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Pentagon, Lockheed agree deal for 32 more F-35 fighters

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Lockheed Martin Corp and the U.S. Defense Department have reached an agreement in principle on a fifth batch of 32 additional F-35 fighter planes, the Pentagon said on Friday, bringing nearly a year of negotiations to a close.

The deal is valued at around $3.8 billion, although the two sides are still finalizing details, according to a source familiar with the agreement.

The agreement will also pave the way for talks about preliminary funding for a sixth batch of aircraft that Lockheed, the Pentagon's largest supplier, has been building at its own cost for some time.

Lockheed shares closed 0.3 percent higher at $93.30, outperforming the Arca Defense Index, which was down 0.53 percent.

Pentagon spokesman George Little said details on the cost per aircraft would be released once the final contract is signed.

People familiar with the process said both sides expected to sign a final deal before the end of the year, which will safeguard those funds from cuts if Congress is unable to avert $52 billion in automatic budget cuts to the Pentagon's fiscal 2013 budget that take effect on January 2.

The contract includes the actual aircraft, but will also pay for manufacturing support equipment, instrumentation for flight testing and other mission equipment needed for the new stealth warplanes. The Pentagon is negotiating a separate contract with Pratt & Whitney, a unit of United Technologies Corp, which builds the engine for the single-seat, single-engine F-35.

The agreement with Lockheed removes a cloud hanging over the $396 billion F-35 program, the Pentagon's costliest procurement program. Both sides have been trying to reach an agreement on this batch of aircraft since last December.

In September, Major General Christopher Bogdan, who will be the top overseer of the program starting December 6, said he was surprised the negotiations were taking so long and described relations between the two sides as "the worst" he had ever seen in decades of working on big acquisition programs.

Retiring F-35 program executive director, Vice Admiral Dave Venlet, said in a statement on Friday that the deal included lower production costs and set the stage for "improving business timelines" for international partners.

Eight countries are helping fund the development: Britain, Italy, Turkey, Norway, Australia, Canada, Denmark and the Netherlands. Together, they plan to buy more than 3,100 fighters in coming decades.

Israel and Japan have also ordered the new fighter jet and South Korea is weighing competing bids from Lockheed's F-35 and Boeing Co's F-15 fighter.

Lockheed spokesman Michael Rein said the company expected to reduce labor costs for the fifth batch of planes by 14 percent from the actual costs of the fourth lot. He said the overall cost of the fifth batch would also come down from lot 4 to lot 5, but gave no details.

He said each aircraft in the fifth batch would cost less than 50 percent of the first lot, which was $220.8 million per plane. Those aircraft were delivered to Edwards Air Force Base in California in May 2011.

Loren Thompson, a defense consultant with close ties to Lockheed, said the reduction in labor costs was "sizeable" and the program was on track to reach a cost-per-aircraft in 2018 that would not exceed the price of an F-16 fighter today.

"These lot 5 negotiations were a pivotal point for the F-35 program that will make it much easier to agree on terms for follow-on production," he said.

Current plans call for the cost of an F-35 to be around $66 million in 2018, excluding the engine, which is comparable to an F-16, he added.

The fifth F-35 order includes 22 conventional takeoff and landing variants for the U.S. Air Force, three B-models that can land vertically for the Marine Corps and seven C-models to be used on aircraft carriers for the Navy.

Production of the fifth lot of F-35 jets began in December 2011 under a preliminary "undefinitized contract action." This order for 32 aircraft was on top of 63 production jets already under contract with Lockheed.

Lockheed has delivered a total of 29 low-rate production and 19 developmental aircraft so far. Company officials say they are confident they will meet their commitment to deliver 30 jets this year, despite a 10-week strike by a key union at its Fort Worth plant, which means they still have 10 more planes to deliver this month.

The Pentagon's chief weapons buyer, Frank Kendall, told Reuters on Wednesday the two sides were "getting close" to an agreement after what he described as a "very productive" meeting with Lockheed President Marillyn Hewson.

Hewson also cited progress in talks about additional funding for early work on the sixth batch of F-35 jets.

Lockheed said last month it faced a potential termination liability of $1.1 billion on the sixth batch unless it received additional funding by year end.

The company did received some initial "long-lead" funding for advanced procurement of materials for the aircraft, but that money ran out a while ago. It has continued work using its own money to keep production on track.

(Additional reporting by David Alexander in Washington; Editing by Leslie Gevirtz and Tim Dobbyn)

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