September 5, 2014 / 7:16 PM / 5 years ago

U.S. eyes deal with South Korea on F-16 upgrades by year-end: sources

WASHINGTON (Reuters) - The U.S. government hopes to hammer out an agreement with South Korea by the end of the year for the U.S. unit of Britain’s BAE Systems Plc (BAES.L) to carry out $1 billion-plus of upgrades to more than 130 F-16 fighter jets, sources familiar with the discussions said this week.

A South Korean Air Force F-16 fighter jet fires flares during events to commemorate the 65th anniversary of Armed Forces Day, at a military airport in Seongnam, south of Seoul, October 1, 2013. REUTERS/Kim Hong-Ji

The U.S. Air Force has been leading talks with Seoul about the second phase of a contract won by BAE in 2012, when it beat out F-16 maker Lockheed Martin Corp (LMT.N) to upgrade 134 of South Korea’s fighter jets for $1.3 billion.

BAE, the first non-original equipment maker to win such an F-16 upgrade order, is already developing the design for the upgrades under a $140 million contract that includes new radars, mission avionics, higher resolution screens and new weapons.

But the two sides are trying to finalize the pricing and schedule of the second phase of the contract, given some changes requested by South Korea that have increased the cost, said the sources, who were not authorized to speak publicly about the discussions.

“The question now for BAE, the U.S. government and the South Korean government is, can we fulfill the requirements the South Koreans are asking for at the price they’re asking for,” said one of the sources.

The source said South Korea had budgeted money for the project this year, and the goal was to conclude the current negotiations before the end of the year.

“It’s a normal part of any FMS program,” said the second source, when asked about the discussions. “The basic scope of the contract isn’t changing. I wouldn’t expect to see a significant increase in the price.”

Air Force spokeswoman Ann Stefanek said the U.S. government routinely communicates with other countries about weapons systems upgrades and procurements, but declined to address any specific communications between the Air Force and South Korea.

BAE said it was assisting as needed in the talks between the U.S. Air Force and South Korea. “Phase One of the program began earlier this year and is proceeding on schedule, and we look forward to soon beginning Phase Two,” said spokesman Neil Franz.

BAE said in its half-yearly report for 2014 that it expected to wrap up the second part of the contract before year end.

BAE, Lockheed and other companies are jockeying for position in the $10 billion estimated market for F-16 upgrades keen to offset declining orders for new jets.

Singapore and Greece are also weighing F-16 upgrade orders.

Singapore has decided to stick with F-16 maker Lockheed to do the upgrades, an additional source familiar with the matter said, although no formal announcement has been made.

Heidi Grant, deputy undersecretary of the Air Force for international affairs, traveled to Singapore last month for its National Day holiday.

Stefanek declined comment when asked about Singapore’s decision or Grant’s visit there. She said she could not discuss any government-to-government communications.

Reporting by Andrea Shalal; Editing by Richard Chang

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