Israel to buy Italy's M-346 jet trainer for $1b

S. Korea threatens to cancel deals because Israel did not choose its T-50 Golden Eagle.

The Ministry of Defense has decided to buy the Alenia Aermacchi M-346 jet trainer for the Israel Air Force, rather than South Korea's T-50 Golden Eagle, jointly developed by Korean Aerospace Industries Ltd. (KAI) and Lockheed Martin Company (NYSE: LMT). The ministry notified the companies of its decision, after the Air Force decided that it preferred the M-346 on the grounds that its performance was better than the T-50.

The deal is worth around $1 billion. An Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) joint venture, Thor, will buy 30 planes, maintain them, and sell air time to the Air Force. In exchange for the procurement deal, the Ministry of Defense intends to demand $1 billion in reciprocal procurements from Italy. The Italians will reportedly procure IAI's advanced AWACs planes and will jointly develop a new reconnaissance satellite with Israel.

The Ministry of Defense said today that director general Uri Shani made the decision to buy the M-346, and that Minister of Defense Ehud Barak still has to approve it. The negotiations on the new jet trainer deal have been extremely tense, especially because of suspicions by KAI executives that Israel had opted for the Italian plane a long time ago.

In light of these suspicions, the South Koreans threatened that if Israel picked the M-346, Seoul would cancel current and future contracts for Israeli defense systems. These deals are reportedly worth hundreds of millions of dollars, and include the procurement of radars, electronic warfare, and missile defense systems.

The defense establishment has said in the past that South Korean claims that Israel capitulated to political pressure from Italy to favor the M-346 were groundless.

A defense source said, "We can hope that South Korea will not cancel future arms deals, and that we won't have to prepare for such an eventuality. The competition was completely transparent."

A top defense official said today that as part of the review of the two bids, Air Force pilots tested the performance of both the M-346 and the T-50, flying them for many hours, and testing them against various challenges. These tests included testing the planes' costs, specifications, maintenance cost, safety, and training quality for cadets. The Air Force found that the M-346 cost less, and a defense official said that it better meets the Air Force's needs.

The defense establishment said that the officials responsible for the deal were well aware of Italy's shaky economic conditions, and that measures for dealing with this have already been coordinated with the Ministry of Finance to prepare a package of guarantees for reciprocal procurements.

In addition to a large arms deal with a country with uncertain economic soundness, an M-346 crashed three months ago at an air show in Dubai. The defense establishment said that the Italians thoroughly invested the circumstances of the crash and presented the results of the investigation to Israel. The investigation found that the plane crashed due to an electrical fault that was characteristic of the prototype, but not to the production models.

Nonetheless, the M-346 lacks many flight hours, which is also true of the T-50 even though it is in operational use with the Republic of Korea Air Force.

Published by Globes [online], Israel business news - www.globes-online.com - on February 16, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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