The U.S. government has not yet provided Korea with a new letter of offer and acceptance agreement to switch the prime contractor to upgrade the country’s 134 F-16 fighters from BAE Systems to Lockheed Martin, although the Korean Defence Acquisition Program Administration (DAPA) was expecting it this month. Meanwhile, BAE Systems told AIN that the company is now reconsidering whether to bid on other international F-16 upgrade programs. Korea’s change of mind is unprecedented in the history of the U.S. Foreign Military Sales (FMS) program, and raises questions about future U.S. international defense sales, according to officials involved in such sales who were contacted by AIN.

DAPA abandoned its first choice of upgrader early last November, after the U.S. government upped the overall price of the agreed FMS by 45 percent, to about $2.5 billion. Korea had previously become the first international customer to choose a non-OEM to modify a fourth-generation combat jet. BAE Systems’ successful pitch was based on its experience upgrading U.S. Air National Guard F-16s, and some unique technology solutions. After its selection of BAE Systems in mid-2012, DAPA held a separate competition for an AESA radar, in which Raytheon’s RACR product was preferred to the SABR offered by Northrop Grumman, the incumbent F-16 radar supplier. The upgrade was originally envisaged as a direct commercial sale (DCS), but Korea eventually opted for an FMS.

BAE Systems told AIN that right up until the Koreans pulled out, it remained committed to the firm fixed-price (FFP) deal that had been agreed in December 2013. The inter-governmental Letter of Offer and Acceptance (LOA) outlined a $1.7 billion program, with BAE to charge $1.3 billion and the U.S. government $400 million. BAE subsequently received a $140 million FFP contract for Phase 1 of the program, providing design, development and other preparations. The company opened a new facility at Alliance Airport in Texas to handle the work, and began construction of a systems integration laboratory (SIL). Two Korean air force F-16s were flown to there in June 2014. Alliance Airport is near Lockheed Martin’s F-16 production line at Fort Worth, and BAE Systems recruited workers and managers from Lockheed Martin.

According to a DAPA spokesman, the U.S. government asked for an additional Won 500 million ($470 million) for “risk management” and increased the amount that would ultimately be paid to BAE Systems by Won 300 million ($280 million).

U.S. DoD spokesman Lt. Col. Joe Sowers told AIN that “cost is never promised or guaranteed in the FMS process. Rather, the U.S. government completes an independent cost estimate to calculate the total cost of delivering the required capability—and not just the equipment itself—to the FMS partner over the life of the program.” Sowers described this policy as a Total Package Approach. “This estimate takes into account the historical cost of similar programs, to ensure the partner understands the expected cost of the program prior to signing a Letter of Agreement with the U.S. government,” he added.   

BAE Systems told AIN that it is closing the Alliance Airport facility, with the loss of 190 jobs. It is contesting, in the U.S. courts, Korea’s belief that the company is required to pay it a bid bond of $43 million. The company told AIN that it has no further information on whether DAPA would restrict BAE’s ability to bid on other Korean programs, a possibility that the company mentioned in its court filing last November.

Lockheed Martin told AIN that it had been contacted by the U.S. government and looks forward to discussing the program with it and with Korea “at the appropriate time.”