Lockheed Martin's (LMT.N) F-35A, previously considered too expensive, has shot to the front of the line in the race for the contract after the defense ministry singled out a fifth-generation fighter as the preferred option.
The fifth generation F-35A, complete with its hi-tech stealth capability, has already been ordered by seven countries, including Japan and Israel.
Boeing's F-15 Silent Eagle had been in the box seat to win the 8.3 trillion won ($7.7 billion) tender - as the only bid to fall within budget - but former military top brass and even the ruling party's lawmakers had criticized the plane as it lacked crucial stealth capabilities.
"Our air force thinks that we need combat capabilities in response to the latest trend of aerospace technology development centered around the fifth generation fighter jets and to provocations from North Korea," defense ministry spokesman Kim Min-seok told reporters.
A third bid by the Eurofighter consortium's Typhoon was also ruled out for going over the finance ministry's budget. Under South Korean law, only bids under budget are eligible to win defense contracts.
A deal with Boeing or Lockheed Martin was seen as the most likely by experts because of South Korea's close military alliance with the United States against the belligerent North.
The South Korean government and air force will map out a fresh tender process and consider a new budget. The defense ministry said it could take around one year to complete the new tender round.
"DAPA...will swiftly pursue the program again in order to minimize the vacuum in combat capabilities," South Korea's Defense Acquisition Program Administration (DAPA), which led the assessment of the fighters, said in a statement.
FRESH START FOR LOCKHEED
The collapse of the deal, however, means a fresh start to Lockheed Martin, which has recently taken a new order from the Netherlands for the F-35. Britain, Australia, Italy, Norway, Israel and Japan have also placed orders.
Increased production of the aircraft will potentially allow Lockheed to lower its tender bid. Earlier this month, a U.S. Air Force general said he was committed to continue lowering its F-35 program cost.
"We will continue to support the U.S. government in its offer of the F-35A to Korea," Lockheed Martin's South Korean representative said after the decision.
U.S. military officials say the biggest strength of the F-35 is its ability to fuse data from other aircraft and sensors, allowing it to help identify targets for other fighters, and essentially command the battlefield.
South Korea's decision marked a defeat for Boeing, which has spent significant amounts of its own money developing the Silent Eagle variant of the F-15.
Last month, 15 South Korean former air force chiefs signed a petition opposing the selection of F-15, saying it lacked the stealth capabilities of more modern aircraft.
Boeing said in a statement it was deeply disappointed by Tuesday's decision, saying it had rigorously followed the DAPA's instructions throughout the entire process.
"We await details from DAPA on its basis for the delay while evaluating our next options," Boeing said.
A DAPA official said South Korea had followed the rules in the bidding process, but declined to comment on possible legal action by Boeing.
A local representative of the Eurofighter consortium said it would participate when the project restarted.
The DAPA had earlier estimated that any delay in the tender process could leave the South Korean air force 100 fighters short of the 430 jets deemed necessary by 2019.
Given delays that pushed back first delivery by three years to 2017, and a total budget fixed without wriggle room, top decision-makers had been keen to buy jets as soon as possible to partially replace ageing F-4 and F-5 fighters and maintain combat capabilities.
($1 = 1073.9500 Korean won)
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