UPDATE 2-Pentagon signs F-35 fighter contract with Lockheed

Thu Sep 23, 2010 1:21am IST

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* Delay had starting worrying investors and Congress

* Lockheed puts value at over $5 bln

* Lockheed says more cost-cutting work to do

* Deal includes 30 fighters for U.S., one for Britain (Adds further details, quotes, contract value, byline)

By Andrea Shalal-Esa

WASHINGTON, Sept 22 (Reuters) - The Pentagon said on Wednesday it reached a "fixed-price" agreement with Lockheed Martin Corp (LMT.N) for a fourth batch of F-35 fighter jets, wrapping up months of negotiations about the U.S. military's biggest weapons program.

Pentagon spokesman Bryan Whitman said the deal, concluded Tuesday, included 30 fighter jets for the United States, one for Britain and an option for one more for the Netherlands.

He said the contract provided a "fair and reasonable" basis for the fourth lot of production jets and "sets the appropriate foundation for future production lots" of the $382 billion multinational Joint Strike Fighter program.

Lockheed said the new contract was valued at over $5 billion, including sustainment costs for the new radar-evading fighter jets, and tooling needed for their production.

Pentagon acquisition chief Ashton Carter and Lockheed Chief Executive Robert Stevens signed the agreement on Tuesday.

Whitman gave no details on the price per airplane negotiated in the contract, but said it was below independent cost estimates released earlier this year.

One senior industry executive said all four batches of F-35 production aircraft were now priced below government estimates, but Lockheed realized it still had "a significant amount of work" to do to continue driving down costs.

The industry executive, who was not authorized to speak on the record, said it was imperative for Lockheed to continue increasing the rate at which it is building the new fighters to achieve the "economies of scale" needed to lower future costs.

The deal, initially expected in May, took longer to negotiate given a shift to a "fixed price, incentive fee" contract structure two years earlier than planned.

Previous F-35 production contracts were on more traditional "cost plus" contract terms, which make the government liable for cost overruns.

PENTAGON AGGRESSIVELY MANAGING PROGRAM

Defense Secretary Robert Gates significantly restructured the program earlier this year, adding 13 months to the development program, withholding $614 million in award fees from Lockheed and firing the Marine Corps general who ran it.

"The Department continues to closely monitor and aggressively manage this important program," Whitman said.

Lockheed shares rose 0.76 percent to $72.20 in afternoon trading, while the Standard & Poor's 500 index .SPX, of which it is a component, fell 0.7 percent.

The F-35 Joint Strike Fighter will eventually account for about 25 percent of Lockheed's yearly revenue.

Lockheed confirmed the agreement in a separate statement, saying it brought the total number of F-35 production aircraft under contract to 63, including aircraft for the U.S. military and three other countries.

"We remain confident that this agreement keeps us on track to reach our long-term price projections for the F-35 at full-rate production," said spokesman Joe LaMarca.

"We know we have to adapt to the new reality that we face, with more demanding affordability goals that place an even greater premium on program execution and we are committed to meeting that challenge," he said.

The delay in reaching a deal with the Pentagon had begun to unsettle investors and lawmakers.

Last week, the Senate Appropriations Committee's defense subcommittee slashed funding for 10 of 42 F-35 fighters the Pentagon requested in its fiscal 2011 budget, saying the move would give the program more time to stabilize production.

Defense consultant Loren Thompson said the deal would provide a big boost to Lockheed's aeronautics division.

"Any time there's a delay on such a critical contract, people begin to worry," he said. "With a contract now in place Congress is less likely to take money away from the F-35 program and use it for other purposes."

Analysts say Lockheed had even begun building some of the aircraft in the fourth batch using its own funds to ensure that its production stayed on schedule, despite the long delay in negotiating a contract.

The industry executive said Lockheed was continuing to improve the manufacturing process for the new fighter and was in discussions with the Pentagon about ways to earn back the entire $614 million in award fees being withheld.

Target milestones were being set during a technical baseline review due to be completed by a Nov. 23 meeting of the high-level Defense Acquisition Board. (Reporting by Andrea Shalal-Esa; editing by Robert MacMillan, Lisa Von Ahn and Andre Grenon)

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