Aug. 14, 2012  -- The Air Force and major defense contractors were warned about a design flaw in the F-22 Raptor fighter jet more than a decade before it directly contributed to the death of an American pilot, according to an internal Air Force document obtained exclusively by ABC News.

Air Force officials also revealed that early in the plane's development, in order to save money on the $79 billion program, the service had decided against a safety measure that would've addressed the flaw -- the same safety measure the military is now paying millions to install and that the pilot's family insists would have saved his life.

"It's really nice of the Air Force to have known about this 12 years ago and then let my brother die," Jennifer Haney, sister of the late Capt. Jeff Haney and family spokesperson, told ABC News.

Late Monday Lockheed Martin and Boeing confirmed the companies had settled a wrongful death lawsuit with the Haney family for an undisclosed sum. The suit, filed in March, had alleged the companies knowingly provided the Air Force with a "dangerous" and "defective" aircraft. The Air Force was not named as a defendant in the suit.

The settlement came just days after ABC News requested comment from the Air Force and Lockheed Martin concerning a memo written by a combined Air Force and civilian contactor test group in March 2000 that warned of an "operational deficiency" in the F-22s life support system -- a flaw that was only partially addressed in the last decade and one that was explicitly referred to in the Haney lawsuit.

Capt. Haney was 31 years old when he was killed in a crash approximately a minute after a malfunction in his F-22 cut off his oxygen supply during a routine training exercise in Alaska in November 2010. An Air Force investigation blamed the crash on Haney, saying he failed to properly fly the plane or deploy a manual emergency back-up oxygen system while experiencing a sense "similar to suffocation."

"The Air Force and Lockheed both knew of the design flaws associated with the [F-22 life support system] for ten years before and failed to correct this deadly flaw that killed a pilot, destroyed a half-billion dollar aircraft and placed all F-22 pilots and these aircraft at unacceptable risk," a source in the F-22 program told ABC News.

READ Exclusive: Family Demands Truth in F-22 Fighter Pilot's Death

'Unacceptable…May Result in Pilot Debilitation or Fatality'

The document, written by a member of the Combined Test Force at California's Edwards Air Force Base in March 2000 and updated in 2002, described a problem with the design of the plane's Environmental Control System (ECS), which is charged with regulating several systems in the plane including the conditions in the cockpit. During certain specific high-altitude maneuvers, the ECS system would shut down and it was built so that if it failed, it would spark a cascade effect that would also cut off the pilot's primary oxygen supply.

Under the heading "Impact If Not Fixed," the test group member wrote, "Real-world failure of [the oxygen system] due to ECS shutdown is unacceptable. ECS failure and the subsequent loss of supplemental breathing oxygen may result in pilot debilitation or fatality due to either altitude hypoxia [oxygen deprivation] or decompression sickness in the event of cabin depressurization."

"Investigate and take corrective action," the 2000 document says. "Suggest repairing the ECS system so it will provide continuous, adequate service throughout the flight envelope. Suggest providing a reliable source of bleed air for [the oxygen system] in the event of ECS failure... [C]onsider addition of pilot breathing air plenum to fill gaps when [the oxygen system] is not operating, as during ECS shutdown."

A plenum, as described by former Marine Corps fighter pilot and ABC News consultant Steve Ganyard, is a common feature in legacy fighter planes akin to a tank within the primary oxygen system that could hold excess air for use in the case of crisis.

The Air Force was able to "mitigate" the instances of ECS shut down due to the high-altitude maneuvers to "an acceptable level of operational risk," the service said, but it never provided a secondary "reliable source" of air for the oxygen system nor did it add a plenum as a back-up. Instead, the Air Force directed pilots to a manual emergency oxygen system in the event of an ECS shutdown.

That emergency system -- currently installed on the 180-odd F-22s -- gets oxygen directly from a separate oxygen bottle and can only be activated after a pilot locates and pulls a small ring tucked into the corner of the cockpit, a process the Air Force admits is difficult even under controlled conditions and during which the pilot would not be able to breathe.

At the time the memo was written, the test group said the delay between the primary oxygen system being cut off and the pilot being able to activate the manual emergency system was "an acceptable safety risk for flight test operations."

Capt. Haney's F-22 Experiences ECS Failure Before Crash

It was the ring on the emergency system that Air Force investigators believe Haney was struggling to find and pull as he turned his jet into a dive from 51,000 feet and flew nearly straight into the ground in 2010.

Moments before, a still unidentified malfunction caused Haney's ECS to shut down and he lost all oxygen to his mask.

In the full, nearly 1,000-page version of the crash report obtained by ABC News through a Freedom of Information Act request, Air Force officials noted that the ring Haney was meant to pull to give himself air was hard to see and, if he dropped the ring during a failed pull, he would have had "significant difficulty" retrieving it from between the seat and console.

The report still concluded "by clear and convincing evidence" that Haney was at fault in the crash, saying he was likely distracted by trying to activate the manual back-up system and did not properly fly the plane.

The Air Force said Haney was not believed to be unconscious due to lack of oxygen at any point in his ordeal -- a claim strongly disputed by his family and questioned by other F-22 pilots, aviation experts and the Pentagon's own Inspector General, who has launched a rare review of the Air Force investigation. Haney's family said it was more likely he was unconscious due to lack of oxygen at least part of the time and, therefore, could not be held responsible for the crash.

Whatever happened in Capt. Jeff Haney's last moments, no one disputes that his ECS shut down at 51,000 feet and, for about a minute until his death, he could not breathe.

DOWNLOAD: Air Force's Capt. Jeff Haney F-22 Crash Report (Abbreviated, PDF)

Safety System Cut to Save Cash

Though the Air Force investigators' crash findings were made public last December, it wasn't until this May -- more than 12 years after the warning document was written, a year and a half after Haney's death and in the wake of prominent news reports including an ABC News "Nightline" investigation -- that an Air Force Scientific Advisory Board recommended that the Air Force give the Raptor an automatic back-up oxygen system. In addition to Haney's crash, the advisory board had been looking into why, in at least two dozen incidents since 2008, F-22 pilots had experienced the symptoms of oxygen deprivation in mid-air while the oxygen system appeared to be working properly.

In June the Air Force awarded Lockheed Martin a $19 million contract to retrofit 40 jets in the fleet with the new automatic system, designed to kick in whenever the plane's instruments detected an interruption in the oxygen flow, such as in the case of an ECS failure. A month later the Pentagon announced it believed it had solved the mystery oxygen deprivation problem with the other F-22 pilots, which it said was unrelated to Haney's crash, but would be going ahead with the automatic back-up system regardless.

According to a top Air Force official, however, installing such a back-up oxygen system for the $420 million-a-piece planes was not a new idea, but one that was scrapped to save money years before Haney climbed in the cockpit.

"The back-up oxygen system was originally in the design of the F-22, as we got into cost constraints it was eliminated from the design," Air Force Maj. Gen. Charles Lyon told reporters earlier this month.

The Air Force later clarified Lyon's comments.

"In his response, General Lyon was summarizing a Scientific Advisory Board discussion about the necessary trade-offs made in the early history of the jet between improving safety margins and controlling costs. During the F-22's development, the decision to select an emergency oxygen system (EOS) -- as referenced in his remarks -- was determined to provide an acceptable level of control for the risk of an interrupted air flow, based on operational experience in legacy fighters," the Air Force said in a statement to ABC News. Lockheed Martin began developing the F-22 in mid-1980s and was awarded an Air Force contract for the plane in 1991, according to the Air Force.

The new system, the Air Force said, will "further improve that safety margin that is provided by the [emergency oxygen system]."

Jennifer Haney questioned why the military would have "skimped" on a safety precaution in a program that's estimated to cost $79 billion.

"I'm glad they saved money, but they didn't save Jeff," she said. "I understand that things can be expensive, but when you have a jet that is capable of doing the things that the jet can do and all the technology it has, I can't understand why you would sacrifice on the safety of the pilots you are putting in the jet to fly it."

'They Knew There Was a Problem'

Jeff Haney's wife, Anna, filed a wrongful death lawsuit against Lockheed Martin and other contractors in March and claimed, among other allegations, that the Raptor was "designed, manufactured, distributed and sold with a dangerous and defective oxygen back-up system that did not automatically provide life support or breathable oxygen to the pilot in the event of a malfunction."

Lockheed Martin said at the time the lawsuit was filed that while Jeff Haney's death was a tragedy, the company disagreed with his widow's claims and would fight them in court. Early Tuesday Lockheed Martin confirmed the lawsuit had been settled, but declined to answer any questions about the settlement, citing confidentiality.

As the major civilian partner to the Air Force in the F-22's production, Lockheed Martin officials make up part of the F-22 Combined Test Group -- the same group that wrote the March 2000 memo.

When ABC News contacted Lockheed Martin last week about the F-22 life support concerns raised in the memo, a spokesperson for the company said, "Since the beginning of the F-22 program, Lockheed Martin has and continues to support the U.S. Air Force's requirements to ensure the F-22 meets their expectations on availability, performance and reliability, and to enhance the aircraft's capabilities to address emerging and proliferating threats."

The spokesperson said that Lockheed Martin "fully supports the Air Force's decision regarding the automatic emergency back-up oxygen system and has no further comment."

The Air Force contends that the original warning document did not explicitly "specify a need for a back-up oxygen system," despite the suggested plenum and second source of "reliable" oxygen, but said the service is adding an automatic back-up now because it is "a prudent step to further reduce risk of interrupted oxygen flow to the pilot."

Jennifer Haney said such a prudent step had been taken far too late.

"It was 12 years ago. That's 10 years before Jeff died that they could've done something and they did nothing," she said. "They knew there was a problem with the jet."

The Air Force does not expect Lockheed Martin to have outfitted the first batch of F-22s with the new automatic back-up oxygen system until next spring. Until then, the Air Force plans to begin loosening strict flight restrictions placed on the planes by Defense Secretary Leon Panetta in March.

Though they were officially "combat ready" beginning in December 2005, none of the $420 million-a-pop F-22 Raptors have ever been sent to war.