South Korea, Pentagon Kill BAE F-16 Upgrade Contract
WASHINGTON — At the request of South Korean officials, the Pentagon has officially canceled an F-16 upgrade contract with BAE Systems, paving the way for South Korea to recompete the program for competitor Lockheed Martin.
South Korea’s arms agency says it “temporarily halted” the contract with BAE, not canceled it. But the move is construed as a de facto cancellation here.
The Pentagon announced Wednesday that the contract, which covered “Phase 1” of the planned upgrade of 134 KF-16 jets, would be terminated “for convenience.”
Because the contract was conducted through a foreign military sale, the US government had to cancel on behalf of South Korea, but the move is driven at the behest of Seoul, which two weeks ago began complaining of unexpected price increases on Phase 2 of the planned upgrade.
Kim Si-cheo, a spokesman for the South Korean Defense Acquisition Program Administration, said “after consultations with the US government, we told BAE Systems to suspend the upgrade work, based on an assessment that it would be better not to be continued any longer under the current situation.”
The spokesman said his agency is in talks with the US over the cost issues.
“No decision has been made regarding the cancellation of our government’s contract with the US,” he said, adding it will re-consider cancellation of the deal should the upgrade work proceed as agreed to in the original contract. “We will make a final decision after a thorough review of the costs that have already been spent and other financial issues.”
Kim said his agency will start negotiations with Lockheed Martin for a fresh deal to upgrade the fleet of 134 KF-16 aircraft.
“We’ll review how much it would cost if a contract is signed with Lockheed Martin, but our best-case scenario is to keep the original contract with BAE Systems.”
When BAE won the contract, which includes a series of avionics and radar upgrades, it was seen as a major breakthrough for the company. Lockheed Martin, the prime on the F-16, was thought to have a lock on the lucrative upgrade market for the jet. The program appeared to be on track through most of this year, as Phase 1 began and negotiations for Phase 2 got under way.
So it was unexpected in October when top South Korean officials began publicly complaining about what they described as hidden cost jumps. Military officials there claimed the US government added about US $470 million and BAE Systems about $280 million in costs that were not part of the original agreement for Phase 2.
What seemed like a potentially minor argument over costs quickly spiraled, leading to Wednesday’s official cancellation of the contract.
A BAE spokesman said in a statement the company was “disappointed“ by the decision, and emphasized the work already being completed under Phase 1 of the contract.
“We made it clear throughout the government-to-government discussions that we were committed to our firm-fixed-price contract for the overall scope of work agreed upon by both the US government and Republic of Korea last year,” spokesman Neil Franz wrote. “We remain confident that we could have performed the remaining work on the program in an efficient and cost-effective manner.
“Unfortunately, the program was impacted by Korea’s strict budget limitations and the US Air Force’s conservative approach to the overall program cost.”
The big winner appears to be Lockheed, which has been operating behind the scenes since cracks began to appear between BAE and South Korea.
One source told Defense News that Lockheed has offered significant technical support for Korea’s indigenous KF-X fighter design in exchange for choosing the Lockheed upgrade suite.
A spokesman for Lockheed said any specifics regarding the KF-16 contract would have to be addressed to officials in Seoul, but indicated the company stands ready to step up if required.
“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,” spokesman Mark Johnson wrote in a statement. “You will need to speak to the ROKAF and USG on specific questions regarding their F-16 upgrade program.”
The loss of the contract is bad enough for BAE, but there may be further fallout. One South Korean military official told Defense News that BAE runs the risk of being designated an “undesired firm,” which could limit its participation in future arms deals in South Korea.
It also creates a potentially messy situation for the Pentagon, as a pair 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 under the Phase 1 contract.
The US announcement said the Pentagon would work with BAE to close out the contract; what costs that could involve are unclear.