Following a request from South Korea, the US Defense Security Cooperation Agency (DSCA) has terminated a Foreign Military Sales contract with BAE Systems to upgrade 134 Lockheed Martin F-16 fighters operated by South Korea.

“On November 5, 2014, at the request of the Government of the Republic of Korea, the U.S. Government notified BAE Systems Technology Solutions & Service of Rockville, Maryland, that it would terminate for convenience a contract with BAE Systems, for initial development and long lead production in support of the Republic of Korea KF-16 fighter aircraft upgrade.”

The cancellation will come as a severe blow to BAE Systems, which saw the South Korean F-16 upgrade programme as a pivotal win in its bid to be seen as a viable rival to Lockheed in the global F-16 upgrade market.

It follows price haggling between BAE Systems, the US government, and the Korean government over costs. A report by South Korean official news agency Yonhap, quoting a spokesman at South Korea’s Defense Programme Administration (DAPA), said the US government wanted an additional W500 billion ($473 million) and prime contractor BAE Systems W300 billion.

BAE Systems’s contract would have seen 134 aircraft receive new avionics and an active electronic scanned array (AESA) radar produce by Raytheon.

Two South Korean F-16s – one single-seat C and a twin-seat D model – have already received the upgrade in BAE System’s Fort Worth Facility. It is not clear what will happen to these aircraft, but the DSCA statement says that it will work with BAE Systems to close out the contract.

"We are disappointed to learn that the Republic of Korea has requested to terminate the U.S. Air Force's contract with BAE Systems for the KF-16 Upgrade Program," says BAE Systems in an emailed statement. "BAE Systems was selected by the Republic of Korea in 2012 after a full and open competition, where our solution was deemed the best, most flexible and cost-effective to meet the Republic of Korea's F-16 upgrade needs. The U.S. Government approved the selection in 2013 and since May of this year, we had been successfully executing phase one of the program on schedule."

"We made it clear throughout the government-to-government discussions that we were committed to our firm-fixed-price contract for the overall scope of work agreed upon by both the U.S. Government and Republic of Korea last year. The U.S. Government also signed a Letter of Offer and Acceptance for the first phase. We remain confident that we could have performed the remaining work on the program in an efficient and cost-effective manner. Unfortunately, the program was impacted by Korea’s strict budget limitations and the U.S. Air Force's conservative approach to the overall program cost."