Pentagon delays F-35, buys more Boeing fighters

WASHINGTON (Reuters) - The Pentagon overhauled the Lockheed Martin Corp F-35 fighter program for the second time in a year and said it would buy 41 Boeing Co F/A-18 warplanes over the next three years to offset slower production of the Lockheed plane.

Defense Secretary Robert Gates announced on Thursday a further restructuring of the radar-evading F-35 as part of a broad cost-reduction plan, saving it would result in net savings of about $4 billion over the next five years.

The Pentagon's biggest arms program, the new fighter is being developed with eight international partner countries at total cost of $382 billion, but the program has run into schedule delays and massive cost overruns in recent years.

Gates said work on the Air Force and Navy versions of the plane was moving along satisfactorily.

But he said the Marine Corps variant of the plane, which offers short takeoff and vertical landing (STOVL) capabilities, was put on a two-year "probation," and could be canceled if Lockheed was unable to fix significant test problems.

"If we cannot fix this variant during this time frame and get it back on track in terms of performance, cost and schedule, then I believe it should be canceled," Gates told reporters at a Pentagon briefing.

For now, he said adopting "a more realistic production schedule" and repricing would save $4 billion over the next five years. The changes must be approved by Congress.

A Pentagon document on the changes called for Lockheed to build 325 F-35s through fiscal 2016, instead of the 449 that were planned, and said cost-cutting efforts were still needed.

Pentagon officials said the cuts would not have a significant impact on the overall cost per plane, since additional testing would stave off problems later on.

Cutting those 124 planes could save well over $10 billion at current prices, which ranged between $109 million per plane and $142 million under the Pentagon's last contract with Lockheed. That does not include the price of the aircraft's engine.

Of the total savings, $4.6 billion will be shifted into the program's development phase to pay for more testing and to offset too-low cost estimates, the Pentagon said.

Development of the new fighter was now slated for completion in early 2016 instead of mid-2015 under the previous restructuring, according to the Pentagon document.

The Pentagon estimates that it must still spend $13.8 billion to finish the F-35's development, on top of $37 billion spent to date.

The document said all three military services would reassess when they could begin using the new Lockheed fighter jets in combat but had not done so yet.

News of the further delay comes after the disclosure of images this week that appeared to show that China had a working prototype of its own stealthy fighter jet.

Boeing will benefit by being able to sell the Pentagon 41 more of its F/A-18 fighters in the next three years, a deal industry sources say could be worth close to $2 billion for Boeing, plus engine orders for General Electric Co.

Boeing said it had been delivering its "Super Hornet" warplanes to the Navy on time and on cost for years, and was ready to meet the Pentagon's new demand. "If the secretary has decided that's what needed to fill the gap, we'll be there for them," said Boeing spokesman Dan Beck.

Analysts said the Lockheed restructuring was more severe than expected. "This is clearly a major blow to the program," said Virginia-based analyst Jim McAleese.

A technical baseline review conducted by the program's new manager, Navy Vice Admiral David Venlet, had obviously gone worse than expected, he said, adding, "We've never seen something this significant before."

Lockheed Chief Executive Robert Stevens said his company was determined to meet its commitments.

"We recognize our role and responsibility to deliver extraordinary fighters in three variants," Stevens said. "We're committed to doing that, and we're confident that we'll succeed, including delivering the STOVL variant."

The F-35 has been expected to eventually account for about 25 percent of Lockheed's yearly revenue.

Lockheed shares closed 1.75 percent higher on the New York Stock Exchange.

(Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn and Steve Orlofsky)