ROME and WASHINGTON – The collapse of the deal between Raytheon and Italy's Leonardo to offer the T-100 jet trainer in the US T-X competition followed Leonardo's inability to cut the price of the aircraft by nearly a third, Italian sources have told Defense News.

"Raytheon wanted to drop the price of the plane by 30 percent below Leonardo's idea," said the source, who was knowledgeable of the talks between the two firms. "Leonardo worked towards that but could not achieve it." 

The partnership was nearly called off in October in a dispute allegedly over control of the program. All appeared to be back on track later the same month when Raytheon announced it would build a final assembly and check out line in Mississippi. While structural assembly would take place in Italy, at least 70 percent of the T-100 training system — including ground-based systems —would be built in the United States, a Raytheon spokesman said at the time.

"The October row was over control, and that never really went away, but the debate over price also became more important, particularly as the [competitiveness] of Boeing's offer in the T-X program became more evident," said a second Italian source. Boeing has teamed with Saab to offer a clean sheet design.

The second source added that Raytheon wanted to reduce the price by 25-30 percent.

The first source sympathized with Leonardo over the price wrangle, stating, "Raytheon saw price as key to competing, but perhaps didn’t fully understand the cost of the plane, not being an aircraft manufacturer."

"Leonardo really worked on pricing," he added.

A US source with knowledge of the discussions confirmed that the final price per plane was the sticking point, saying Raytheon’s target figure was "several million" less than Leonardo was willing to accept. The issue remained one of contention for several months, the source added.

Raytheon declined to comment on its split from Leonardo beyond a company statement released yesterday, which attributed the breakup to the fact that the "companies were unable to reach a business agreement that is in the best interest of the U.S. Air Force."

Richard Aboulafia, an analyst at the Teal Group, said it was no secret that cost was crucial in the T-X bid.

"And it’s no secret the M-346, with a fly away cost of about $25 million, is an expensive plane — about the same price as the T-50," he said. "For the M-346, which lags on some specifications including Gs, price was doubly important and they needed to hit the $15-18 million zone."

Aboulafia said Leonardo may have been partly to blame for the high price: "Italy has a fundamentally high cost structure, with high labor costs and rigid labor terms. Dependence on a home market can make you less entrepreneurial." But he also suggested Raytheon’s lack of recent experience in aircraft building may have limited the efficiency of its planned US line, making Leonardo shoulder more of the burden on cost.

"Lockheed Martin has the ability to set up a production line, Raytheon less so since it has not built an aircraft in 15 years. It was not clear what they would be doing and this will have put more pressure on the Italians."

Leonardo may also have been wary of the deal it would get from a win, the first Italian source noted. Future export sales of the aircraft would have been via the US FMS program, which brings a sacrifice in revenue through the whole life of the program; volumes go up but margins go down.

"The flipside however is that Leonardo might have sold up to 600 aircraft combining US and FMS sales," the first Italian source added. "How many will they sell now?"

Leonardo said on Wednesday it was looking at competing in the T-X competition despite the break-up with Raytheon. Unless it can find another major US prime to team with, its prospects, however, will be weaker.

The break-up follows over a decade of mishaps for Leonardo, formerly Finmeccanica, in the US. Sales of its C-27J were cancelled while it teamed with Lockheed Martin to sell its AW101 helicopter as the new White House helicopter, only for the contract to be scrapped.

"The US101 disaster was due to requirements creep on steroids,"

said Aboulafia. "The C-27J debacle was due to an Army-Air Force aviation turf war. Still, this series of otherwise unrelated setbacks must be quite demoralizing for Leonardo."

A former Italian government minister took aim at Raytheon on Thursday, blaming it for the divorce.

"Raytheon knew how much the aircraft cost a year ago — they could have avoided making this decision so close to the US decision," said Guido Crosetto, a former Italian junior defense minister and now the head of  the  Italian Industries Federation for Aerospace, Defence and Security.

"Raytheon has not behaved correctly. Leonardo must participate in the competition, but how? Moreover, after the C-27J and the US101, this becomes a political problem with the US," he said.

Aaron Mehta and Valerie Insinna contributed to this report.

Tom Kington is the Italy correspondent for Defense News.

More In Breaking News