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Boeing Spurned as South Korea Plans New Tender for Jet Fighters

Sept. 24 (Bloomberg) –- South Korea's weighing up a $7.64 billion purchase of fighter jets - and Europe and U.S. companies are hustling for the biggest combat plane contract up for grabs. Bloomberg's Hans Nichols compares their offers. (Source: Bloomberg)

South Korea said it would hold a new tender for 60 fighter jets after rejecting Boeing Co. (BA)’s bid for the 8.3 trillion-won ($7.7 billion) contract over concerns the F-15SE wasn’t advanced enough to counter North Korea’s nuclear threat.

“South Korea needs measures for retaliation against North Korean provocation,” Defense Ministry spokesman Kim Min Seok said in Seoul today after the decision. “South Korea needs to secure military capability in line with recent aviation technology developments.”

Boeing’s F-15 Silent Eagle, a new model featuring stealth technology to avoid detection, was the only jet that remained in contention after Lockheed Martin Corp. (LMT) and the European Aeronautic, Defence & Space Co. presented bids that exceeded budget guidelines. Another auction will be held “swiftly,” said Baek Youn Hyeong, spokesman for the arms procurement office. The F-15SE may still be considered, Kim said.

South Korea faces North Korea over one of the world’s most heavily armed borders, a legacy of the 1950-53 Korean War that ended in a truce. The contract to build 60 fighter jets would have been South Korea’s biggest weapons deal ever and Boeing already supplies fighter jets to the country.

A Boeing F-15SG Eagle fighter jet is displayed at the Singapore Airshow in Singapore on Feb. 14, 2012. Photograph: Roslan Rahman/AFP via Getty Images Close

A Boeing F-15SG Eagle fighter jet is displayed at the Singapore Airshow in Singapore on... Read More

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A Boeing F-15SG Eagle fighter jet is displayed at the Singapore Airshow in Singapore on Feb. 14, 2012. Photograph: Roslan Rahman/AFP via Getty Images

‘Deeply Disappointed’

The decision is a blow to Boeing, which has invested “significant resources” to improve the performance of the F-15SE, including redesigning its fuel tanks to increase the jet’s range and weapons capability, Howard Rubel, a New York-based aerospace analyst with Jefferies LLC, wrote in a research report today. As of June 30, Chicago-based Boeing had $85 million in potential termination liabilities and inventory tied to an anticipated international order, Rubel said.

“Boeing is deeply disappointed by the Republic of Korea’s Defense Acquisition Program Executive Committee decision,” Boeing said in an e-mailed statement, referring to South Korea’s official name. “Boeing has rigorously followed the Defense Acquisition Program Administration’s instructions throughout the entire process. We await details from DAPA on its basis for the delay while evaluating our next options.”

A Boeing victory would have been the first for the F-15SE over Lockheed’s F-35 Joint Strike Fighter, which is considered part of the so-called fifth generation of fighters. The single-engine jet, the world’s most expensive weapons program, is being bought by countries from the U.S. to Australia to Israel, and is being considered by Singapore, which also operates F-15s.

Fifth Generation

“Lockheed Martin will continue to support the U.S. government in its offer of the F-35A to Korea,” the company said in an e-mailed statement via its local public relations agency.

Boeing rose 0.9 percent to $118.51 at 10:40 a.m. in New York. Lockheed Martin, based in Bethesda, Maryland, increased 0.5 percent to $128.22.

North Korea tested its third nuclear device in February and in March threatened the South and its main ally, the U.S., with a first strike. The growing atomic threat is shifting South Korea’s defense strategy.

“Part of what the Defense Ministry is saying is, ’We’re not sure when they are going to use weapons, but they could use them early in a conflict, and therefore, we have to have a fighter aircraft that can go after those weapons even earlier on in a conflict,’” Bruce Bennett, a senior defense analyst at Rand Corp., said by phone.

Mixing Models

South Korea may consider acquiring a mix of fighter jet models in the future, Kim said during the briefing. The budget for the jet fighter project will also be adjusted, the procurement office said in a statement.

Rubel, the Jefferies analyst, sees several potential outcomes as the jet competition moves into a second round. The South Korean government could raise the ceiling to allow Lockheed Martin to boost its bid, Lockheed could rein in costs, or the price ceiling could be confirmed with Boeing declared the winner, Rubel said.

“While we still like Boeing’s affordable solution approach, and believe that Stealth has limits because of radar advancement, this development does provide Lockheed with some credibility and may expand the F-35 opportunities,” Rubel said.

In 2010, North Korea bombarded a South Korean island near the front-line, killing four people. That incident has led military officials to vow air strikes should another front-line provocation take place.

The purchase of new fighter jets would also boost South Korea’s ability to independently defend itself after the country takes back the wartime command of its 640,000 troops from the U.S. in 2015. That command was given to the U.S. at the onset of the Korean War and has never been returned.

To contact the reporters on this story: Sam Kim in Seoul at skim609@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editor responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net

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