Lockheed Martin Corporation, Korea Aerospace Industry Sign $7.8 Billion Deal With South Korea

LockheedReportedly, the partnership of Lockheed Martin Corporation (NYSE:LMT) and the Korean Aerospace Industry (KAI) has won the bid to manufacture 120 KF-X military aircraft for South Korea. The amount of the bid has been valued at 8.6 trillion won ($7.8 billion) as initial investment, while the total development cost is expected to double. Lockheed’s and KAI’s bid was preferred over the rival bid by Airbus Group (OTCMKTS:EADSY) and Korean Air (KAL).

Lockheed and KAI will design and manufacture 120 Korean Fighter Experimental (KF-X) military aircraft, which will replace the aging South Korean fleet of F-4 and F-5 by 2025. Out of the total, South Korea will fund 60% of the manufacturing costs, and Indonesia, under a bilateral defense treaty with South Korea, will fund 20% of the manufacturing cost. The remaining 20% will be invested by KAI and Lockheed Martin.

Last year too, Lockheed Martin signed a contract with South Korea to manufacture 40 F-35 military aircraft for 7.3 trillion won. KAI officials said that the current version will not be as advanced as Lockheed’s F-35, but it will have competitive price. Airbus has also been delivering aircraft to South Korea – the last contract was to deliver four air refilling tankers for 1.4 trillion won.

Lockheed Martin has been facing sales issues ever since the US reduced its spending on the department of defense. As a result, the company is focusing on the international market to meet its estimates for fiscal’15 (FY15).

South Korea’s Defense Acquisition Program Administration (DAPA) is also looking forward to upgrade its Patriot missile system, and plans to give the contract to Raytheon Co. (NYSE:RTN). Lockheed Martin will have the contract to manufacture the surface to air PAC-3 missile. The total amount of the upgrade is estimated at 1.3 trillion won.

According to DAPA, South Korean budget for military spending has increased. Earlier, a budget of 72 trillion won was announced for 2015-2019, which increased to 96 trillion won for 2016-2020. The increase in the military budget is an opportunity for Lockheed Martin, which it will try to avail in upcoming years.

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