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UPDATE 2-Pentagon approves BAE sale of F-16 upgrades to South Korea

Andrea Shalal-Esa
Monday, 25 Nov 2013 | 11:21 PM ET

WASHINGTON, Nov 25 (Reuters) - The United States Defense Department has approved a deal under which the U.S. unit of Britain's BAE Systems Plc would upgrade 134 older F-16 fighter jets for South Korea, the Defense Security Cooperation Agency (DSCA) notified Congress on Monday.

The approval is a significant boost for BAE Systems, one of the Pentagon's largest defense contractors, which hopes to win similar deals in other countries that aim to upgrade their current F-16 jets.

It also increases pressure on the original maker of the F-16s, Lockheed Martin Corp, to compete more aggressively on pricing in the hunt for deals to upgrade what are the most widely installed fighter jets in the world.

U.S. lawmakers generally have 30 days to block potential foreign military sales, but in this case the period is 15 days, according to BAE spokesman Neil Franz. Congress rarely acts to block such deals, since arms sales are generally well-vetted before a formal notification is sent.

BAE beat out Lockheed to win the South Korean competition in 2012. The first phase of the deal is valued at $200 million, and covers initial design and development efforts, according to the DSCA, which oversees major foreign military sales.

Coupled with a second phase to upgrade the F-16 C- and D-model fighter jets with new avionics and radars proceeds, the deal could eventually be worth $1.1 billion, according to South Korean media reports.

"The BAE deal potentially sets a precedent that opens the door to similar deals in a dozen other countries," said Loren Thompson, chief operating officer of the Lexington Institute.

He predicted that Lockheed would fight hard for future contracts. "At the very least, it puts pressure on Lockheed's pricing," he said, describing servicing the global F-16 fleet over the next 20 years as a multi-billion dollar opportunity.

Historically, the companies that make warplanes have also serviced them and carried out major upgrades. Given the dearth of major new acquisition programs, weapons makers are fighting hard for all new orders, including deals for upgrades of existing systems.

ROAD MAP

The DSCA said the sale would provide South Korea's air force with a detailed road map for improving the capabilities of its current fleet of F-16s in order to better deter regional threats, strengthen its homeland defense and operate together with U.S. forces more effectively.

BAE welcomed the announcement by the Pentagon agency, saying the congressional notification marked a big step forward in the plan agreed by South Korea and the U.S. Air Force for BAE Systems to carry out the upgrades.

Erin Moseley, president of BAE Systems' Support Solutions sector, said South Korea's decision to award the contract to BAE reflected its confidence in BAE as "a viable, experienced and proven provider of F-16 upgrades and system integration".

BAE has already completed upgrades of over 260 aircraft for the U.S. Air Force, and an additional 50 jets for Turkey, BAE officials said.

At Lockheed, Bill McHenry, head of business development for the F-16 program, told Reuters during the Dubai Airshow last week that the company was aggressively pursuing upgrades and additional sales of new jets around the world.

"One of the good things is we've sold 4,500 airplanes, but that makes us a very big target," he said. "There's lots of competitors who are trying to get into the market."

He said Lockheed's work with F-16 customers in 26 countries and continuous development of new upgrades would allow more customers to benefit from the economies of larger orders. For instance, he said, Lockheed was now testing new upgrade packages that would extend the service life of the aircraft from 8,000 hours to 10,000 or 12,000 hours.

"A competitor, a BAE, may not have all the data or the insight, the technical expertise, or the laboratories that we have," he said.

McHenry said Lockheed had enough orders to keep the F-16 production line running through the third quarter of 2017. But he said he felt confident further orders would emerge that would stretch production until around 2020.

South Korea announced last week that it planned to buy 40 F-35 Joint Strike Fighters, Lockheed's newest fighter, with initial deliveries to begin in 2018.

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