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Exclusive: South Korea nearing decision to buy F-35 fighters

By Andrea Shalal-Esa and Joyce Lee

WASHINGTON/SEOUL (Reuters) - South Korea is nearing a decision to buy some Lockheed Martin Corp F-35 fighter jets, but will likely keep its options open for a limited purchase of Boeing Co's F-15, sources familiar with the country's fighter competition said on Wednesday.

South Korean officials could announce their plans as early as November to secure the funding needed to ensure initial deliveries of the F-35 in 2017, according to multiple sources who were not authorized to speak publicly. They cautioned that the decisions were not yet final, and an announcement could still be postponed if the decision-making process hits a snag.

South Korea's fighter competition has been closely watched given its importance to Boeing, which is keen to extend its F-15 production line beyond 2016, and to Lockheed, which is trying to drive down the price of the F-35 by securing more buyers.

Boeing's new F-15 Silent Eagle model was the only bid that came in under South Korea's budget cap of 8.3 trillion won ($7.2 billion). However, Seoul last month rejected that offer and said it needed a fifth-generation warplane that is nearly invisible to enemy radar - a move widely seen as an endorsement of the F-35.

Europe's Eurofighter also plans to bid again for the order, but the head of Europe's EADS acknowledged last month that the company faced a tough battle against its U.S. rivals.

South Korean officials have said they are examining a mixed procurement approach that could help Seoul maintain sufficient numbers of fighters in its fleet if the F-35 runs into further delays. They are also looking at scaling back the size of the order to 40 or 50 planes.

Analysts say Boeing is now offering Seoul a range of options for an upgraded F-15, instead of the more expensive Silent Eagle variant the company initially proposed, although the Silent Eagle version remains an option.

South Korean officials are under pressure to commit to at least some F-35 purchases soon, given their own budget deadlines, and the need to start buying certain "long-lead" materials needed for any jets that would be delivered in 2017.

However, Seoul may put off, at least for now, whether to buy a smaller number of F-15 variants, the sources said.

"South Korea will need to decide on a plan as soon as possible in order to secure (the project's) budget for next year," said one source with direct knowledge of a task force set up last month to review options for the delayed fighter jet buy.

U.S. officials say South Korea must make a commitment by the end of 2013 to secure a place in the ninth low-rate production contract for F-35 jets and ensure delivery of the first planes in 2017.

The Pentagon needs to include any South Korean jets in an advanced procurement contract for "long-lead" items, such as titanium parts, said a source familiar with the F-35 program.

Four additional sources familiar with the South Korean process told Reuters that they expected an announcement by early November. Two other sources expected a decision by year's end.

South Korea's parliament must put in place concrete acquisition plans by December to ensure funding for an initial batch of jets, which would have to be ordered in 2014.

Sources said South Korean officials were ordered to keep mum in order to prevent media scrutiny from swaying the discussions, after public pressure was seen to have played a part in Seoul's rejection in September of Boeing's bid to supply 60 warplanes.

Executives from Boeing, Lockheed and Europe's EADS are in South Korea ahead of the Seoul International Aerospace and Defense Exhibition, which runs from October 29 to November 3, but the sources do not expect a decision during the show.

One of the sources said Seoul was expected to commit to buying F-35s without specifying an exact number, leaving open the possibility of a mixed fleet.

A second source said Seoul was still eyeing some F-15 orders to avoid a "fighter gap" if F-35 deliveries were delayed, and to address growing safety issues with its older F-4s and F-5s.

"Korea is concerned about quantity and (getting) capable aircraft delivered on time, which is why they are considering a mix, with some variant of the F-15," said the source.

While Seoul considers a new path, Boeing has begun to back away from the F-15 Silent Eagle model, focusing on other possible upgrades to create a more advanced, albeit less stealthy, plane, according to industry sources and analysts.

The company has scaled back the team that had been working on the Silent Eagle variant while it awaits instructions from Seoul and the defense ministry, industry sources said.

Richard Aboulafia, analyst with the Virginia-based Teal Group, said the Silent Eagle would have been essentially an "orphan plane" since there would have been only a very limited number of those planes in service.

Prospects for an even smaller order meant the plane's nonrecurring development costs would have to be spread over fewer planes, raising their overall cost, he said.

Asked about the quiet retreat from the Silent Eagle model, Boeing spokesman Conrad Chun said only, "We stand ready to work with Korea on a solution that best meets their requirements."

Lockheed said it would continue to support the U.S. government in its offer of the F-35 to South Korea. Officials at the Pentagon's F-35 program office said they were keeping a close eye on Seoul's interest in the F-35, but had no further details.

(Additional reporting by Siva Govindasamy in Singapore; editing by Matthew Lewis)

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