Israel has developed an extremely capable aircraft industry, honed by combat experience unmatched in the world. Israeli-built aircraft include the Nesher (a copy of the Mirage III), and the Kfir (which resembles the Mirage 5, using the American J-79 engine). In addition, Israel gained considerable experience in aircraft production from indigenous upgrade programs for its Mirage and F-4 aircraft. In the mid-1970's, Israel sought agreement for coproduction of the F-16, but this fell through due to American concerns about potential third-party sales in competition with the American manufacturer.
Building on the experience it had accumulated in the development and manufacturing of combat aircraft, the Government of Israel, through the expertise of IAI, felt ready to take on the greatest challenge of its history - the development and manufacture of a modern fighter plane to be the mainstay of the IAF. Plans called for the Lavi to be a superior attack aircraft with advanced weapons systems.
The aircraft achieved all its technical and operational objectives. It had its rollout in July 1986 and successful maiden flight in December 1986.
Israel planned to build up to 300 Lavi dual-role combat aircraft to replace its fleet of A-4 and Kfir aircraft between 1993 and 2003. One estimate put the development cost at $3 billion. The United States provided $1.3 billion of $1.5 billion Lavi development costs between 1980 and 1986, and between 1983 and 1988 Congress earmarked a total of $1.8 billion (through FY1987) for the Lavi. The Lavi program used mature US subsystems, and Israel subcontracted to American companies for the PW1120 engine project that it was not in a position to develop on its own, as well as for other elements that were beyond domestic Israeli capacity such as composite wings and flight control computers.
But concurrent to the Lavi's technological successes was a wide-ranging public debate questioning Israel's economic ability to support the cost of the program. Lavi was canceled in 1987 as a result of growing American concerns about the cost of the project, as well as from concerns that Lavi fighters would threaten the export market of the US F-16 and F-18. After extensive government deliberations, the decision was made by the Israeli Cabinet in to cancel the Lavi program. This led to a serious crisis at IAI which necessitated a major reorganization of the Company's structure and business strategy. Under American pressure, on 30 August 1987 the Israeli cabinet voted to cancel the Lavi project, but asked the United States for $450 million to pay for canceled contracts. The State Department agreed to raise the earmark for procurement in Israel from $300 million to $400 million to pay Lavi cancellation costs.
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