Cooperation between Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) unit Elta Systems and Boeing Company (NYSE: BA) to produce airborne early warning and control (AEW&C) is being threatened because the project is due for delivery to the Turkish Air Force, "Defense News" reports. Israel's Ministry of Defense has instructed Elta to delay delivery of two of the four sub-systems for electronic support slated to be installed in the early warning aircraft, as part of the US Peace Eagle program for Turkey.
"Defense News" says that some Israeli defense sources fear the incident could inflict long-term damage to trade relations between the US and Israel.
"Defense News" writes that "If Elta cannot deliver the remaining systems for the Turkish program, industry sources here said Boeing may seek alternate suppliers for South Korea and other customers of the 737-based AEW&C aircraft."
Consequently, Elta is pressing Israel's Ministry of Defense to cancel delay of delivery. The instructions, which became valid last fall, also threaten to expose Elta to fines for violating contracts and would tarnish its good name.
"Defense News" recounts that late last year Israel's Ministry of Defense refused to allow Elta and prime contractor Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) to complete delivery of previously authorized long-range aerial photography systems to the Turkish Air Force. The decision cost Elta $55 million, while Elta Systems reported losses of $80 million and a $65 million drop in 2011 fourth quarter net profit as a result of write-offs and other costs associated with the terminated program.
"Defense News" notes that, "Unlike the earlier contract with Turkey, government and industry sources insist Elta's export license to Boeing is not suspended is not suspended but rather put on hold pending additional review. In contrast to the terminated long-range pod program, industry sources said the ESM subcontract to Boeing involves a passive, purely defensive system that in now way enhances the attack capabilities of the Turkish Air Force."
There is a danger that Boeing will declare force majeure and kick us out of this prestigious and lucrative program," one industry source said.
An Elta spokesman confirmed that delivery of the two electronic sub-systems had been delayed for "political reasons." He said, "We're trying to work it all out, before it becomes a much bigger problem."
Boeing spokesman David Sloan declined to discuss licensing issues or delivery delays associated with the firm's Israeli subcontractor. He said, "We continue to be on plan for delivery of Turkey's first Peace Eagle aircraft by the end of the year."
US defense sources said that beyond immediate commercial and legal repercussions for Elta, the freeze on deliveries to Boeing carries grave, long-term implications for the future of US-Israeli defense trade.
A former Israeli defense official told "Defense News" that the case, if not resolved promptly, threatens to hamper a high priority US-Turkish program with operational implications for NATO. He said that it might also impede Boeing's ability to perform as required under its $1.6 billion contract with Turkey and discourage other US firms from entering into strategic international cooperation with Israeli suppliers.
Published by Globes, Israel business news - www.globes-online.com - on March 12, 2012
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