Bill Sweetman Washington and Brad Perrett Beijing

What looked like a small acquisition five years ago has helped BAE Systems break Lockheed Martin's monopoly on F-16 upgrades—a market that has grown as the U.S. Air Force and other users confront delays and possible lower production rates for the Joint Strike Fighter, and seek to extend their F-16s' service lives and improve their effectiveness against evolving threats.

Until now, Lockheed Martin has ruled the market. In April the USAF identified Lockheed Martin as the sole source for a major upgrade of 300-350 F-16s, intended to render them “viable in the threat environment beyond 2025.” The company has signed an agreement with Taiwan's AIDC covering the modernization of 146 F-16A/B Block 20s, and has been awarded contracts for smaller batches in Indonesia and Thailand.

That winning streak ended late in July, when South Korea announced the choice of BAE Systems as prime contractor for the upgrade of 134 KF-16C/D Block 50/52 fighters.

South Korea's Defense Acquisition Program Agency (DAPA) chose BAE to upgrade the fighters because its quoted price—$750 million—was lower than that of rival Lockheed Martin, which asked for more than $1 billion, according to the Segye (World) newspaper.

This is the first upgrade of any modern U.S. fighter that is not being led by the original equipment manufacturer. Companies such as Elbit have upgraded older U.S. aircraft, such as F-5s, Russian designs and some older European types. Aircraft like late-block F-16s are a different matter, having complex integrated avionics systems. The OEMs' experience with software integration and the development and release of operational flight program (OFP) revisions normally constitutes a high barrier to entry.

BAE Systems, however, performed a quiet side-entry into the F-16 business in 2007 by acquiring Dayton, Ohio-based MTC Technologies. The company had been selected by the USAF's Ogden Air Logistics Center two years earlier to provide a replacement for the obsolete fire-control computer fitted to older F-16 Block 25/30/32 fighters flown by the Air National Guard and Reserve. The Commercial Fire Control Computer (CFCC), the basis for the South Korea offering, acts as an ethernet hub for the other systems on the aircraft. BAE now says its CFCC experience and the hardware itself are key to its ability to compete with Lockheed Martin.

Adding equipment and engineering to be supplied by equipment makers, plus local installation work, the Korean upgrade program will reportedly cost 1.80 trillion won ($1.60 billion), of which 673 billion won appears to be allocated to the radar.