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UPDATE 2-Saab wins Brazil jets deal after NSA spying sours Boeing bid

Alonso Soto and Brian Winter
Wednesday, 18 Dec 2013 | 3:48 PM ET

BRASILIA/SAO PAULO, Dec 18 (Reuters) - Brazil on Wednesday awarded a $4.5 billion contract to Saab AB 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 consecutive Brazilian presidencies, will supply Brazil's air force with 36 new Gripen NG fighters through 2023. Aside from the cost of the jets themselves, the agreement is also expected to generate billions of additional dollars in future supply and service contracts.

Saab did not immediately comment on the purchase. In addition to Chicago-based Boeing, France's Dassault Aviation was a contender for the contract.

The timing of the announcement, after a decade of off-and-on negotiations, appeared to catch even the companies involved by surprise.

Brazilian officials said the purchase, one of the most coveted defense contracts anywhere for an emerging market, was sealed after Brazil decided that Saab provided the most affordable option for the new jets as well as the best conditions for technology transfer to local partners that would be necessary for upkeep and service on the jets.

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."

Until earlier this year, Boeing had been considered the frontrunner for the purchase. But revelations of spying by the U.S. National Security Agency in Brazil, including the personal telephone calls and emails of President Dilma Rousseff herself, led Brazil to believe that 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.

Boeing called the decision a "disappointment" in a statement, but added that it would continue to work with Brazil to meet its defense requirements. Dassault declined to comment.

Brazil coexists peacefully with all of its South American neighbors and has no enemies elsewhere. 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 rainforest and massive new offshore oil discoveries.

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

The deal meant serious business, though.

French President Fran├žois 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 ongoing slowdown in Latin America's biggest economy, coupled with Rousseff's expected bid for re-election next year, would delay the purchase until 2015.

Indeed, the decision coincides with pressure on Rousseff from economists, the private sector and political opponents to curb public spending. Having initially stoked government spending in efforts to spur growth, the president now faces growing criticism because of creeping inflation and a worsening outlook for the country's budgetary targets.

Still, the country's current fleet of Mirage fighters, which the new jets will replace, is so old that the air force is in the process of grounding them.

Saab's Gripen NG jet edged out Dassault's Rafale and Boeing's F/A-18 Super Hornet.

The delta-winged Gripen, Swedish for Griffin, was first introduced into service in the late 90's and is currently flown by the Swedish, Hungarian, South African, Thai and Czech air forces, according to the company's website.

Saab says the latest-generation Gripen NG has the lowest logistical and operational costs of all fighters currently in service.

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