THE IMPACT OF CANCELLING THE LAVI ON ISRAEL'S AIRCRAFT INDUSTRY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000700610001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 23, 2016
• Document Release Date: April 30, 2012
• Sequence Number: 1
• Publication Date: October 13, 1987
• Content Type: MEMO

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Central Intelligence Agency
DOC Nom /YJ Zo io l
OIR 3
FBFD I
DIRECTORATE OF INTELLIGENCE
13 October 1987
The Impact of Cancelling the Lavi on Israel's Aircraft Industry 25X1
Summary
After more than five years in research and development, Israel
cancelled its controversial Lavi fighter aircraft program in late
August because spiralling cost overruns made the plane unaffordable.
The adverse impact on Israel's indigenous aircraft industry, which
will lose more than $200 million per year in Lavi contracts, however,
was minimized with Israel's decision to allot the industry its full
complement of Lavi funding this year and to promise it $100 million in
annual subsidies in future years. Moreover, many of the 3,000
engineers and technicians likely to lose their Lavi-related jobs will
probably be rehired by other Israeli high-tech firms or by the Israeli
military. Despite a blistering domestic debate, the decision to
cancel Lavi has not damaged the Labor Party's public standing--even
____ .
though Labor led the ?-,.
rge to
Israel's decision in late August to kill the Lavi fighter aircraft program
will force the country's largest defense firm--Israel Aircraft Industries
(IAI)--to restructure itself. The state-owned firm will lose more than $200
million per year in Lavi contracts as a result of cancelling the plane and
additionally faces stiff penalties for terminating Lavi-related contracts with
US firms. Moreover, as many as 3,000 skilled IAI workers face lay-offs. Some
of these workers may be considering job offers outside Israel--such as assisting
South Africa modify Mirage III fighters. But many probably will be rehired by
IAI to continue to work on advanced avionics and alternative airframe programs
This Memorandum was prepared by
the Israel-Jordan-PLO 25X1
Branch, Arab-Israel, Office of Near Eastern and South Asian Analysis at the
request of Philip Wilcox, Deputy Assistant Secretary of State, NEA/IAI.
Information as of 13 October 1987 was used in its preparation. Questions and
comments should be addressed to Chief, Arab-Israeli Division
25X1
MESA M 87-20101
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and others will be absorbed by private Israeli high tech firms. 25X1
The full impact of scrubbing the Lavi has been minimized and delayed with
Israel's decision to allot IAI its full complement of Lavi funding this
year--even though the plane is no longer being developed. Additionally, the
22,000-strong, politically potent firm has been promised $100 million in annual
government subsidies to help defray defunct Lavi contracts. Part of these
subsidies will go to continued development of the third Lavi prototype. which is
-
t---- -, .
to he used
as
for
This will further soften the impact or killing the
prprogra~ina Pill allow Israel Aircraft Industries to retain many of its key
Lavi--Only One of IAI'S Problems
-before the Lavi was killed.
Cuts in.-Israel's defense budget recently have reduced orders by the military for
IAI products, forcing the company increasingly to seek overseas markets. But
even with-aggressive marketing strategies, the Israelis recognized that export
sales were unlikely to stave off growing budget deficits. Instead, IAI had
formulated plans--also before the Lavi program was scrapped--to fire as many as
1500 employees.
Personnel benefits at IAI are unusually attractive and prohibitively costly
for the company. Engineers work only about 32 hours per week and are paid
better than the average Israeli worker, who
puts in 47 hours per week.
Severance benefits, which have become particularly important with the Lavi's
termination, are also extremely generous. Each engineer laid off will be paid
the equivalent of four years' salary--about $55,000. Additionally, a wasteful
25 percent of IAI's workforce are service and administrative employees, some of
whom were tar
eted for l
ff
g
ay-o
s long before Lavi's cancellation.
Lavi Termination Forces Restructuring
Lavi contracts comprised nearly one-fourth of IAI's workload during the past
five years. -More than 5,000 of IAI's 22,000 workers devoted their efforts to
developing the?Lavi, and-the company received more than-.$200 million annually
for-Lavi. contracts. Largely because of money for Lavi development, IAI expanded
to an unmanageable si7p-
factories have survived only because of infusions of-US grantdaidnforlthenLavi.
The Ramta plant in Beersheeba, a perennial money-loser for IAI, is a good
example. Despite losing money for years, the plant remained open in expectation
of fabricating components for the Lavi. The Lavi's scrubbing will allow IAI
lant
management to close the
..A-
d
p
-
an
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IAI staked much of its international reputation on developing and
manufacturing the Lavi and now must rebuild its image by boosting other less
prestigious weapons programs. Although the principal focus of IAI in past years
has been on the Lavi, the company produces and is developing a wide variety of
products which can employ many, but not all displaced Lavi workers. Some of the
more promising projects are:
--Phantom 2000 Radar: A new, advanced technology radar built by the
electronics firm ELTA that IAI hopes to incorporate in F-4E
aircraft.
--Falcon Airborne Early Warning Aircraft: The future Israeli
electronics collector to complement E-2C Hawkeye and Boeing 707s.
This Israeli version of AWACS likely will get additional funding
with Lavi's demise. A potentially lucrative export product.
--Kfir and A-4 upgrade programs:- Since the air force will not get
Lavis, IAI could modernize these older platforms, modernizing the
avionics and airframes to extend their lives to the late 1990's when
advanced model US fighters will be available.
--Remotely Piloted Vehicles: Some of IAI's hottest sellers and a
longstanding Israeli strength. An IAI subsidiary is working on the
Harpy attack RPV--and expects increased air force orders in the wake
of the Lavi's cancellation. The US Navy has purchased IAI's Pioneer
RPV.
--Precision Guided Weapons: IAI is developing alternative systems to
the successful Popeye guided munition produced by Israel's weapons
development authority Rafael and is also working on modification
kits for existing unguided weapons.
--Anti-tank Missile Systems: The Nimrod, a 26-kilometer range missile
system that can be mounted on jeeps, aircraft, or tripods, currently
is in production at IAI.
--Arrow Anti-Tactical Ballistic Missile System: IAI hopes to fund 90
percent of Arrow's research and development costs through the US__
Strategic Defense Initiative program. Lavi funding requirements
precluded sufficient funding for the program, but with Lavi's demise
Israel will probably devote more energy and divert Lavi-related
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Israeli Cabinet Eases Lavi Termination Impact
The impact of cancelling Lavi on IAI was substantially reduced by the
Israeli Cabinet decision to allocate IAI its full share of Lavi funding--about
$200 million this year--even though it is no longer developing the aircraft.
This funding will likely be used in large part for termination costs and
severance pay for discharged IAI workers, and to au ment existing research and
Defense Minister Rabin estimates that 3,000 IAI employees will lose their
jobs as-a result of the-Lavi's demise, according to public interviews. But IAI
intends to implement the lay-offs gradually throughout the remainder of the
Israeli fiscal year, which ends on 31 March 1988. The 3,000 lay-offs will have
only a minimal effect on Israel's overall unemployment rate-now at just over
six percent-
(that as many as 500 Lavi-dedicated engineers have approached the
South African company working on the Cheetah--the Israeli-styled adaptation of
Mirage fighter aircraft. Although South Africa probably could not employ all
500 engineers on-the relatively simple and small-scale Cheetah modification
program, some Israeli engineers probably will take advantage of the longstanding
close ties between the two countries' defense sectors to take lucrative
positions in South Africa.
Recent articles in the Israeli press have downplayed the impact on
employment of cancelling the Lavi--Lavi proponents like former Minister without
Portfolio Arens initially claimed that over 6,000 high-tech jobs would be
permanently lost. Now a variety of Israeli assessments estimate that no more
than half this number of jobs will be forfeited. Although of concern to IAI
officials who worry about morale and image problems, these revised job loss
figures indicate that the Lavi's death will not significantly increase Israel's
overall unemployment rate and also will not appreciably erode the country's
high-tech- capability
.
The most serious impact will be on IAI itself--and particularly on the
engineering division, which will-be hardest hit-by lay-offs since much of the
work on Lavi so far has been research-oriented. To minimize the impact,_IAI is
attempting to make the transition into new programs as quickly as possible.
Many of the workers not absorbed likely will be hired by other high-tech firms
in Israel
and others ma
b
hi
,
y
e
red by the military.
Implications for the US
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Most Israelis believe that the Lavi was cancelled because of US pressure.
As a result, many Israelis believe the US owes them a debt and expect the US to
help. pay for termination penalties, to provide funding for alternative programs,
and to increase cooperation and joint ventures in weapons development. IAI
specifically wants US funding for a variety of its programs, including the Arrow
anti-tactical ballistic missile which it hopes can be funded through the
Strategic Defense Initiative Office. 25X1
The domestic political debate over the Lavi has been blistering. Trade
Minister Sharon and Arens continue, weeks after the plane's termination, to
attempt to resuscitate the program and blame the Labor Party for what they
describe as the action most damaging to Israel's national security since the
1973 Arab-Israeli war.--They repeatedly have accused Labor--specifically Peres
and Rabin--of buckling to US pressure. Although their attempts to save the Lavi
almost certainly will fail, Arens and Sharon appear to wan. to keep the Lavi
issue alive in anticipation of the national election schedu::d for ,amber
Their attacks-so-far do not appear to have damaged Labor's public standing.
A recent public opinion poll--conducted after the Lavi was cancelled--shows
popularity gains for Peres and Rabin. Likud ministers stayed at their previous
levels or declined slightly, except for Finance Minister Nissim, who was the
only Likud cabinet minister to vote for cancellation and whose popularity
increased significantly according to the latest poll.
25X1
7 __1
Labor's longer-term prospects will depend heavily on whether most of the
approximately.-.33;000 IA-1--workers likely to be laid-off are rehired fairly
quickly.. If they are,-Labor's public stock likely will not be damaged by Lavi's
demise--and may even improve. But if a large number of these highly skilled and
d E,,..~...t_:___ _ -?
valued en
ineers
g
an
Labor probably would become vulnerable to Likud's stinging attacks. u"c~~~Ylu ea 25X1
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BOX
The Israeli Air Force Reaction
. Israel's air force long opposed the Lavi program on the grounds that the
money could be spent more efficiently by buying proven US aircraft, with enough
left over to purchase other badly-needed weaponry. For years, the future plans
have been complicated by the Lavi's uncertain future and ravenous funding
demands. With the departure of the expensive and controversial fi
i- 25X1
ht
g
er, a
force planners for the first time in over five years can develop a cohesive
l
t
ong-
erm force plan and explore alternative projects and weapons systems..
Top on-the air-force--priority list are 75 advanced F-16 fighters, as many as
15 new F-15D aircraft, a squadron of attack helicopters--preferably modern AH-64
Apaches--and_possibly a squadron of assault helicopters as well. The air force
also is considering fitting a limited number of aging F-4E aircraft with PW-1120
engines,-at least 30 of which were ordered for the Lavi. Israel's upgrade
program for the F-4's--known as Phantom 2000--originally included only fuselage
work and electronics improvements designed to extend the life of the aging
planes into the next century. IAI has marketed a more comprehensive engine
replacement program abroad to the Japanese, Turks, and Germans, but lacked the
funds to purchase the PW-1120 engines for Israel's own air force.
But the IAF appears to be overestimating the amount of t'i::. likely to be
freed up by cancelling the Lavi. The navy and ground forces .-:so have high
priority procurement and modernization plans and certainly will fight for their
share of Lavi money. For its part, the navy is planning to procure expensive
submarines and corvettes, and to purchase them with some of the money the air 25X1
force hopes to secure. The army wants more money to train its reserve force and
isl
ki
t
o
ng
o purchase modern anti-tank missiles, armored reconnaissance
vehicles, and a variety of upgrade programs for its existing tank fleet.
-------------------------
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BOX
Thumbnail Sketch of Israel Aircraft Industries
Israel Aircraft Industries (IAI) was founded in 1953 as a maintenance base
for the Israel Air Force and El Al Airlines. In the past 34 years, it has grown
from a one hangar operation with 200 em loyees, to an enormous aerospace complex
with over 22,000 employees. 25X1
IAI's workforce includes about 4,000 engineers, 4,500 technical engineers,
8,200.production_workers, and 5,600 service and administration employees. Of
these numbers, about 5,000 were involved in the Lavi's development--including
about 1,500 engineers which IAI officials al to its future as a
high-technology-center. that research and 25X1
development alternatives av within IAI wwill provide employment for about
3,700 of the 5,000 currently involved with the Lavi program. 25X1
IAI is organized into five divisions:
--The Aircraft Manufacturing Division produces the Kfir fighter, Arava
transport plane, and Westwind business Jets, along with Jet engine
components, machine parts, and mini-RPVs. Scrapped plans for
producing Lavi fighters in the 1990s are unlikely to disturb the
division since it had not begun to gear up seriously for the
operation.
--The Electronics Division includes four plants--ELTA, TAMAM, MBT, and
MLM. ELTA produces radars, computers, communications;-and has done
considerable work on Lavi avionics--as much as 60 percent,
Much of this work is applicable for other programs
or is valuable as pure research on future aircraft systems. ELTA
views the Lavi's cancellation as only a minor setback.
--The Engineering Division provides support to the manufacturing units
and is Israel's center for aircraft design and
development--including most of the work on the Lavi airframe. Most
of the lost employment will come from this Division--thus IAI!s
capability to design future aircraft systems will decline.
--The Technologies Division produces patrol boats, armored cars,
artillery, and a wide variety of support systems such as aircraft
seats, helicopter rotor blades and parts, tank mine plows, and
hydraulic systems for the Merkava tank. The impact of cancelling
the Lavi will be minor for this Division.
--Bedek Aviation Division provides aircraft repair and overhaul
services. In addition to maintaining Israeli aircraft, it has
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subsidiaries in Europe working on NATO aircraft and is negotiating
with Turkey to modernize its F-4 fleet. The Lavi decision will not
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SUBJECT: The Impact of Cancelling the Lavi on Israel's Aircraft
Industry
NESA M# 87-20101
DISTRIBUTION:
EXTERNAL:
1 - Philip Wilcox, NEA/IAI, STATE
INTERNAL:
1 - DIR/DCI/DDCI Exec Staff
1 - DDI
1 - ADDI
1 - NIO/NESA
1 - C/PES
1 - PDB Staff
1 - NID Staff
6 - CPAS/IMD/CB
1 - D/NESA
1 - DD/NESA
1 - C/PPS
2 - NESA/PPS
1 - C/NESA/SO
1 - C/NESA/IA
1 - C/NESA/PG
1 - C/NESA/AI
2 - NESA/AI/I
DDI/NESA/AI/I
13 Oct 87 25X1
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