WASHINGTON (Reuters) - The Pentagon on Tuesday announced it had reached agreement with United Technologies Corp (UTX.N) to build 38 engines for a sixth batch of Lockheed Martin Corp (LMT.N) F-35 fighter jets, securing discounts of 2.5 percent to 9.6 percent on the engines.
Pratt & Whitney, the engine-making unit of United Technologies, said it is targeting further cost reductions on the next two batches of engines under contracts that will be negotiated with the Pentagon in coming months.
The Defense Department did not disclose the value of the deal, which was first reported by Reuters on Monday, but sources close to the matter said it would be worth over $1 billion.
Mandatory budget cuts have prompted U.S. military officials and weapons makers to focus increasingly on cutting costs so they can ensure the continuation of big programs like the $392 billion F-35 program, the Pentagon's costliest weapons program.
Chris Flynn, vice president of Pratt & Whitney's F135 and F119 engine programs, said the company is "laser-focused" on reducing costs, meeting its delivery schedule and reaching contracts quickly for the next two batches of engines.
Flynn told Reuters the company hoped to conclude agreements for the seventh and eighth sets of engine orders in the first quarter of 2014. The two orders will be negotiated together.
He said the company planned to submit its proposal for those engines by the end of September, including further cost reductions that reflect increasing economies of scale.
"We're starting to see production increase, and you can see some of the benefits of that," Flynn told Reuters in a telephone interview. He noted that Pratt had already reduced the cost of producing the engines by more than 40 percent since the first engines it built for the program.
"We anticipate continued price reductions, as long as we're able to keep the volume in place," Flynn said.
He said Pratt was in talks with the Pentagon about accelerating moves to fixed-price terms for operations and maintenance of the engines under a performance-based logistics contract, which he said could generate additional savings.
The Pentagon's F-35 program office agreed in late July on the terms of a contract for the sixth and seventh orders of F-35s with Lockheed Martin, which builds the jets.
The government buys the engines from Pratt & Whitney and then provides them to Lockheed. Pratt is the sole producer of F135 engines for the radar-evading plane. The latest agreement in principle will be finalized in coming weeks.
The Pentagon said the agreement reflected a 2.5 percent reduction in each of the 32 common configuration engines, which power both the Air Force's conventional take-off variant of the F-35 and the Navy's carrier variant.
The unit prices for the six engines that power the Marine Corps' short take-off and vertical landing (STOVL) aircraft, were about 9.6 percent lower compared with the previous contract, according to the statement.
"Driving down cost is critical to the success of this program and we are working together - in each successive contract - to lower costs for the propulsion system," said Air Force Lieutenant General Chris Bogdan, the Pentagon official who runs the F-35 program.
The deal includes 36 engines to be installed in aircraft and two spares. It also includes the first propulsion systems for planes to be sold to Italy and Australia.
Pratt & Whitney has delivered 107 production engines for the F-35 to date and will start delivering engines covered by the latest contract in the fourth quarter.
The Pentagon announced later on Tuesday that Pratt had won a contract worth $70 million in preliminary funding to start purchasing parts and components for an eighth batch of 29 F135 engines, as well as 10 engines for Britain, Italy and Norway that will be included in the seventh batch.
Flynn said the company invested millions of dollars of its own funds to keep the schedule for the sixth batch of engines on track after initial funding provided by the Pentagon ran out.
Reporting by Andrea Shalal-Esa; Editing by Dan Grebler