By Randall Palmer, David Ljunggren and Andrea Shalal
OTTAWA/WASHINGTON (Reuters) - Canada is likely to choose between two major U.S. firms when it buys a new fleet of jet fighters, excluding two European competitors, according to a source with direct knowledge of the matter.
The source, who spoke on the condition of anonymity, said Lockheed Martin Corp's (N:LMT) F-35 stealth fighter and Boeing Co's (N:BA) F-18 E/F Super Hornet were deemed more suitable for the variety of tasks the military has laid out.
That would mean the exclusion of Dassault Aviation SA's (PA:AVMD) Rafale and the Eurofighter Typhoon, jointly made by BAE Systems PLC (L:BAES), Finmeccanica SpA (MI:SIFI) and Airbus Group NV (PA:AIR).
The fighter selection has proven enormously problematic for Canada's Conservative government, which in 2012 scrapped a sole-sourced plan to buy 65 F-35s for C$9 billion (5.08 billion pound) after a parliamentary watchdog savaged the decision.
Ottawa then set up a special secretariat to compare the merits of the four contenders. It is deciding whether to hold a competition or go ahead with the initial plan to buy F-35s, which would likely prompt accusations that it was acting in bad faith.
Polls show the Conservatives of Prime Minister Stephen Harper could lose the next federal election, which is set for October 2015.
The source said that while the F-35 had scored well on the various tests laid out by the secretariat, the Super Hornet was almost as capable and had the advantage of being cheaper.
The secretariat was not asked to make a recommendation about which jet to buy.
A spokeswoman for Public Works Minister Diane Finley, who has day-to-day responsibility for military procurement, said ministers were reviewing a number of reports, including information on fighter capabilities, industrial benefits, costs and other factors.
"Until a decision is taken, all options remain on the table," Alyson Queen said for the minister.
The $400 billion (244.91 billion pound) F-35 programme, the largest in Pentagon history, is already late and well over budget. U.S. officials said on Wednesday they were nearing a fix for the engine that powers the F-35. The failure of Pratt & Whitney's F135 engine grounded the entire F-35 fleet for several weeks this summer. Flights have resumed but with certain restrictions on speed and other manoeuvres.
A potential attraction for Canada is that Lockheed's bid offers Canadian industry some $11 billion in work building airplane components.
Three other sources familiar with the deliberations said Ottawa had been poised last month to announce it would buy the F-35s. That plan changed when Harper – concerned about the political fallout - suggested that Canada could wait since it did not need to replace its existing CF-18 jets until 2020.
One of the three sources, who was not authorized to speak publicly, said Harper could still announce in coming weeks Canada would buy the F-35 and skip a new competition but that "ultimately, it will be a political decision."
Boeing's bid would likely include more traditional offset agreements, giving contracts to Canadian firms. Dassault says it is prepared to eventually build the Rafale in Canada.
Analysts and opposition critics suspect the government will delay the decision until after the next election. If Canada puts off buying new planes for too long, it would likely have to upgrade its current fleet of ageing CF-18s, which date back to 1982, at a cost that some analysts estimate could top $1 billion.
Lockheed said on Thursday it was continuing to support the Canadian government and the special secretariat as Ottawa weighed its options. A Boeing spokesman said the company continued to support the Canadian process.
Harper is in Wales for a NATO summit, where he is under pressure to boost Canada's defence spending in the face of instability in Ukraine and the Middle East.
(Editing by Jeffrey Hodgson and Tom Brown)