South Korea on Monday selected Korea Aerospace Industries (KAI) and partner Lockheed Martin as the preferred bidder for a multi-billion-dollar contract to develop 120 "indigenous" fighter jets.

The bid from KAI and the US aerospace giant was always seen as the favourite for the 8.6 trillion won (US $7.8 billion) deal over a rival bid by civilian carrier Korean Air (KAL) teamed with Airbus.

The KF-X fighter project is designed to develop and produce 120 fighter jets of a new, indigenous type to replace South Korea's ageing fleet of F-4s and F-5s.

"We have chosen KAI as the preferred bidder based on our review of ... cost, development plans and development capabilities of the two bidders," the Defense Acquisition Program Administration said in a statement.

"We are planning to sign the (final) contract during the first half of this year after negotiating with the preferred bidder over technology ... and the price," the state-run procurement agency said.

The South Korean government would provide 60 percent of the development costs, with the rest to be shared by the winning consortium and Indonesia, whose involvement is the result of a bilateral defence treaty.

The KAI-Lockheed alliance always had the upper hand, as the same partnership developed the T-50 trainer, which is South Korea's first homegrown supersonic aircraft.

Lockheed, which won a contract in 2013 to sell 40 F-35A joint strike fighters to South Korea, has promised to transfer key technologies for the KF-X project to Seoul.

South Korea's military procurement needs, especially where the air force is concerned, have overwhelmingly been met by US suppliers in the past -- a reflection of their close military alliance.

KAL had talked up its bid by highlighting the technical support available from Airbus, which is part of the European consortium that developed the Eurofighter.

Airbus has made a number of bids for the South's military contracts, including a $1.38 billion deal to provide air refuelling tankers.

Korean Air currently operates aircraft maintenance workshops for both the South Korean and US air forces.

The defence ministry's request for the KF-X project required a new design, although experts say a heavily modified version of an existing fighter model would also be acceptable.