UPDATE 2-GE, Rolls offer fixed-price fighter engines

* Pentagon still opposes second engine

* Pratt calls GE-Rolls offer "a distraction" (Adds response from Pentagon, Pratt, byline)

By Andrea Shalal-Esa

WASHINGTON, April 27 (Reuters) - General Electric Co (GE.N) and Britain's Rolls-Royce Group Plc (RR.L), scrambling to stave off cancellation of their alternate F-35 fighter engine, said on Tuesday they had offered to build the new engines at progressively lower fixed prices through 2014.

The offer, presented to Pentagon officials this month, could save $1 billion over five years if Pratt & Whitney, the United Technologies Corp (UTX.N) unit that is building the main F-35 engine, matched its offer, GE and Rolls said.

But Pratt dismissed the offer as "a distraction," and the Pentagon said Defense Secretary Robert Gates still opposed the second engine program which Congress has declined to kill.

The GE-Rolls team is developing a second engine to power the Lockheed Martin Corp (LMT.N) F-35 Joint Strike Fighter under a program launched by Congress in 1996 to provide competition in an engine market valued at $100 billion.

The Pentagon has tried unsuccessfully for five years to cancel the program, saying the long-term benefits of competition will fail to offset the short-term cost of developing two F-35 engines.

Gates was not convinced that the "speculative benefits of competition will offset the very real upfront and ongoing costs for pursuing an extra engine," Pentagon press secretary Geoff Morrell said in a statement.

"The secretary does not believe the JSF needs an extra engine. Period," he said.

Pratt said the Obama administration had repeatedly stated its opposition to the GE-Rolls engine, saying it made no sense to spend $2.9 billion more to potentially save $1 billion.

"This belated offer and its timing, coming just prior to congressional consideration, is simply a distraction," said Pratt spokeswoman Erin Dick.

GE and Rolls argue it would cost just $1 billion to finish development of their F136 engine, or $1.8 billion, including tooling and other items added to the Pentagon's higher $2.9 billion estimate.

GE and Rolls made a more modest fixed-price offer last year that is still being considered by the Pentagon, but this new proposal would extend to 150 low-rate production engines to be built at progressively lower cost from 2012 through 2014. The Pentagon usually signs cost-plus contracts with its contractors for weapons before they enter full-rate production.

The previous plan called for a head-to-head competition between the two engine makers once the engines enter full-rate production, but John Rice, vice chairman of GE, told reporters the GE-Rolls team was ready to compete now.

"We say compete now. We think competition is the best answer," Rice said on a teleconference.

The Pentagon is trying to move to more fixed-price deals, which makes contractors bear the risk if costs exceed plans, or production falls behind schedule.

In total, GE and Rolls argue that competition could save $20 billion from the estimated $100 billion expected to be spent on F-35 fighter engines over the next 30 years.

GE and Rolls say they have presented their offer to the F-35 fighter program manager and key congressional committees, and have asked to brief chief weapons buyer Ashton Carter.

They said development of their F136 engine is more than 75 percent completed and flight testing will start next year.

Under the GE-Rolls offer, the companies would assume the risk of meeting or beating price targets for early production engines, essentially adopting practices widely used in the commercial sector. (Reporting by Andrea Shalal-Esa; Editing by Derek Caney, Matthew Lewis and Tim Dobbyn)