SINGAPORE-(IDB) : Malaysia’s proposed purchase of fighter
jets has switched from a procurement competition to a leasing
competition due to affordability issues, according to industry
executives.
The Malaysian government put its multirole combat
aircraft program in the freezer last year for fiscal and political
reasons. Now Boeing, BAE Systems and Saab have, or are about to, submit
leasing proposals in the hope of making a deal palatable.
It’s
possible Dassault Aviation and Sukhoi, which were also on the original
procurement shortlist, are in a similar position, according to
executives on the sidelines of the Singapore Airshow last week.
“The
Malaysian government are mindful of the need for an affordable
solution, so we understand that all the competitors are putting offers
on the table for leasing. The program has become very much about
affordability,” said Alan Garwood, BAE’s group business development
director.
Until recently, the Royal Malaysian Air Force had been
looking for a straight purchase of a new jet to replace 18 aging MiG-29
fighters, due to leave service next year.
But Malaysian budgets
are under pressure to be cut, making it politically difficult to approve
a multibillion-dollar deal for a fighter while the administration is
cutting subsidies on items such as food and fuel while hiking taxes.
An
industry executive asked whether Malaysia has the political will to
make any kind of selection at this time, leasing or otherwise.
“The
political debate is more about the cost of living, so you wonder
whether it is the best time to be looking for investment in defense
equipment. So timing is very difficult,” he said. “Higher up in
government, do they care about the problem? The MiG-29s are due to go
out of service, but they could hang on for a couple more years. That’s
an Air Force problem, but they won’t be driving the replacement
timelines on this.”
The new jets, if they arrive, will complement
the Boeing F/A-18D and Sukhoi Su-30 fleets in service with the Royal
Malaysian Air Force.
“Saab has put an offer on the table for the
Gripen. Boeing is about to with the F/A-18 and BAE with the
[Eurofighter] Typhoon won’t be far behind. I imagine the French and
probably the Russians are doing the same. We hope it’s about leasing and
a purchase later on,” an executive said.
“Everybody thinks that
whatever Malaysia leases will eventually become the long-term solution
because the Air Force will have already invested in infrastructure items
like bases, spares and training,” Garwood said.
Leasing civil
airliners like the Boeing 737 is big business, but in the fighter world,
it’s a rare event. Sweden’s Saab is the only top-line combat jet
supplier involved in leasing, with existing deals with the Czech
Republic and Hungary for the Gripen for several years.
Teal Group analyst Richard Aboulafia reckons that Saab’s experience in fighter leasing could give it the edge in Malaysia.
“They have planes to spare, they know how to structure this kind of deal and have a good presence in the region,” he said.
Neighboring Thailand is operating the Gripen, having purchased 12 of the single-engine combat jets.
The
current leasing arrangements involve Saab upgrading spare Swedish Air
Force Gripen C and D models. It’s likely that a similar formula is being
offered to Malaysia.
The Swedish company submitted its leasing
option as long ago as 2012. Rival bidders were dismissive of the move at
the time, but now, everybody is following Saab’s initiative.
Even Garwood admits to being surprised at the turn of events.
“I wouldn’t have thought we would be talking leasing, but it’s changed over the last year,” he said at the air show on Feb. 11.
Garwood’s
not saying what the British offering will be, but analysts say it will
most likely involve secondhand Royal Air Force Tranche 1 aircraft.
The
BAE executive said that whatever Typhoon model is offered, it will be
equipped with a new anti-ship capability — a key Malaysian requirement.
The
UK’s diplomatic relations with Malaysia have improved since the
Conservative-led coalition government of Prime Minster David Cameron
came to power in 2010.
BAE opened a cyber center in Malaysia recently in a move that buoyed the relationship.
Boeing’s
product offering isn’t clear. It has a choice of spare F/A-18D Hornets
or, more likely, new Super Hornets similar to the aircraft operated by
the US Navy.
Jim Armington, Boeing’s vice president for business
development in the region, wouldn’t discuss the product strategy when
asked the question at the show.
He did say, though, that Boeing
prefers a straight purchase arrangement, but would respond to what the
customer needs and can afford.
Not everybody agrees with Aboulafia over who has the edge in the competition. Some believe it is Boeing.
“I
assume Boeing has an advantage from being in country already. They have
a maintenance operation, a local partner and the Air Force is familiar
with the F/A-18,” a second executive said.
“There is, though, the
political dimension,” the second executive said. “Will the US be the
right choice politically? President Obama is going to Malaysia next
month. That could be a turning point in either direction.”
Speaking
to reporters at the show, Boeing’s Armington declined to voice an
opinion on the timing of a possible deal, beyond saying, “Hopefully
within the course of the year, we will see some decision.”
Like
other executives here, Armington concedes that the timing of any
decision will likely not be paced by Royal Malaysian Air Force
requirements.
“The fighters do need to be replaced from the point
of view of the Air Force,” he said. “But it’s a national decision. It’s
domestic politics and economics. Despite the concerns and urgency from
the Air Force, there are other factors at play.”
Whoever comes out
on top, Aboulafia says he believes that for some fighter markets with
“pressing recapitalization needs and limited financial resources,
leasing might catch on.”
Financial tightening in the region is
causing some people to wonder whether other programs will feel the pinch
in a similar fashion to the Malaysian fighter.
Garwood said the
squeeze on financial resources in Southeast Asia means “growth is not at
the levels people have been predicting. ... there is, though, a massive
amount going on in Japan, South Korea and Taiwan.”
Dan Darling,
the Asian and Pacific Rim market analyst at Forecast International, a US
consulting firm, said that with the exception of Indonesia and
Singapore, defense spending in Southeast Asia “remains largely
restrained.
“Because of the conflux of geopolitical pressures
bearing down on the region, any slowdown in the local, regional or
global economy is unlikely to result in an abrupt downturn in defense
investment,” the analyst said.
Darling said, though, that spending is already slowing.
“According
to our estimates from 2010 to 2011, defense spending in the
Asia-Pacific region grew by $31 billion, [a] 16 percent year-on-year
increase, while from 2012 to 2013, the level of growth totaled $14.4
billion,” or 6.2 percent, he said.
“Our tentative estimates for
regional defense spending from 2013 into 2014 reflect another slower
rise in overall growth, with military investment increasing by $16
billion overall, with a little over half of that attributable to China,
or 6.5 percent,” Darling said.
The analyst said he anticipates
relatively consistent — but steadily upward — year-on-year defense
spending for the region, largely driven by China, but to a lesser extent
also by Indonesia.
“As China increases its military might and
reach, neighbors as diverse as Japan, India, the Philippines and Vietnam
are mapping out fresh modernization plans to achieve satisfactory
levels of deterrence,” he said. “Even countries such as Malaysia, which
maintains healthy relations with Beijing, have recognized the need to
upgrade their hardware in light of China’s growing strength and
increasingly assertive territorial claims in the East and South China
seas.”
The Forecast International figures do not include Australia, New Zealand or India.
