Rivals unite for Israeli jets

Israel's leading arms makers, Elbit Systems and Israel Aerospace Industries, are taking an unusual procurement concept and giving it an ambitious new twist in a deal that will see the Israeli air force lease advanced jet fighter trainers from a joint venture set up by the two rivals.

Through their Tor joint venture, privately-held Elbit and state-owned IAI will purchase either Alenia Aermacchi M-346s or Korea Aerospace Industries/Lockheed Martin T-50s in exchange for a 20-year IAF contract to maintain the selected trainer and supply flight hours.

Elbit already has some experience with such a private finance initiative contract, having purchased Grob G120AI "Snunit" basic trainers in which it sells flight hours to the IAF. When the IAF bought Beechcraft T-6 "Efroni" basic trainers in 2009, it signed Elbit to a 10-year maintenance and operation contract.

BOND ISSUE?

But the Tor deal is thought to be the first time any air force has gone down a PFI procurement route for an aircraft as close to the front line as an advanced jet trainer. And, according to CEO Ilan Harel, Tor may also break new ground in its financing of the venture, with a bond issue.

Tor is not yet being specific about the details of its planning, but estimates of the cost to replace about 34 ageing Douglas A-4 Skyhawks with about 30 T-50s or M-346s range between $750 million and $1 billion, and Tor could be looking to raise some $300 million from a bond issue.

Central to the concept is aircraft final assembly in Israel, to which both KAI and Alenia have committed themselves. Harel says Elbit and IAI have yet to agree how they'll split maintenance work on the aircraft, but "IAI will focus on the final assembly line that will be built in its facilities while Elbit Systems will supply avionics and also build and operate the simulator for the selected trainer".

The programme is moving towards issuance of a request for proposals in July, to allow the IAF to make a final selection in early 2012. The budget for operating the new trainer will be part of the multi-year Israeli defence forces plan set to be approved this summer.

"The IAF wants to have a replacement for its aging A-4s by 2015 and that, in many ways, dictates the timetable of the process," Harel says.

Harel is confident the business plan is a sound one. "Based on the experience gained in [the Snunit] contract I can say that the maintenance of an aircraft by civilian companies results in meaningful savings," he says, adding that a study of the IAF's Lockheed Martin F-16s showed that building sections of the aircraft domestically has saved "many dozens of millions of dollars during the last 30 years.

"We think that building a final assembly line for something around 30 aircraft is logical as this line will ensure that the know-how is kept in Israel for the lifecycle of the aircraft."

Success is crucial to the IAF's plans to introduce Lockheed Martin F-35s during the latter half of this decade, as its A-4s are too out of date to serve as a step into such a fifth-generation fighter; the IAF already has to do its fighter training in its F-16s.

Much clearly depends on Tor's ability to raise the finance it needs to purchase the aircraft and build an assembly line. A joint venture between IAI and the USA's Aviation Technology Group (ATG) to develop a trainer based on ATG's Javelin very light jet collapsed in 2007, when ATG halted operations after failing to raise $200 million in development funds.

The plan had been to develop three versions of Javelin to meet civil and military requirements, with IAI hoping to sell a variant as a replacement for the Israeli air force's CM-170 Zukit and A-4 trainers. Instead, Israel replaced its Zukits with the T-6s now maintained by Elbit.

Since the M-346 and T-50 emerged as leading candidates two years ago, both Elbit and IAI have been angling for a way to participate. However, the two companies are rivals with a history of competing very hard against one another, and the creation of Tor had to be approved by Israel's antitrust commissioner, which strictly restricted the venture to the trainer contract.

Thus, some industry watchers in Israel see the very existence of an Elbit-IAI deal as indication that the world of Israeli defence procurement is changing.