the service life And if

itrsquos in good condition they will extend the service life if itrsquos in poor condition they will reduce it and that then becomes the recommended life of that component

Mr Little Mr Neill this very specifically is to PwC itrsquos all about Thamburajrsquos report and it says gt

ldquoGenerally if an exhaust achieves its predicted recommended life it will be taken out of service and a new one

will replace itrdquo If that is not saying a replacement at 40 thousand hours to everybody

other than those within the industry what is it saying It could not be any clearer

(See Page 9 re Lynch 11-14 and his consistent assertions to Mr Bobbi) Mr Neill It doesnrsquot use 40 thousand hour life it doesnrsquot use the repair mandated regulatory life it

uses the term recommended life because it is not a known number per se Mr Little But Rich yoursquove related it to the 800 units up above between 2007 and 21 and I can tell

you it is about 800 units on that basis

Mr Lynch No No Judge Just put a question to him rather than comments

Mr Little Well itrsquos quite explicit the English language says to somebody in PwC that ldquo generally if an exhaust achieves its predicted and recommended life it will be taken out of service and a new one will replace itrdquo helliphellip 40000 hours is equivalent to 800 units as calculatedrdquo

And I would concur with that calculation on that basis as I have done in case 4B Mr Neill I would sorry I would in response I would suggest that wersquore in a new paragraph in

this email wersquore talking about spares and repairs and wersquore talking about life in relation

to spares and repairs I donrsquot know how PwC interpreted this but I have assumed that they segregated these two paragraphs to come up with the conclusions they did

Mr Little Rich with respect hellip interrupts Mr Neill Beyond that yoursquore asking me to testify what they understood but it and I canrsquot

lt Can I now refer the reader to Mr Lynchrsquos Points 11 ndash 14 at page 10 and I replicate 13 and 14 below

Lynch Page 1 Replicated 13 and on Page 65 states

Line 5 ndash 16 Mr Lynch QC ldquoWe have Mr Neillrsquos email to Mr Moore of PricewaterhouseCoopers I know itrsquos a bit compressed in its typescript Tribunal of course there is a bigger version in the bundle if thatrsquos a bit small to read (Pause) ltdoc 3597hellip in referring to doc3605H ndashAeronca estimates based on 40K lifegt

30


Replicated 14 and on Pages 72 and 73 line 1-3 states Line 10 - 13

Mr Lynch QC ldquoRight So itrsquos plain isnrsquot it that PwC did indeed examine and accepted for accountancy purposes the validity of Dr Thamburajrsquos calculations yesrdquo



As you can read Mr Lynch QC conduct in his questioning is asserting the exact case of my constituent in that Mr Neill was LYING to PwC within his 29 March 2007 email on the need for replacement spares when referring to the 14 March forecast produced on his instruction for 800+ spares

continued Page 116 ndash Line 23-25 and Page 117 Line 1-22

Mr Little No Im suggesting to you youre lying because that says to anybody a replacement The calculation of 800 stacks together with that it only makes sense in that context It cant mean anything else and they then go off and say thats how theyve done their calculations

but cant even get the maths right (overspeaking)

Judge Wait please Youre suggesting hes lied in the email

Mr Little Yes hes deliberately lied and given that impression

Judge In the email

Mr Little In the email relating to the 800 and he then conditions --ltreferring to doc 3605Hgt

Judge Nohellip

Mr Lynch Wait

Judge In the email what youre suggesting is that hes lying to PwC

Mr Little Hes deliberately given the impression of that 40000 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 Thats whats been suggested to you I

think That thats a lie

and here it is again Mr Neill writes an email to PwC in response to their verbal questions from the previous eveninghelliphellip ldquohellipto produce a forecast of spares required based on the Engineering work completed by Dr Thamburaj which concluded that the useful life of the exhaust system was approx 35000 hours to provide a margin of safety John Furbayrsquos analysis used 40000 hrs as the useful life This analysis showed that the likely spares requirement was in excess of 800 units over the period 2007 to 2021helliphellipldquoTo attempt to explain the terminology ldquoSpares and Repairsrdquo ldquo generally if an exhaust achieves its predicted and recommended life it will be taken out of service and a new one will replace itrdquo

31

Information item 4 Website part K extract and Mr Littlersquos letter to Mr Lynch QC Mr Rae

You will recall from my constituents website at Part D Part E and in page 1 of this document that Mr Lynch QC has consistently pursued the line of questioning and argument which asserts Spares replacements for the A340-500600 exhaust systems at not greater than 40000 flying hours ltpage3gt

Given all the evidence and the continuing position stated in correspondence I wrote in an unprecedented action directly to Mr Lynch QC as a litigant-in-person on 30 September 2009 ndash see subject 2 on pages 5 ndash 10 and specifically the warning on page 8hellip reproduced belowhellip

41A ldquoIn real business terms this would mean that every A340 aircraft in airline service would require a ldquoSpares replacementrdquo - not a Repair ndash at least once in its product life That crucially is not what Mr Neillrsquos said in his oral evidence repeatedly nor in the AirbusAircelle Component Maintenance Manuals ndashdoc (781141 Pages 50015002 and 78-1142 pages 500150025003 amp 15004page 2 now numbered 3625GH and 3635QRST) nor Dr Thamburaj in his emails and documents nor the summary and conclusions in Professor Ghonemrsquos 2003 Article nor anybody else with actual experience within the aerospace industry You should then revisit carefully directly with Mr Neill and Dr Thamburaj precisely what they are saying to their customers and the airlines to ensure you both have a proper understanding

I warn you now in writing (as I did verbally to Mr Lynch QC on 8 June 2009) that if you continue to pursue the line you have been stating in your letters above as the on the record representatives of the Respondents then I will be absolutely clear to Airbus Toulouse and the contacts we have in the top management of the eight airlines (new contact via Ian Massey - Audit Chair at Vought and my friend and a former Airbus Toulouse CFO - in SAA) and elsewhere what despite all the current REPAIRS documentation in the hands of the airlines certification paperwork from AirbusAircelle and disclosed by Magellan itself that you all believe that Mr Neill and Dr Thamburaj are predicting 100 replacements on a ldquoBeyond Economic Repairrdquo approach and therefore replacement spares for all of their Trent 500 Exhaust Plug and Nozzles

I shall in fact quote the specific texts in your letters above to support that assertion from October 2009

Let me assure you cannot dosay one thing in a public courtroom involving in excess of hundred million dollars of additional costs to the airlines and additive revenues to Magellan and then say the opposites elsewhere without consequences Such inevitable consequences for the avoidance of doubt will lie with Mr Lynch QC and yourselfrdquo

Mr Little having stated earlier at Page 6

41B ldquoYou complain about the word for word quoted evidence from Mr Bobbirsquos and Mr Neillrsquos oral evidence ndash as I suggested before both Mr Lynch QC and you should read that evidence carefully again and learn what is actually being said and think beyond a public courtroom to its implications elsewhere Although I have no obligation to provide them those court stenographer transcripts can assist both of your understanding if read carefully

It is also abundantly clear to me that Mr Dekker is in large part instructing you on some of these matters and your letter statements above He knows full well that the International accounting policy and

32

practice for NRC Engineering and Development costs recovery can ONLY include Repairs work when they are

1 ldquoscheduledrdquo repairs (that is NOT an ON CONDITION Service Life Policy for the Trent 500 Exhaust system as Mr Neill confirmed) with 2 ldquoknownrdquo revenues and costs and 3 which are 100 certain to be carried out by the Original Equipment manufacturer (OEM) This is why Mr Neill from his engine experience stated and knows that only some very specific NRC can be retained on the Balance Sheet ndash a certain point for repairoverhaul AND a certain revenue and cost AND a 100 OEM Repair ndash such as on Engines and APUrsquos These are the subject of mandatory documents within EASA FAA etc for ldquoactualrdquo time limitsrdquordquohot service life partsrdquo - known as LLC ndash Life Limited Components or sometimes LLP ndash Life Limited Parts That of course is NOT the situation on the Trent 500 Exhaust Nozzle and Plug ndash which is Maintenance ldquoOn Conditionrdquo ( document 3625A-3625Z2 Mr Neillrsquos oral evidence) and confirmed by the eight airlines and Airbus In effect the Repairs are as PwC say at para 872 simply unpredictable with variable revenues and costs and no certainty that Magellan will carry out those Repairsrdquo which Mr Little then sets out at pages 9 - 11 ldquoFor education purposes in simple terms Nacelle Spares usually arise from three elements

1 Initial Provisioning for Quick Engine Change Units (QECU) ndash these are normally contracted with the initial order and are predictable based on the number of airlines operating the engineaircraft the airline ldquoinventoryrdquo policyMRO centres and their risk of ldquoaccidental Airline damage This information or assessment is readily available within the aircraftengine manufacturers and some of the largest component suppliers ndash eg RohrGoodrich SNECMASafran Today this is also software predicted with various algorithms and from both the major software packages the data available for A340 aircraft in service would predict 16 units While I was at MAC Magellan showed 18 units were delivered for Spares purposes in their EAC

2 Airline Spares Inventory Rotables - Mr Neill referred in his evidence to ldquoRotablesrdquo These are spare units which are generally purchased or leased (such as those offered to Virgin Atlantic in document 4263) or exchanged This happens when there becomes an increasing possibility of components requiring Repair in the life cycle of the product These ldquorotablesrdquo are also forecast using custom software packages in what is part of a ldquoRanging and Scaling processrdquo with major drivers obviously being Guaranteed Turnround Times (in MAC case 30 calendar days25 calendar days) Replacement prices (say $250K each = as production Aircelle contract) and ldquoassessed Vendor Repair performancerdquo This has also been run though as part of the Mark Bobbi report DecemberMarch 2009 report with a prediction of 36 units needed for the in service A340 fleet in 2012 Separately I have now provided the detailed data from end June 2009 (see summary at document 4240A-E) to some friends in an organisation I worked with in 1985 and they have provided predictive results for Trent 500 of

33

some 38 ldquorotablesrdquo units at peak in FY2012FY2014 It should also be noted that as some aircraft are withdrawn from service and put in long term storage it is not unusual for some of the high expense components to be removed and used as part of the ldquorotablesrdquo inventory which of course reduces the purchase or lease of replacement spares An example I would cite is Virgin Atlantic who now have two A340 600 aircraft in storage at Lourdes in September 2009 and who I understand are planning to use some ldquohigh costrdquo components from MSN371 as part of their ldquorotablesrdquo inventory to support the scheduled repairs and overhauls of specific components

3 The final part is of course the parts which are returned for Repair and which after analysis are judged uneconomical to repair (Beyond Economic Repair - BER) and where a replacement is required There are lots of benchmarks on this available within the industry and lead times guaranteed for the provision of those replacement spares and prices Mr Neill you will see in the transcript referred to ldquoheavyrdquo repairs on a couple of occasions in his oral evidence and the associated revenues I have obtained up to date data on this from RR Goodrich Vought Bombardier and SNECMA for Engine exhaust systems Including elements 1 and 2 the lowest number was 13 Spares (as compared with production volumes) for the In service fleet of Airbus A330rsquos with RR Trent engines Of the remaining eleven engine types in the survey the highest was a current military application of some 24 in Rohr

The marketbusiness development people at RohrGoodrich estimate that the Spares market is for some 20 of the in service fleet for the Trent engine exhaust and nozzle which is 50 higher because of the use of some thin BETA21S sheet in parts of the Exhaust system Their estimate for the 125 aircraft in airline service is for a potential 100 spares (categories 1 2 and 3) leaving the remainder of the market available for a Repair and Overhaul offering (see specifically the A340 exhaust nozzle and plug in their Capabilities Brochure (document 4269F) They also correctly point out that it is an important segment because of the wider strategic Goodrich relationship with RR (such as A350XWB engine nacelle and new Single Aisle product research) and as the Trent 500 engine is concentrated in 8 global airlines with some 100 plus aircraftndash almost all of whom have some form of ldquoone-stop MRO offeringrdquo from the Goodrich family of products A380 will be similarrdquo

and at page 18 concludes

ldquoIt would seem that Mr Lynch QC and you regard this as just another employmentlitigation case in your busy days I doubt however if there are many legal teams who wittingly or unwittingly are abetting their clients in continuing to break the law of a Canadian public company by the representations and argument being made in the growing evidence in this case on A340 in a public courtroom and elsewhererdquo

41C Unsurprisingly this REPAIRS and Spares perspective is reinforced in the PwC report at para 872

ldquoIt is of note that the internal report also makes reference to the requirement for repairs in its conclusion and not explicitly to the need for spares or replacement units Management acknowledges the unpredictability of repair work and has appropriately chosen not to consider repairs in the EAC analysis Management believes that given the estimated life of the exhaust system there will be a combination of spare units and repair work Further management asserts that the requirement for spare units will support and exceed the total number of units projected in the EACrdquohellip assertion by Mr Neill

34

and then proceeds to follow this by reference to the PwC table 875 with its calculation of ldquo1572rdquo

Spares amp Repairs demand by FY2021 in paragraph 876 stating

ldquoIn order to achieve MACrsquos EAC projections only 365 (ie spare) exhaust system units would need to

be delivered This is far below the expected demand of 1572 spare and repair units as set out in

paragraph 875 aboverdquo

The 365 number being based on the amortization quantity of 1247 less 882 ltthe sole forecast relied

on by PwC in consciously ignoring 6 other available third party forecasts (including Teal report in their

London offices) customer production plan and press publications whilst also failing to question the

glaringly conflicting data available against that single FI forecast and wrongly including deliveries

shipped by Aeronca rather than the actual aircraft in servicegt

Had PwC used the third party consensus forecast of 135 aircraft 540 units (and the 14 March 2007

scenario PwC put to MAC identical to my constituents view) the maths would of course have been

1247 less 540542 = 707 705 spare units required for amortization (Actuals at 31 Oct 2011=723)

Can I now recommend you access and open this document untruthful industry PwC logic+maths wrong

Particularly pages 2- 4 are relevant on the PwC FIVE points

1 PwC basic mathematics errors 2 PwC logic ndash failed to use aircraft in service dates


(apparently relying instead on Magellan management ldquohearsayrdquo) When points 1 2 and 3 are calculated properly (whilst continuing to assume the erroneous 40000 flying hours before repairs (ampBER repairs) together with the absurd PwCFI total production unit build forecast equivalent to 221 A340-500600 aircraft -882- before production cessation in FY2015) about 650 units or MORE THAN 50 LESS hellip than the 1572 PwC had calculated

4 PwC used only ONE production build forecast (consciously ignoring the customer production plan 6 other third party forecasts A340-600 cancellations from airline customers which PwC audit general and specialist press publications and MAC Board approved 30 March 2007 Management Discussion and Analysis at page 14 (MDampAAIFp12) which states

The Corporation relies on customers delivery projections as well as external market forecasts to determine the number of units over which to amortize non-recurring costs Should deliveries not reach the number projected any unamortized balance that remains would then need to be charged to cost of revenues which could have a material adverse impact on the Corporation

now falls to 500 Sparesreplacements and Repairs by FY2021 rather than the 1572 PwC calculated

5 Detail technical data for BETA21S materials - Magellan state they provided two of Dr Thamburajrsquos reports to PwC and EampY I had not seen or heard of these before and I agreed with the view Mr Neill expressed on 27 July 2009 (p96) hellip ldquo I have no clear recollection of actually giving them the documents I would not have seen the value of itrdquohellip will further reduce the 500 by FY2021

As per my ws para 2263 my view was a further 132 SparesBER replacements by FY2021 Mr Bobbi estimated 82-112 Also Aeroncarsquos long-standing estimate of 190 ndash 18 = 172 units was provided to EampY and PwC on 1 March 2007

35

42A Oral evidence from Mr Neill on 27 July 2009 page 120 Line 5-

Mr Little Okay the EAC then chooses to ignore ndash your fourth point just the end of that paragraph

ltdoc 3597 ldquoWe find it difficult to predict the business that would arise from these Repairs and hence we would choose to ignore this in any EAC analysis being done But the business is there and will happenrdquo

Mr Neill The spares Mr Little Yes Mr Neill Yes Mr Little So your point here is we ignore repairs irrespective of the size and for the EAC we

have purely done replacement products which we think are around 800 units Thatrsquos what thatrsquos saying Thatrsquos what yoursquove told PwC

Mr Neill Is that a question

Mr Little I think so isnrsquot it Yoursquove said wersquore ignoringhellip Mr Neill Are you asking me -- interrupts Judge Well the question is really (overspeaking) Mr Neill the question is is that an accurate

statement

Mr Neill I helliphelliphellip hindsight is 2020 and you look at language today and it could be clearer but the point I was trying to make when units are repaired in overhaul hellip are on the line and people buy spare parts to support that we donrsquot normally include that in the EAC calculations But major repairs and the sale of major spares like whole new nozzles and plugs we do

ltwhich Mr Neill knows is contrary to actual accounting policy and PwC para 872 and their separate table of ldquo1572rdquo Spares and repairsrdquo ndash to 365 spares ndash when at Page 97 Line 18 ndash 22 Mr Neill affirms

Mr Little Okay But you know that the PwC report referred only to spares being in the EAC and that

they did not think repairs ought to be I presume yoursquore aware it said that in their

report Mr Neill I know I read these words yes

which followed his evidence at Page 9697 Mr Little Right okay now his ltThamburajgt emails refer consistently to repairs not just

replacements Can you explain more about the EAC makes assumptions that replacements only is in the accounting thatrsquos what PwC and Ernst amp Young have said Can you explain the repairs and the spares replacement bit to the tribunal please

Mr Neill I suspect we-re struggling with nomenclature because wersquove always talked about spares

and repairs in the same breath and the question becomes when does a repair become a spare For example if you have like we have had from Lufthansa if two plugs show up in your shop and you replace 95 per cent of the material thatrsquos in these plugs and you send them back is that a repair or a spare So wersquove always kind of looked upon them in

the same vein I would distinguish between that and spare part pieces individual pieces that we sell to airlines for maintenance purposes when the aeroplanes are actually on the line in service and I suspect that in the EACs when we see spares wersquore actually talking about a combination of spares and repairs That is what my understanding is and thatrsquos what my belief is

Mr Little Okay But you know that the PwC report referred only to spares being in the EAC

and that they did not think repairs ought to be I presume yoursquore aware it said that in their report

Mr Neill I know I read these words yes

36

Mr Neill had read this is in the PwC report at para 872














1247 less 540542 = 707 705 spare units required for amortization (Oct 2011 = 723)

Can I now recommend you access and open this document untruthful industry PwC logic+maths wrong lt in re-examination by Mr Lynch QC page 136 Line 9 ndash 25 and page 137 Lines 1-12 Mr Lynch Why did you consider it important to make it clear to PwC ltthat there are not regulatory

provisionsgt

Mr Neill Because I did not want anybody to misunderstand the basis of the forecasts that we were assuming Remember the analysis was did we ndash would we have enough units in the forecast to recover all of the money invested in non recurring costs And I thought I took almost a worst case scenario and 190 units and the best case scenario with 800 units and said between these two numbers there will be quantity produced in support of spares and repairs which will more than satisfy the non-recurring costs Let me add on

other thing Brian picked me up on the second paragraph on the word recommended but

if you look at the phrase its says quite clearly itrsquod predicted and recommended life and I think that should have given a signal to PwC that 60 (40) thousand hours was not a regulated or mandatory life for the components

Mr Lynch In that same paragraph you say that you ignore repairs because theyrsquore rather uncertain

in terms of predictions what did you have in mind when you used that word repairs

Mr Neill This is when I made the 2020 comment I was really talking about the repairs that an airline on an overhaul centre would make it was in their own premises and only called on to plant for spare parts to support that I was really not talking about the major or heavy repairs that would be undertaken by Aeronca as the manufacturer

37

So Mr Lynch QC was consciously aware that Mr Neill has now given his 27 July 2009 evidence that the numbers are for BOTH Factory Repairs and Spares and the accounting position relating to Spares only Despite that 27 July 2009 evidence Magellanrsquos solicitors and Mr Lynch QC subsequently repeat the Spares theme in parts 1C-1F

You will also recall from earlier and on Mr Littlersquos website In part this accounting treatment is because other companies such as the global number 1 supplier

of engine nacellesexhaust systems Goodrich (also audited by E amp Y) provide a Repair amp Overhaul

service for the A340Trent 500 engine Exhaust plug and nozzle to the airlines

42B Mr Neillrsquos oral evidence on 27 July 2009 continued from page 121 Line 14 ndash 24 to P123 line 25

Mr Neill I think you want me through the to show you that there was an error in the second

line of their (PwC) calculations which would reduce the number so on the basis of thats what they did youve interpreted it that way and I would have to agree with you right

now but it still doesnt change the overall basis of the EAC that we had more than the necessary 1250 or whatever the number was mentioned in this email to get all the amortization completed

Mr Little Rich just so were both on the same wavelength the evidence youve given is that the ltPwC table para875 for 1572 Spares and Repairs by FY2021gt you didnt correct and

both of us believe that its probably wrong Youve said independently in this email that youve done a calculation ltreferring to this doc 3605Hgtthat suggests 800 units on a replacement basis on 40 thousand hours is what is in the EAC and what Im saying is if that is true and everything has changed at 40000 hours purely for spares that would meet the 1247 which is your point but its only in that situation that everything is getting replaced at 40 thousand hours without exception No

repairs nothing straightforward replacement Thats what your emails are saying

Mr Neill I think were 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 didnt go back and check in detail every calculation that followed that All I was saying was that if you took Dr Thamburajs 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 Thats what I was trying to say in the opening paragraph (of his email dated 29 March 2007 at document 3597)

Mr Little Irsquove heard what yoursquove said we have your evidence Earlier in this afternoonrsquos evidence you made a remark to this is the worst case scenario and is for the hot and high and damaged products Was where the 40 thousand hours came from okay

Mr Neill Yes

Mr Little So what yoursquore saying is yoursquove 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 assume 800 units are needed then you have to assume the whole fleet will need that kind of replacement and that will occur if airlines operate in difficult situations or conditions where therersquos significant deterioration

38

However to get beyond the 1247 which was the amount needed as I understood it at that time to amortise out you only needed 190 units and the point I was making to PwC was that to exceed 190 units should be something that is quite credible because now you no longer have to rely on the worst case condition you can look at other events occurring like wersquove seen in the past 2 years that would suggest that they will be the repairs and spares bought to support the fleets

Mr Little My position is that you knew full well there was never going to be anywhere near those production levels in that programme never anywhere near it from about July August 2006 Which is precisely what we discussed on 8 August lt2006gt

42C and on 27 July 2009 at Page 125 line 21-25 and Page 126 Line 1-7

Mr Little The question is how come everybody doesnrsquot understand the magnitude of that problem in the industry Rich And Magellan donrsquot seem to be doing something about it within their engineering and the quality process

Mr Neill And the answer is I think that only time will tell whether Dr Thamburajrsquos tests and the coupon tests 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 hellip to undergo a major repair and as I say time will tell that

lt I have reproduced a relevant paragraphtext at Paragraph 188 below about the PwC calculation of demand for 1572 Spares and Repairs in the Magellan Final Submissions by Mr Lynch QC on 1 July 2011 to the UK Employment Tribunal

ldquoIt is for these reasons that the Respondents respectfully invite the ET to find that the PWC report is indeed a work of thoroughness and reliability This does not mean of course that it is suggested that there are no slips at all in that Report It would be wholly unrealistic to suppose that that could be the case Thus for example it is acknowledged that PWC did make a slip in its calculation of replacement

units for the A340 This topic is discussed between paragraphs 863 ndash 878 of the PWC Report However as the ET will be aware PwC calculations of the likely number of further units for the A340 far exceeded the number required to justify MACrsquos calculations and accounting As a result the slip referred to above is not material to the conclusions reached by PwCrdquo

now read the extract from Mr Littlersquos website ndash opening screen

A340 quantities ndash ldquomanagement assertsrdquo ndash PwC para 872876 (1572) ndash untruthful industry PwC logic+maths wrong (open and read document ndash 15 pages) see again page 34 here for the five points

This conduct and approach was in repeated in the example of A340 pricing ndash ldquomanagementrsquos assertionrdquo ndash PwC para862b ndash maths wronguntruthful 1 Revenue increases from Q2-Q42006 of C$8470K for FY2007-FY2012 could not support Magellan

management assertion to PwC basic analysis by PwC

2 PwC basic mathematics errors audit testing failures in sales prices in Q42006 EAC

3 PwC fail to obtain BETA21A material quotes to support Q42006 independent verification and assumed increases from Q22006 ndash 10 pa increase from FY2007 to FY2012

39

Point 4 Other information and Pricing status at August 2006 prior to my termination which is relevant in Q2 (BL Observation The reader should note my written evidence (Website Part B para 205) which states ldquo In a conversation at Farnborough Airshow in July 2006 with Mr Butyniec held after he had met Aircelle representatives to try and progress the commercial negotiations on the application of the pricing escalation formula he said he too was concerned about MACAeronca ever recovering its NRC investment on the A340-500600rdquo Mr Butyniec andor the Respondents counsel Mr Lynch QC never challenged this evidence in court Mr Butyniec had explained that he was skeptical (perhaps even cynical) about pressing for the arbitration route in Europe ndash they had not done so in their prior March 2005 amended commercial settlement (see history in Part D Exhibit 81 document) which brought into existence this escalation formula I was the only Magellan person with prior experience of European arbitration via ShortsBombardier and it was really only Mr Furbay (Aeronca CFO) and myself who were convinced we needed to do this to get a proper overall pricing settlement for FY2006 etc and appropriate and relevant price escalation arrangements for the future I was also conscious of the limitations of the current escalation formulae in the medium- long term for a MAC perspective (the 031 fixed limit for BETA21 materials escalation Prior to the MAC Board meeting on 8 August 2006 the MAC Directors were provided with a Gross Margin analysis document which showed that the ldquoOperational Efficienciesrdquo across the MAC units reporting to Mr Butyniec were some (C$7460K) below the approved FY2006 budget Whilst price changesincreases across MAC were a net C$1856K ahead of the FY2006 budget for the Aeronca business (A340 amp A380) some C$1036K in price increases had not yet been definitively secured In part and as a result of these deteriorating FY2006 results Mr Butyniec produced his Best and Final Offer (BAFO) commercial letter proposal for settlement immediately following the MAC Board on 1114 August 2006 with the approval of Mr Dekker Mr Neill and Mr Edwards ndash see website Part D (c) CD2 extracts with the relevant contemporaneous documents and sent it to Aircelle It was not discussed or approved at the MAC Board on the 10 August 2006 in the minutes or whilst I attended it throughout or before the Q22006 results were published) Point 5 Amortisation $ per unit shipped in FY2006 ndashPwC analysis approval of MAC and EampY prior conduct ltFor information Magellan Aerospace Corporation used only a fixed amortization amount of $30000 per exhaust unit in FY2006 ndash which if continued at $30000 per exhaust unit would lead to only 65 recovery of the circa C$40m+ (USD 3825M) inventory on the December 2006 MAC Balance Sheet PwC set this out further in their para 8117 Current production costs per unit are such that at present the pre-amortisation margin generated per unit is not sufficient to absorb an amortization of USD 30000 per unit and still break-even In order for MAC to report an overall breakeven position while at the same time amortising NRC inventory it has been capitalizing that amount of production costs that is necessary to achieve the break-even position each year For this reason ldquoproduction inventoryrdquo for the A340 programme has been increasingrdquo If MAC were to maintain the amortization at $30000 per exhaust system as in FY2006 only $330 million would have been reduced from the total A340 programme asset for the 110 units delivered by MAC in the three years between January 2007 and the end of December 2009FY2009 (Updated 18 January 2011 With aircraft production exhaust units now all delivered a total of 110 production ndash to 131 A340-500600 - production aircraft and 11 spares were delivered by MAC in the four years between January 2007 and the end of December 2010FY2010 or equivalent to $363m) PwC continues at para 8118 ldquoPwC believes that MACrsquos NRC and production inventories should be considered collectively (for a total inventory of USD 382 million) and then

40

amortised from this basis onward Aeronca should also review the NRC amortization factor We believe that this factor should vary with the profitability of each unit As increasing labour and material cost efficiencies are realized in the production process furthermore the amortization rate should increaserdquo This policy does not even appear to be logical and mathematically sound on A340 as PwC recognised earlier in their report at PwC 894 ndash 895 that the current escalation formula ndash under any interpretation ndash would not lead to increased profitability per unit as BETA21S materials costs exceeded 31 of the total cost Those relevant PwC paragraphs are 894 The price escalation formula currently in effect (as per the SA dated 11 March 2005 between Aeronca MAC and HH) directs that the total sales price for exhaust system units will increase by 031 for every 1 increase in the cost of Beta 21S In effect MAC is protected for increases in the cost of Beta 21S providing that the cost of Beta 21S per unit remains equivalent to or below 31 of the total cost of production per unit 895 Given the volatility in the cost of Beta 21S (a titanium compound) there is a risk that in future years the cost of beta 21S could exceed 31 of the total cost of production Indeed taking into account the existing assumptions in the EAC model the cost of Beta 21S per unit would represent approximately 35 of the total cost of production per unit by FY2012 This rising profitcontribution year on year subject is dealt with in some detail at website Exhibit 81 PwC failed to apparently integrate and challenge themselves EampY and MAC on this varying profit per unit policy in its specific implications for A340 amortisation with the escalation formula in place I should also add that it has not been my experience elsewhere that such an approach was countenanced either by management or auditors As above MAC continued to add Labour learning costs ndash after 400+ A340 nacelle sets5 years of production to production inventory (and EampY as their auditors accepted the further US $15m to US $863 million added in the FY2006 Balance sheet to sustain the ldquobreak-evenrdquo ) whilst the Inventories Exposure Draft (3031) which would end this capitalisation was issued by the CICA in August 2006 The subsequent introduction of that Canadian Accounting Inventories Standard 3031 in MAC from 1 January 2008 permitted some C$40m of inventory assets to be written off against retained earnings (approx C$10m of which was for these A340 -500600 program labour learning costs) and the reader can see Mr Dekkerrsquos opening comments at Page 2 and then in his answer to questions regarding Magellan inventory and the new accounting standards from Mr Cameron Doerkson of Versant Partners (p6) and in more detail again by Mr Claude Proulx at Page 8 of the published transcript of that May 2008 webcast for Q12008 Earningsgt Claude Proulx - BMO Capital Markets ndash Analyst Thank you good morning Just again on that accounting change if we look going forward it seems to me conceptually that because you wrote off a cost that your margins will be improved going forward But at the same time when you start delivery and probably you brought up like a bonus for the Joint Strike Fighter or 787 or the Airbus A350 the margins will be depressed So when we look going forward like for the rest of 2008 that C$550000 is that something that we could put in our model for each of the [next three] quarters or ndash Dekker interrupts

John Dekker - Magellan Aerospace Corporation - VP-Finance I guess there is a couple of comments Claude First of all the fact that we had to take that charge against retained earnings does not mean that those were not valuable costs and not anticipated costs Those were costs that we had anticipated when the programs were originally bid and we will still get recovery of those costs going forward As we sit here at this point in time very few of our programs going forward will require learning curves with the current programshelliphellip

41

The primary purpose of this document is to address the assertions of fact made by Mr Rae of

PinsentMasons and set out a response which incorporates the substantive detail and interim

conclusions from the EASACAA investigations and Trent 500 Spares and Repairs and provide a final

opportunity for Magellan andor its legal team to correct any substantive factual errors and potentially

apologise to my constituent Mr Little

If there is any further information to be provided by Magellan to EASA and Airbus and Aircelle for their

consideration then it should be sent immediately

Jim Shannon MP for Strangford

9 November 2011 To Bar Standards Board For BSB complaint submission on behalf of my constituent Mr Brian Little ndash as set out in B in my letter 5 April 2011 (2) ldquoThe Barrsquos Code of Conduct (rule 708 (a) makes it clear that a barrister when conducting proceedings in court is personally responsible for the presentation of his case He must not adduce evidence obtained otherwise than from or through the clients or devise facts which will assist in advancing the lay clientrsquos case and must not make a submission which he does not consider to be properly arguable (Rule 708 (9f) of the Barrsquos Code)rdquo hellipetc

Copy Mr amp Mrs Brian Little

2

He recognises Aeroncarsquos schedule with the 190 T500 Spares and Repairs forecast lt the 65 spares above and their prediction based on design certification life and other projects experience of 125 units (10 for

Repairs returned to Aeronca for Factory Repair but judged Beyond Economic Repair (BER) and justifying spare replacements

after analysis by Aeronca team = Mr Littlersquos category 3gt This was provided from within the Aeronca senior team as an input to the prediction of spares and replacement spares and was their long-standing forecast

A Mr Gilbert and Mr Furbay at Aeronca concluded they could only incorporate the spares they could be reasonably certain of in the number determined for project amortization on A340 at the time Factory repairs would be subject to third party competition would be unpredictable and any NRC recovery in the pricing could only come at a significant commercial disadvantage by tens of thousands of dollars Hence the 1285 units determined for T500 amortisation by MagellanAeronca in their accounting

Though not relevant to you he also comments on A380 and how the sum of 2400 units for amortisation was determined Apparently the accounting policy was then to exclude all spares Though he cannot be certain he recalls that he was told by the General Manager of MALUSA that this policy 2400 had been decided in Toronto HO (Mr Neill Mr Edwards or the Board) at some point in 2002 or 2003 as the A340 was by then facing a fall in projected revenues and their T500 development and unit costs were rising

1B Despite the evidence Mr Lynch QC and you had and have wrongly challenged my constituents ldquoreasonable beliefrdquo based on subsequent events beginning at the first ET hearing in November 2007

Firstly this occurred only under very specific circumstances when PwC asked Magellan to consider the impact of the 135 aircraft build (542 units) series production cessation in 2010 scenario conveyed by Mr Little in his interview with PwC in Belfast Secondly it followed Mr Neillrsquos first documented interview with PwC on 7 March 2007 when Dr Thamburaj was asked to produce a view given specific assumptions by Mr Neill Mr Dekker met PwC then too

The direct result of which was that Mr Furbay at Aeronca was instructed by Mr Neill to produce a Spares schedule which now stated ldquo Aeronca estimates based upon exhaust system life of 40000 hoursrdquo It was now inflated from the long-standing 190 units to a minimum of 886+ units Mr Furbay created it on 14 March 2007 His email to PwC on 29 March 2007 was quite clear most importantly in its interpretation by Mr Lynch QC during his cross examination of Mr Bobbi on 8 June 2009 I extract some of this and replicate it at Points 11-14 (page 10) for example Page 65 states

Mr Lynch QC ldquoWe have Mr Neillrsquos email to Mr Moore of PricewaterhouseCoopers I know itrsquos a bit compressed in its typescript Tribunal of course there is a bigger version in the bundle if thatrsquos a bit small to read (Pause) ltdoc 3597hellip in referring to doc3605H ndashAeronca estimates based on 40K lifegt


Pages 72 and 73 line 1-3 states Mr Lynch QC ldquoRight So itrsquos plain isnrsquot it that PwC did indeed examine and accepted for accountancy purposes the validity of

Dr Thamburajrsquos calculations yesrdquo Mr Bobbi ldquoNo thatrsquos not Because a component has a ldquolifespanrdquo does not mean necessarily it will be replaced by

something new it can be repairedrdquo Mr Lynch QC ldquoYes Well no I think the whole point is this itrsquos not Dr Thamburajrsquos point was not a question that they will

need repairs after that period Dr Thamburajrsquos point was around 40000 flying hours was indeed the lifespan of the unit That after that itrsquos lifespan was spent and should be replaced That was the pointrdquo

3










4








Dear Mr Shannon


from Mr Little







Quote








System



Unquote





5














approval




6





7
















8










9










10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











3










4








Dear Mr Shannon


from Mr Little







Quote








System



Unquote





5














approval




6





7
















8










9










10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











4








Dear Mr Shannon


from Mr Little







Quote








System



Unquote





5














approval




6





7
















8










9










10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











5














approval




6





7
















8










9










10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











6





7
















8










9










10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











7
















8










9










10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











8










9










10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











9










10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











10








11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











11








Yours faithfully


14 November 2011

12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











12
















13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











13


14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











14


15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











15















16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











16

Paragraph 169


Paragraph 170


Paragraph 171


Paragraph 172







the BSB for



17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











17





In his Report ndash









18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











18






31B and on p438












19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











19










correct








Mr Neill Yes


Mr Neill Yes



20


















21













32C

Mr Little


Mr Little

Mr Neill

Mr Little









22



















23









24







25






















26











Mr Neill








27










28





29






















30












Judge In the email


Judge Nohellip

Mr Lynch Wait






31











32





33








34
























35








statement














36

















provisionsgt







37















Mr Neill Yes



38















39


40



41











Documents

Final reply to Mr Rae letter dated 24 October 2011