Saab wins Brazil jet deal after NSA row sours Boeing bid

Fabrice Coffrini | AFP/Getty Images

Brazil awarded a $4.5 billion contract to Saab AB on Wednesday to replace its aging fleet of fighter jets, a surprise coup for the Swedish company after news of U.S. spying on Brazilians helped derail Boeing's chances for the deal.

The contract, negotiated over the course of three presidencies, will supply Brazil's air force with 36 new Gripen NG fighters by 2020. Aside from the cost of the jets themselves, the agreement is expected to generate billions of additional dollars in future supply and service contracts.

(Read more: Saab shares soaron Brazil fighter order)

The deal is the largest-ever foreign order for the Saab Gripen, building momentum for a program that has consistently undercut competitors on price, senior executive Lennart Sindahl said in an interview.

Chicago-based Boeing Co and France's Dassault Aviation SA were also contenders for the contract.

The timing of the announcement, after more than a decade of off-and-on negotiations, appeared to catch the companies involved by surprise. Even Juniti Saito, Brazil's top air force commander, said on Wednesday that he only heard of the decision a day earlier in a meeting with President Dilma Rousseff.

Brazilian officials said the deal, one of the most coveted emerging-market defense contracts, went to Saab because it provided the most affordable option, as well as the best conditions for technology transfer to local partners.

The choice, Defense Minister Celso Amorim said, "took into account performance, the effective transfer of technology and costs- not just of acquisition but of maintenance."

"NSA ruined it"

Until earlier this year, Boeing's F/A-18 Super Hornet had been considered the front runner. But revelations of spying by the U.S. National Security Agency in Brazil, including personal communication by Rousseff, led Brazil to believe it could not trust a U.S. company.

"The NSA problem ruined it for the Americans," a Brazilian government source said on condition of anonymity.

A U.S. source close to the negotiations said that whatever intelligence the spying turned up for the American government was unlikely to offset the commercial cost of the revelations.

(Read more: S.Korea military chiefs say want 40 stealth fighter jets)

"Was that worth $4 billion?" the source asked.

The lament echoes recent complaints by Cisco Systems Inc, which said in November that a backlash against U.S. spying hurt demand for its products in China.

In a statement, Boeing called Brazil's decision a "disappointment," but added that it would continue to work with Brazil to meet its defense requirements.

Dassault, for its part, said it regrets Brazil's decision and called Saab's fighter inferior to its Rafale jet.

"The Gripen is a lighter, single-engine aircraft that does not match the Rafale in terms of performance and therefore does not carrythe same price tag," it said.

Saab says the next-generation Gripen NG has a lower operational and maintenance cost than all fighters currently in service. The company has one prototype of the Gripen NG flying and another in production.The Swedish and Swiss armed forces have ordered the updated model for delivery starting in 2018.

Under the terms of their agreement, Brazil and Saab will now finalize contract details within a year. The first jet is expected to be delivered two years later, with about 12 of the aircraft expected each year after that.

Securing vast borders

Brazil coexists peacefully with all of its South American neighbors and has no ongoing conflicts. The country, however, is eager to fortify its military as it considers the long-term defense of its vast borders and abundant natural resources, including the Amazon rain forest and offshore oil discoveries.

"We are a peaceful country, but we won't be defenseless," Rousseff said on Wednesday at a lunch with military officials, where she said the announcement was forthcoming.

Brazil's decision unexpectedly wraps up a tortuous and prolonged decision-making process that had made the negotiations the object of ridicule in some defense circles.

(Read more: Hollande visits Brazil to boost trade, push jet deal)

However, the deal was taken seriously by the competitors.

French President François Hollande personally lobbied for Dassault last week during a state visit. Boeing, for its part, was so committed to winning the contract that it opened a big corporate office in Brazil and named Donna Hrinak, a former U.S. ambassador to the country, as its top executive there.

The timing of the announcement surprised many analysts, who believed that the slowdown in Latin America's biggest economy, coupled with Rousseff's expected bid for re-election next year, would delay the purchase until 2015.

(Read more: Why Brazil's once-booming economy is losing its shine)

Indeed, the decision coincides with pressure on Rousseff from economists, the private sector and political opponents to curb public spending. Having initially increased the federal budget to spur growth, she now faces growing criticism because of stubborn inflation and a grimmer fiscal outlook.

Still, the country's current fleet of Mirage fighters, which the new jets will replace, is so old that the air force this week is taking them out of service. Brazil's government said the money to pay for the jets would not come out of the budget until 2015, after the contract is finalized.

Local partnership

Analysts said the Gripen's cost advantage stems from its relative simplicity compared with competing jets.

"The Gripen is more accessible in terms of technology," said Richard Aboulafia, an analyst at the Teal Group, a Virginia-based research company for aerospace and defense. "It's something Brazil could conceivably build itself."

At the briefing in which they announced their decision, government officials said Brazilian aircraft maker Embraer SA would be Saab's main local partner. The transfer of technology is crucial to help Brazil develop future generations of fighter aircraft.

(Read more: The American dream is alive and well in Brazil)

"There isn't necessarily a need to produce all the parts in Brazil," Amorim, the defense minister, said. "What's important is that specific aviation technology is transferred to Brazil so we can develop it."

The Gripen, which can fly up to twice the speed of sound, will be the first supersonic aircraft made in Brazil.

Still, Boeing's loss is a setback for Embraer's recent collaboration with the U.S. company. Boeing has offered to help with development and sales of Embraer's upcoming military cargo jet, providing a key ally to crack the coveted U.S. market.

Boeing said the decision would not affect the company's ongoing commitment to expand its presence in Brazil or its partnerships with Embraer and other Brazilian companies.

(Read more: Brazil minister to avoid "confusing" accounting)

The delta-winged Gripen, which is Swedish for Griffin, first entered service in the late 1990s and is flown by the Swedish, Hungarian, South African, Thai and Czech air forces, according to Saab's website.

Saab shares rose 1.84 percent to 133 krona on Wednesday, their highest close in 10 days. Earlier in the day, they rose as much as 5.7 percent to 138 krona, a five-month high.

Boeing shares fell 0.13 percent to $135.70 in New York, while Dassault Aviation fell 0.4 percent to 920 euros in Paris.