High-Stakes Dogfight : Lockheed Battles McDonnell Douglas to Win $1.8-Billion Fighter Plane Contract With Israel

Battling for what could be the last big foreign order of fighter jets for the foreseeable future, Lockheed Corp. is lobbying Israel to reconsider a tentative decision to purchase up to 20 fighter planes from rival McDonnell Douglas Corp. for $1.8 billion--a deal that Calabasas-based Lockheed thought it had all but sewn up several months ago.

The battle is significant for the two aerospace giants, the last remaining U.S. makers of fighter jets. Although McDonnell Douglas won’t comment on the Israeli deal, Paul Guse, a company spokesman, said: “In the industry, it’s certainly acknowledged that there are going to be fewer and fewer sales potentials. So every sale is important to companies.”

And they are critical to Lockheed because the federal government has said that after 1994 it will order no more F-16s, the type of plane Lockheed wants to sell to Israel. “They’re battling ferociously to get additional business,” said analyst George Podrasky at the investment firm Duff & Phelps.

Israel is expected to announce its decision by February.

Meanwhile, it’s an old-fashioned aerial dogfight between the two companies. When Israeli Prime Minister Yitzhak Rabin visited the United States last month, Lockheed Chairman Daniel Tellep met with him in New York in an appeal to allow the company to prepare a new proposal for the F-16 that would accommodate Israel’s changing defense concerns.

Joe Stout, Lockheed’s spokesman for the F-16, confirmed the Rabin-Tellep meeting. Stout said that Lockheed might offer to enhance the F-16 with some technology from Lockheed’s F-117 stealth fighter jet, which played a major role in the Persian Gulf War with its pinpoint bombing accuracy and ability to fly undetected by radar.

In recent years some big sales of defense planes to foreign governments have helped American contractors avoid even bigger layoffs in the wake of declining U.S. defense spending. Last year, Saudi Arabia agreed to purchase 72 McDonnell Douglas F-15s for $5 billion, and Taiwan ordered 150 Lockheed F-16s for $5.8 billion. Also, Finland last year purchased 64 McDonnell Douglas FA-18s for $3 billion, and Switzerland ordered 64 of those planes in June for $2.3 billion.

But opportunities for more foreign sales are dwindling, said David Vadas, an economist at the Aerospace Industries Assn., a trade group. “The major powers that have the cash to spend have made their orders, which are going to consume their resources for at least a few years. So the Israeli deal is the last potential sale of that size.”

The F-16 is manufactured at Lockheed’s Fort Worth, Tex., operation, which it acquired earlier this year from General Dynamics Corp. About 17,000 workers are employed at the division, but Lockheed expects that number to fall to 13,000 by the end of 1994 as production slows.

At its peak in the mid-1980s, the division produced about 180 F-16s a year. But this year Lockheed will deliver 91 F-16s, and in the 1994 federal budget only 12 planes have been ordered by the United States, which Lockheed expects to deliver by 1997.

Since the first F-16 was produced in the late 1970s, Israel has purchased 210 of the planes, said Stout.

Stout said Lockheed began bidding about 18 months ago for the latest Israeli contract, which would use U.S. military financial grants to pay for the planes over 10 years. At the time, Lockheed’s competition was McDonnell Douglas’ FA-18 naval attack fighter.

Both Lockheed’s F-16 and McDonnell Douglas’ FA-18 are high-speed jets that have been used to enforce the “no-fly” zones over Iraq and Bosnia. The two aircraft are often pitted against each other for defense contracts because of their similar capabilities.

“Several months ago, it became apparent to us that Israel had lost interest in the FA-18,” Lockheed’s Stout said. “It was apparent that we won that competition.”

But after the Israeli-Palestinian peace accord was signed in September, Lockheed heard that Israel had begun considering buying McDonnell Douglas’ F-15E instead. That plane is capable of flying longer ranges without refueling, a feature thought to appeal to Israel because its defense concerns had shifted to potential adversaries farther away. “This took us by surprise,” Stout said.

Soon after, the trade press reported that McDonnell Douglas had won the order for the F-15Es. Israeli officials could not be reached for comment.

About 5,000 McDonnell Douglas employees work on the F-15, most of them in St. Louis, which is where the company’s headquarters are located. U.S. sales of that plane have also been winding down, from a peak of 124 delivered to the Air Force in 1977 to 14 in 1993. The F-15 was also used in the Gulf War, for air-to-air combat and precision bombing missions.

Stout said another factor Lockheed will stress to Israel is the lower cost of the F-16, relative to the F-15. For its $1.8 billion, Israel could purchase about two to three times as many F-16s, he said.

Israel has agreed to give Lockheed time to prepare its new proposal, Stout said. Although a decision is expected within two months, analyst Wolfgang Demisch at the investment firm BT Securities Corp. said there could be delays as Israel tries to get the best deal possible.

There has been speculation that Israel might split the order by buying some new McDonnell Douglas F-15Es and some used Lockheed F-16s. However, such an arrangement would not benefit Lockheed.

Securing an Israeli contract for new planes, along with other, presumably smaller foreign sales, would help Lockheed keep production going on the F-16, Stout said. That’s important because Lockheed believes the U.S. Air Force might begin buying F-16s again in the next decade as older planes are retired.

“It’s very unlikely they’ll have any airplane they can buy in that number to replace the F-16,” Stout said.

For McDonnell Douglas, losing the Israeli contract would be an added blow to a company also facing intense pressure from the Pentagon over its troubled C-17 cargo plane. Last week the Pentagon told McDonnell Douglas that it must correct the problems with the plane or the government will seek another contractor for the multibillion-dollar program. A possible replacement for the C-17 is the C-5B, built by Lockheed. However, McDonnell Douglas’ FA-18 continues to enjoy strong support in Congress and at the Pentagon.