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Exclusive: Canadian review will recommend buying Lockheed F-35 fighter jet - sources

By Andrea Shalal

WASHINGTON (Reuters) - Canada is poised to buy 65 Lockheed Martin Corp F-35 Joint Strike Fighter jets, sources familiar with the process told Reuters, marking a major renewal of Canada's fighter fleet and helping contain costs of the expensive defense program.

An 18-month review of Canada's fighter jet needs has concluded that the government should skip a new competition and proceed with the C$9 billion ($8.22 billion) purchase, three sources said.

The decision must still be finalized by Prime Minister Stephen Harper's cabinet. The government is likely to face fierce criticism from opposition politicians concerned that the contract is being awarded without an open competition. Similar concerns over sole-sourcing and costs derailed the purchase two years ago.

A spokesman for Harper's office said there was nothing to announce yet.

However, the sources said the recommendation was expected to lead to formal approval of the F-35 purchase. They said Harper and key cabinet members supported the decision.

Canada's planned purchase is the 6th-largest by a country and would further safeguard the $399 billion program. Its rising costs had sparked fears of a "death spiral," in which countries cut plane orders, driving up the price of remaining planes and triggering further cancellations. (Full Story)

The Pentagon recently estimated the average price per plane at $139 million, about twice the original estimate in 2001, but said the projected cost to operate and maintain the jets was down 9 percent from earlier estimates.

Ottawa announced in 2010 it would buy 65 jets but scrapped the decision in late 2012 after an official watchdog said Canadian officials had grossly downplayed the high cost of maintaining and operating the jets.

The Canadian government then launched a multi-agency examination to determine whether to buy the F-35 or launch a new competition. That review has found that the F-35 is the only warplane that meets the government's needs, said the sources, who were not authorized to speak publicly.

A four-member panel of outside experts set up to ensure the objectivity and impartiality of the Canadian review also is expected to give its blessing to the process in coming weeks and may make its own recommendation that Ottawa proceed with buying the F-35, said one of the sources.

ANNOUNCEMENT DUE SOON

The Canadian government has said it will make an announcement in coming weeks, around the time the Canadian Parliament is dismissed for the summer.

Public Works Minister Diane Finley declined comment on Tuesday about the timing of a decision.

“Once we have made a decision we will announce it, and the reports will be released,” she said.

The opposition New Democratic Party decried the review as secretive and designed to provide cover for the original decision to buy the plane.

"We have a public tendering process in this country, and sole-sourcing is not part of it," NDP Member of Parliament Jack Harris said. "We want a transparent process. This is not a transparent process."

The recommendation to proceed with the F-35 purchase was expected, the sources said, in part because the cost of each plane has recently declined. Other factors seen as influencing the outcome of the review was the decision by Japan, South Korea and other countries to buy the jet. Canadian firms could win up to $11 billion in potential business orders linked to the program, they said.

Canada would be the 11th country to buy the jet. It was one of the original nine partners on the F-35 program, contributing $150 million to its development costs.

One of the reports completed as part of the review showed that a new tender would take three years to complete, which would force the Canadian Air Force to spend about $20 million per plane to keep its fleet of older Boeing CF-18 "Hornets" flying, according to a source familiar with the findings.

Russia's annexation of the Crimea region of Ukraine, which has created tensions with European countries, the United States and Canada, also underscored Canada's need for a fifth-generation stealth fighter, said two of the sources.

The F-35 is designed to be the next-generation fighter jet for decades to come. No other new fighters are in the pipeline and the warplane fleets of the United States and Canada are aging.

Canada's participation in the program would help Washington drive down costs, which U.S. officials say are finally heading lower after rising 70 percent over initial estimates.

The total cost of the F-35, the Pentagon's most expensive weapons program, is now estimated at $1.42 trillion, down about 6 percent from $1.50 trillion from last year, including research, development, procurement and operations through 2065.

A spokesman for the Pentagon's F-35 program office said officials were awaiting Canada's decision and understood the country's need to revisit the decision process.

A spokesman for the Pentagon's F-35 program office said officials were awaiting Canada's decision and understood the country's need to revisit the decision process.

But it would spell more bad news for rival bidders, including Boeing Co BA.N, which is urgently looking for orders to keep its F/A-18 production line running past 2016. Boeing argued that its fighter would be cheaper for Canada to buy and operate. The Eurofighter Typhoon and Rafale fighters, both European planes, were also in the running.

Lockheed spokesman Mike Rein said the company supports the Canadian government's process in determining the best way to replace its CF-18s.

Boeing declined to comment.

(Reporting by Andrea Shalal; Additional reporting by David Ljunggren and Randall; Palmer in Ottawa; Editing by Alwyn Scott and Ross Colvin)

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