F-16 Upgrade: Problems With S. Korea-BAE Deal Could Open Door to Lockheed

South Korea is threatening to break an agreement with BAE Systems to upgrade its fleet of KF-16s, opening a window of opportunity for competitor Lockheed Martin to reclaim its dominance in the lucrative F-16 upgrade market.

15th Dec 2014


F-16 Upgrade: Problems With S. Korea-BAE Deal Could Open Door to Lockheed


WASHINGTON AND SEOUL — South Korea is threatening to break an agreement with BAE Systems to upgrade its fleet of KF-16s, opening a window of opportunity for competitor Lockheed Martin to reclaim its dominance in the lucrative F-16 upgrade market.

The Defense Acquisition Program Administration (DAPA) selected BAE Systems’ North American subsidiary in December 2012 as prime integrator to take charge of software and hardware upgrades for 134 KF-16 aircraft. It represented the first time any company had beat Lockheed, the original producer of the F-16, for upgrades to the jet.

Both BAE and Lockheed have built their upgrade packages around new avionics, including dueling sets of active electronically scanned array (AESA) radars. Lockheed’s package features Northrop Grumman’s scalable agile-beam radar, while BAE selected Raytheon’s advanced combat radar. BAE has estimated the worldwide F-16 upgrade market could be worth as much as $10 billion over the next decade, with an estimated 1,000 to 1,300 jets in play.

Now BAE’s contract, which was signed under a foreign military sales deal, is in peril, something DAPA blames on both the US government and BAE Systems asking for additional funds for the work.

“The US government asks for about $470 million, and BAE Systems wants about $280 million,” DAPA spokesman Baek Yoon-hyung said on Oct. 16, referring to costs beyond the $1.6 billion already paid. The US government cites “risk management” for the extra costs, Baek said, while BAE Systems calls for additional costs for a one-year delay in the project.

“We’ve engaged in talks with the US side over the request of extra money since August,” he said. “We believe the US is asking too much.”

If the two sides failed to bridge the differences, the deal could be nullified in the worst-case scenario, he said, adding the issue would be one of the agenda items for the upcoming South Korea-US security talks in Washington.

BAE spokesman Neil Franz acknowledged that “disagreements have recently emerged between the US Air Force and the Republic of Korea about the overall price of the program,” but said the company was “hopeful that a resolution will soon be reached.”

The US Air Force had no comment as of Oct. 17.
An Opening for Lockheed?

But while negotiations are ongoing, Lockheed Martin may already be moving aggressively to capitalize on what appears to be a major roadblock for BAE.

One source with knowledge of discussions said Lockheed is pushing a proposal to include engineering experience for South Korea’s next-generation indigenous fighter to sweeten the pot.

When the RoK agreed to procure 40 F-35A joint strike fighters from Lockheed in September, part of South Korea’s desired offsets package included significant man-years in engineering support for its future indigenous KF-X fighter development program. Under that plan, Korea will produce at least 120 twin-engine fighters by 2025 to replace its fleets of aging F-4s and F-5s.

The RoK wanted around 800 man-years worth of support from Lockheed under that deal, the source said. Lockheed countered with around 300 man-years of support and threw in a new satellite as part of the offset package, due to concerns the company could invest heavily in the KF-X design only to lose all that information to a competitor if the Koreans select a different company to build the jet.

South Korean officials accepted the satellite offer out of a desire to bolster its surveillance capabilities at a time of growing Chinese aggression in the region, but remained interested in more KF-X support.

The source said Lockheed is now dangling another 400 man-years in support for KF-X if South Korea ditches BAE in favor of Lockheed for the F-16 upgrade package. That could well be enough of an incentive to get South Korean officials to abandon their contract with BAE.

“My money is on Lockheed on this one,” the source added.

A spokesman for Lockheed said the company would not “speculate on rumors or comment on hypotheticals,” but did not rule out a play for the contract.

“What I can tell you is that Lockheed Martin values its relationships with its F-16 customers and stands ready to support their current and future needs,” the spokesman said. “We believe we are uniquely qualified as the original equipment manufacturer and design authority to provide best value to our F-16 operators around the world.”

If BAE’s deal with South Korea falls apart, it would be a mirror-image of the situation in Taiwan.

Officials in Taipei selected Lockheed’s offering for its F-16 upgrades as part of a joint program with the US Air Force known as the Combat Avionics Programmed Extension Suite (CAPES).

However, the US canceled its portion of that program this spring, preferring to spend those funds on a service-life extension program instead, leading to frustrations with Taiwanese officials that costs may shoot up without American participation.

BAE has been monitoring the situation, hoping Taiwan would abandon the CAPES program and launch a new competition. Instead, Taiwan appears to have been mollified by US promises to keep the upgrade program on track, and it is BAE which is suddenly at risk of losing a lucrative agreement.

This should not influence Taiwan’s contract with Lockheed Martin to upgrade its 146 F-16 fighters, but could influence the decision whether Singapore and other potential customers of the F-16 upgrade market go with Lockheed or BAE.

According to the DAPA, BAE began the first phase of KF-16 upgrades in June. A couple of KF-16 C/D Block 52 jets have already been sent to a BAE factory in Fort Worth, Texas, to be equipped with an up-to-date mission computer, cockpit-display and other avionics systems.

Phase 2 of the upgrades would involve the integration of the Raytheon AESA radars, ALR-69A all-digital radar warning receiver and weapon systems integration. ■

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