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Exclusive: Brazil jets deal heats up as Boeing freezes bid

A pedestrian walks past the Boeing World Headquarters office building in Chicago April 26, 2006.
A pedestrian walks past the Boeing World Headquarters office building in Chicago April 26, 2006.

By Brian Winter

SAO PAULO (Reuters) - Boeing has frozen the price on its bid for a multi-billion-dollar Brazilian air force jet contract, sources close to the deal told Reuters, as the global race to sell military hardware to emerging economic powers becomes more competitive.

Boeing is offering to sell its F-18 fighter to Brazil for the same price per plane as its previous offer during a round of bidding in 2009, the sources said. They spoke on condition of anonymity because of the sensitivity of the bidding process.

The sources declined to divulge the dollar amount of the bid, which includes the cost of the plane as well as some future maintenance and replacement parts. But the offer essentially means that Boeing would assume the cost of inflation over the past two-plus years, while the planes would be more than 12 percent cheaper for Brazil in real terms compared to 2009.

"It's an unusual move ... that shows how much value is being placed upon this contract," one of the sources said.

Boeing is competing with France's Dassault and Sweden's Saab for the Brazil deal, which is expected to be worth more than $4 billion over time. Brazilian Defense Minister Celso Amorim told Reuters in January that he hopes the government will make a decision in the first half of 2012.

Boeing's offer illustrates how U.S. and European defense firms are aggressively pursuing deals in the developing world as their markets dry up at home due to budget cuts. Companies are also disputing jet contracts in the United Arab Emirates, Qatar and South Korea.

Dassault last week entered exclusive talks to sell its Rafale to India, which could lead to the jet's first foreign order. The deal could make the Rafale a more viable option in the Brazilian bidding process, since an established production line would allow Dassault to offer more stable pricing over time and reduce the risk of cost overruns.

The Brazilian deal will be decided by more than just price. While the F-18 is widely believed to be cheaper than the Rafale, Amorim has said that Brazil will base its choice primarily on how generously the companies offer to share their proprietary technology. Brazil hopes that knowledge will help it build a homegrown defense industry, led by Embraer, which is making a return to its roots by investing in military aircraft.

President Dilma Rousseff also sees the deal as a key decision in Brazil's strategic alignment during the next few decades, officials have said. The planes will be used to help guard Brazil's borders, protect its recently discovered offshore oil fields, and project greater power as Latin America's largest economy continues its climb into the world's elite.

A spokesman for the Brazilian government did not reply to a request for comment. Boeing spokeswoman Marcia Costley said: "We're in a competition and can't comment on the specifics of our offering but what I can say is that Boeing can guarantee a price that has been trending downwards because we have an active production line and can leverage economies of scale."

OUTCOME UNCLEAR

Amorim's recent comments suggest that the Brazilian deal is entering its endgame after more than a decade of intrigue and last-minute surprises.

Rousseff's predecessor, Luiz Inácio Lula da Silva, all but declared Dassault the winner late in his presidency but left office without finalizing the deal. Rousseff then appeared to favor Boeing in comments shortly after taking office in January 2011, but recent developments including Dassault's India talks mean the final decision is now anybody's guess.

Brazilian newspaper Folha de S.Paulo reported this week that the government is leaning toward the Rafale again, though it did not provide a source for the information.

Rousseff is likely to personally lead the decision-making on the contract, Amorim said in January.

The decision may come at a moment when Rousseff will be under unusually heavy pressure to be cost-conscious. The government is expected to freeze about $30 billion in budget spending in the next few weeks, equivalent to just over 3 percent of this year's budget, in an effort to cool the economy and help contain inflation.

The budget freeze will likely be unpopular among members of Congress who will see their discretionary funds cut. That means that Rousseff will need to appear circumspect on other big purchases - including the jets - in order to avert a backlash.

(Editing by Todd Benson and Vicki Allen)

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