Lockheed eyes 2-4 percent cost reduction in next F-35 contract

8:04:00 AM
WASHINGTON, -- Lockheed Martin Corp (LMT.N) is close to signing a roughly $4 billion deal with the U.S. Defense Department for 43 more F-35 fighter jets that will lower the cost of the jet's airframe by 2 to 4 percent, sources familiar with the program said.

The reduction is part of a drive by the company and other key F-35 suppliers to slash the projected $400 billion cost of developing and building 2,457 U.S. jets in coming years - and the $1 trillion in additional costs to operate and maintain them over 50 years.

Lockheed's F-35 program manager Lorraine Martin and Air Force Lieutenant General Chis Bogdan this week both said the two sides were "close" to agreement for an eighth batch of F-35s. Neither disclosed details.

Sources familiar with the process said they expected the cost of the F-35 A-model airframe to drop to $94 million to $96 million under the Low Rate Initial Production (LRIP) contract, down from $98 million in the seventh production contract.

The government buys the jets' engines separately from Pratt & Whitney, a unit of United Technologies Corp (UTX.N). Pratt this week said it is near agreement with the Pentagon on contracts for the seventh and eighth batches of its F135 engines that will lower the engine cost by a combined 7.5 percent to 8 percent.

Industry and government officials are considering other initiatives to lower plane costs in coming years, including changes in manufacturing, and possible "block buys" by some of the foreign countries with pending orders: Britain, Australia, Norway, Italy, Turkey, the Netherlands, Israel and Japan.

South Korea is due to finalize its order for 40 jets later this month.

Lockheed and two suppliers, Britain's BAE Systems (BAES.L) and Northrop Grumman Corp (NOC.N), in July announced plans to invest $170 million in cost-cutting measures expected to generate combined savings of $1.8 billion.

Lockheed's Martin said 66 projects were already under way as part of the so-called "Blueprint for Affordability," with nearly 550 more under consideration.

The companies say they can lower the plane costs to under $80 million, including the engine, per jet by 2019.

"That's an audacious target, but it can be realized," Martin told reporters at the annual Air Force Association conference.

Pratt & Whitney, and Britain's Rolls-Royce Holdings Plc, which makes the lift fan for the plane's Marine Corps version, are finalizing a separate deal to invest their funds in similar cost-cutting measures, officials said.

The companies are also looking at grouping aircraft orders from Australia and other countries into block buys, Martin told Reuters in an interview.

"We're working with General Bogdan and his team to see if there's something we can do to leverage (those orders) that could have price savings not only for them, but for everyone else too," Martin said.

The initiative is likely to be discussed at next week's meeting of the F-35 Joint Executive Steering Board in Oslo.

(PHOTO) F-35 Lightning II external weapons testing at Naval Air Station Patuxent River.



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