Exclusive: Brazil delays jets decision until 2013; Boeing ascendant

The contract to overhaul Brazil's Air Force with more than 36 new fighter jets will be worth at least $4 billion and is one of the most closely watched defense deals in the emerging-market world. The finalists are Boeing, France's Dassault Aviation and Sweden's Saab.

Rousseff plans to apprise U.S. President Barack Obama of the delay during a possible meeting on the sidelines of the United Nations General Assembly this week, the officials said, speaking on condition of anonymity.

Rousseff herself will make the final decision on the jets, which will help mold Brazil's military and strategic alliances in coming decades as it seeks to establish itself as a major global power.

The contract is on hold in part for budget reasons, one of the officials said. Rousseff just emerged from a tough battle with public workers over wage increases, and it would be politically difficult for her to approve billions of dollars in spending for military hardware so soon after alleging that finances are tight.

"The (internal) conversations have become more specific and more focused and I think we're getting close to a decision," the official said. "But it's not going to be announced in 2012."

The tender has dragged on for more than a decade through three successive Brazilian governments, and picking the winner has become a bit like placing odds on a soccer match that never actually gets played. Nevertheless, news of Rousseff's deliberations has been closely followed and has sometimes moved the finalists' share prices, in part because of the lack of major defense deals in Europe and the United States.

Reuters reported in February that Rousseff was leaning toward Dassault's Rafale. However, since then new concerns have emerged about the Rafale's high cost and especially the terms of the technology-sharing that Rousseff believes are the most important factors in the deal, the officials said.

Meanwhile, Boeing has earned points by announcing a series of partnerships with Embraer, which is aggressively expanding its defense operations. Embraer said in July that Boeing will supply weapons systems for its Super Tucano fighter, and the U.S. company is also helping develop Embraer's KC-390 military transport and refueling jet.

Reuters also reported in February that Boeing has frozen the price on its bid since 2009, an unusual step that is believed to have amplified the F-18's cost advantage over the Rafale. The per-unit cost of the jets has not been made public.

"Boeing is definitely looking better in the last few months," a second official said.

Saab is still seen as a distant third in the talks, both officials said.

Defense officials say Rousseff must make a decision soon because the existing Brazilian Air Force fleet is becoming increasingly obsolete and expensive to maintain. Brazil is also under pressure to increase its defense capabilities as it prepares to host the 2014 World Cup and 2016 Olympic Games. (Editing by Todd Benson and Kieran Murray; Editing by Gary Hill)