Bloomberg News

Lockheed Gets Approval of Next F-35 Production Contract

July 06, 2012

Lockheed Martin Corp. (LMT:US) received approval for a sixth production contract of F-35 aircraft, the Pentagon’s largest weapons program.

Undersecretary for AcquisitionFrank Kendall in a two-page Acquisition Decision Memo yesterday approved proceeding with the next contract for as many as 36 aircraft, including 23 Air Force versions, seven aircraft carrier models and six Marine Corps short-takeoff and vertical-landing models. The contract includes five for international customers.

Kendall approved a strategy that “bases aircraft procurement quantities upon development and test progress” as well as progress Lockheed Martin makes reducing the cost to retrofit aircraft to correct deficiencies uncovered in flight tests.

Shares of Lockheed Martin fell 14 cents for the day to $86.86 at the close of New York trading, after rising from $86.44 before Kendall’s approval was reported.

The steps are the latest efforts to control costs for the $395.7 billion acquisition program. The first four contracts for 63 jets are exceeding their combined target cost by $1 billion, according to congressional auditors.

“This strategy provides a means to have control on production that is informed by demonstrated performance” against this year’s program goals, Kendall wrote.

Control Strategy

Under the plan, the Pentagon F-35 program office could proceed with putting under contract 25 of the 31 U.S. planes Kendall authorized. Six wouldn’t be put on contract until the Bethesda, Maryland-based company meets at least five criteria.

“This strategy provides a means to have control -- a dial -- on production that is informed by demonstrated performance against the 2012 plan,” the F-35 program manager, Vice Admiral David Venlet, told the House Armed Services Committee in May, previewing the strategy Kendall approved.

It also seeks a reduction in the “concurrency,” or overlap between production and testing, that has forced retrofits when problems cropped up, he said.

Venlet said the program’s parallel development and production have resulted in aircraft retrofits that “are very real and affect schedule and cost in hardware, software, test and production.”

The overlap will decline as the program approaches the end of development in 2016, he said.

Controlling Costs

A fifth contract remains under negotiation. Kendall wrote that his decision for the sixth contract going forward was contingent on him receiving an update on a “recommended agreement” for the fifth contract.

The F-35’s total acquisition cost has increased 70 percent, to $395.7 billion in April from $233 billion in late 2001 when the development phase began. The costs are calculated in comparable, inflation-adjusted “then-year dollars.”

The program’s projected “life cycle cost” -- including development since 1994, production of 2,443 jets and 55 years of support -- increased to $1.51 trillion from $1.38 trillion in 2010, Pentagon officials told reporters March 30.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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