UPDATE 2-Price of Lockheed's F-35 fighter soars

Thu Mar 11, 2010 7:02pm EST

* Cost/plane seen over 50 pct higher than nine years ago

* Cost growth comes despite efforts to reform program

* Air Force to formally notify Congress, begin review (Adds 'too big to fail' in 3rd paragraph, Lockheed and GAO comments)

By Jim Wolf

WASHINGTON, March 11 (Reuters) - The average cost of Lockheed Martin Corp's (LMT.N) F-35 Joint Strike Fighter, the Pentagon's costliest arms purchase yet, will soar more than 50 percent above what was projected when its development began nine years ago, the Pentagon's top arms buyer told Congress.

The U.S. Air Force is set to formally notify Congress that the program has crashed through a key cost-containment threshold that will force a thorough review, Ashton Carter, undersecretary of defense for acquisition, said on Thursday.

But the net impact of such a notification may be minimal since the program is widely said by U.S. officials to be too big to fail. Washington has no other way to replace aging warplanes like Lockheed's F-16 and the program is a linchpin of fighter modernization for several U.S. allies.

The cost blowout has occurred despite a restructuring announced by Defense Secretary Robert Gates in February to keep the program on track, including adding 13 months and $2.8 billion to the development phase.

"The JSF program has fallen short on performance over the past several years," Carter told the Senate Armed Services Committee. He said the Defense Department planned to aggressively manage it over coming years as it goes from development and testing toward full production.

Affordability was supposed to be a hallmark of the F-35, which is being built in three versions for the U.S. Air Force, Navy and Marine Corps; eight overseas co-development partners; and other projected foreign buyers.

Senator Carl Levin, chairman of the committee, said the cost growth could have significant implications for the rest of the Pentagon's multibillion-dollar acquisition programs and for its budget as a whole. The United States alone is scheduled to buy more than 2,400 F-35s, the backbone of its air combat fleet for coming decades.

"People should not conclude that we will be willing to continue... strong support without regard to increased costs coming from poor program management or from lack of focus on affordability," the Michigan Democrat said.

Carter said he expected Air Force Secretary Michael Donley to notify Congress of the cost-containment breach formally under a law known as Nunn-McCurdy within days.

If unit-cost growth tops 25 percent, Nunn-McCurdy requires the Pentagon to justify continuing the program based on three main criteria: its importance to U.S. national security; the lack of a viable alternative; and evidence that the problems that led to the cost growth are under control.

In 2001, when the development began, the F-35 procurement cost had been projected to be $50.2 million per aircraft in base-year 2002 dollars.

Pentagon estimators, based on a projected procurement of 2,443 aircraft, including all variants, now expect the average price to range from $80 million to $95 million in 2002 dollars, said Christine Fox, director of cost assessment and program evaluation for Defense Secretary Robert Gates.

FOREIGN SALES

The eight U.S. co-development partners are Britain, Italy, the Netherlands, Turkey, Canada, Australia, Denmark and Norway.

Israel has begun a process that could lead it to buy 75 F-35s. Singapore is also mulling a purchase, but cost growth could eat into overseas sales, to the benefit of rival fighters from Europe, Russia and China.

Completing development and approving full-rate production is now expected in April 2016, about 2-1/2 years later than planned in the baseline program approved in 2007, congressional auditors told the committee.

In addition, the Government Accountability Office said there was a "substantial risk" that the program would fail to deliver the expected number of aircraft and required capabilities on time, despite the restructuring.

Carter said initial operational capability was now set for 2012 for the U.S. Marine Corps version and 2016 for the Air Force and Navy models.

Lockheed Martin, the Pentagon's No. 1 supplier by sales, said F-35 production trends showed significant improvement, indicating aircraft deliveries will be back on schedule in 2011.

The three most recent aircraft loaded into production tooling are now on schedule, said Jeffery Adams, a company spokesman. "We are committed to delivering our airplanes on time." (Reporting by Jim Wolf; Editing by Tim Dobbyn)

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