South African state arms company Denel is in talks with Airbus about winding down production of parts for the European planemaker's A400M military aircraft, Denel said on Saturday.

Denel, a cornerstone of South Africa's once mighty defence industry, is battling to emerge from a financial and operational crisis. In February it said it could sell stakes in some divisions as part of a strategy to return to profits within two years.

The company has also been trying to renegotiate onerous contracts and exit parts of its business which are no longer viable, after making a 1.7 billion rand ($117 million) loss in the 2017/18 financial year.

Denel said it was yet to finalise terms with Airbus for the winding down of production for the A400M.

"The two companies agreed that the continued manufacturing of aircraft parts by Denel is no longer sustainable in its current form," Denel said in a statement. "Alternative options are now being considered between the two parties."

Denel will try to minimise the impact on jobs at its Aeronautics division, it added.