S. Korea picks Boeing for spy aircraft project

-- South Korea on Thursday chose Boeing Co. of the United States as the sole bidder for its big-ticket project to procure surveillance aircraft, dropping Israel's IAI ELTA out of the competition.

"The Defense Acquisition Program Administration (DAPA) selected Boeing's B-737 model as (the only model) well-equipped enough for the AWACS project," said Lee Yong-chul, deputy chief of the DAPA.

However, Lee said DAPA will only be able to announce whether Boeing is the winner of the project next month after the two sides complete price negotiations for the contract.

Successful price negotiations would enable Boeing to win the the 2 trillion won (US$2 billion) E-X project, which aims to introduce four surveillance planes to South Korea by 2012.

"Price negotiations will certainly determine the future course of the project. If the two sides fail to see eye-to-eye on prices, a state committee of defense industry promotion will have to decide whether to go back to the drawing board," Lee told reporters.

On July 13, South Korea gave IAI ELTA until the end of last month to remove any restrictions on a U.S. export license, putting off its decision on whether to disqualify the Israeli company from the country's project, code-named E-X.

The Israeli firm failed to meet the deadline and submitted two letters of statement to the Korean authorities on Wednesday.

"But IAI ELT did not provide a guarantee for removing restrictions on the procurement of system integration in its U.S. export license, so we had to disqualify the firm from the competition as we warned earlier several times," Lee said.

In June, South Korea gave a green light to two surveillance plane models vying for the project, but it asked the Israeli company to ensure it could obtain an export license on a par with that of Boeing when it sets forth the terms for the contract, as well as accept a penalty clause if it fails to comply. Boeing has no conditions attached to the license.

DAPA has warned IAI ELTA that if it fails to secure the restriction-free license it will result in the company's elimination from the lucrative E-X program.

But IAI ELTA questioned the fairness of the bidding war for the project, claiming the country has created a favorable environment for its U.S. rival.

U.S. aircraft giant Boeing has been fighting an uphill battle with the relatively obscure Israeli manufacturer to win the procurement project.

South Korea had originally planned to conclude the deal in June at the latest after selecting the winning bidder in mid-June, amid indications that the supplier could be a non-U.S. company.

IAI ELTA's qualifications, however, came into doubt earlier this year, as it was said to have failed to provide all the U.S. licenses needed to export the surveillance aircraft.

Boeing officials complained that the South Korean authorities are applying different rules to Boeing and IAI ELTA, saying Boeing has submitted all the necessary licenses while the Israeli company failed to do so.

IAI ELTA and its U.S. partner DRS submitted the export license to sell Datalink equipment, which can identify other aircraft, and the Satcom ground satellite communication system. They are to be installed in its G-550 model.

But Boeing questioned whether the license is sufficiently exclusive, saying it does not cover all of the sensitive items made in the United States for exporting the Israeli model.

The export licenses have become a key issue in South Korea, as IAI ELTA was still awaiting U.S. approval for its overseas sales after South Korea postponed the deadline by which it was supposed to choose a winner for the coveted project from the first half of this year.

The delay fueled speculation that IAI ELTA was favored to win due to its alleged price advantage, although South Korea said both sides failed to submit the necessary documents on satellite communications and other key equipment to be installed. The selection had earlier been delayed from January to December last year.

The surveillance plane project is aimed at strengthening the aerial surveillance capability of South Korea, which is still technically in a state of war with North Korea since the 1950-53 Korean War ended with an armistice instead of a peace treaty.

South Korea plans to deploy the first two surveillance planes in 2009 and the other two in 2011. The country now depends on U.S. radar aircraft based in Okinawa, Japan, as it has no aerial warning systems of its own.

Seoul, Aug. 3 (Yonhap News)