European Aeronautic, Defence & Space Co. plans to improve its bid to sell 60 Eurofighter Typhoons to South Korea, and top Boeing (BA:US) Co. and Lockheed Martin Corp. (LMT:US) when a competition for the combat jets is reopened.
“We expect that through this new process we will re-enter a dialogue that will allow us to optimize the offer,” Christian Scherer, head of strategy at EADS’s defense unit, said yesterday in a telephone interview. EADS leads the Typhoon campaign for the Eurofighter joint venture that includes BAE Systems Plc and Finmeccanica SpA.
The South Korean government yesterday called off a tender for 60 fighter jets after rejecting Boeing’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. The Eurofighter Typhoon and Lockheed’s F-35 entries were rejected earlier on cost grounds.
“You can always improve an offer by making it more suitable to the requirement,” Scherer said. “It is more subtle than just dropping the price. We have plenty of ideas.”
South Korea said it would move quickly to reopen the bidding. Boeing’s F-15 Silent Eagle may also still be considered, Defense Ministry spokesman Kim Min Seok said in Seoul after the decision. Based on the F-15 that entered U.S. Air Force service in 1974, it features radar-evading stealth technology.
Toulouse, France-based EADS faces a big hurdle of winning in South Korea given the country’s close military relationship with the U.S., Daniel Darling, of Forecast International, said by e-mail.
Early Test Case
The European group is trying to recover from a string of losses in India, Japan and Switzerland and has tried to streamline operations to be more successful in export campaigns, with South Korea considered an early test case.
“It is quite comforting that despite the huge political might of the the U.S. we are still standing in the ring,” Scherer said. “What this whole Korean experience is telling us is when we put our heads to it Eurofighter is quite competitive on the export market.”
Boeing said it was “deeply disappointed” by the decision and that it is “evaluating our next options.”
Failure to secure a South Korean contract comes with “significant” potential cost to Boeing, which spent company money on devising the Silent Eagle configuration that includes new tanks, Howard Rubel, a New York-based aerospace analyst with Jefferies LLC, wrote in a research report. As of June 30, Chicago-based Boeing had $85 million in potential termination liabilities and inventory tied to an anticipated international order, Rubel said.
Meanwhile, “the scuttling of the current bidding round is a huge win for Lockheed Martin,” Roman Schweizer, a Washington-based analyst at Guggenheim Partners, said in a note. “The decision immediately puts Lockheed Martin’s F-35 Joint Strike Fighter back into the contest and presumably in the lead.”
The purchase of new fighter jets would 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.
“South Korea needs measures for retaliation against North Korean provocation,” Kim said. “South Korea needs to secure military capability in line with recent aviation technology developments.”
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.
Stealth Trumps Cost
“Concern over the vulnerability of the stealth features Boeing planned to incorporate appears to have trumped worries over the cost of the project,” Forecast’s Darling said by e-mail. If South Korea plans to buy the F-35 it will need to raise its budget, he said.
The budget for the jet fighter project will be adjusted, the procurement office said in a statement.
A focus on a more advanced aircraft will not hinder a Typhoon bid even if the European plane does not provide all-around stealth characteristics championed by the F-35, Scherer said. “The Eurofighter advantage is that in addition to having some stealth attributes it has unmatched self-defense capability meaning if it is threatened it can evade that threat through countermeasures and through its agility and speed.”
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