US F-35 production slowdown may delay foreign orders

Fri Feb 10, 2012 8:14pm EST

* Lockheed seeks to assure partners of progress in testing

* Company eyes future orders from South Korea, India

* Order slowdown hampers drive to cut per-plane price

By Andrea Shalal-Esa

WASHINGTON Feb 10 (Reuters) - Washington's plan to further slow production of the F-35 Joint Strike Fighter is prompting its eight foreign partners to rethink their own orders, threatening a vital revenue stream for Lockheed Martin Corp and slowing its drive to make the stealthy new fighter jet as affordable as promised.

The Pentagon is restructuring the most expensive U.S. arms program for the third time in recent years, a move that will delay savings that would come from building more planes faster.

International partners who were banking on the savings as they face their own budget pressures are balking at the shift, according to multiple government and industry sources here and overseas.

Lockheed, the Pentagon's No. 1 supplier, and U.S. officials who run the $382 billion weapons program are anxiously preparing for a meeting in Australia in mid-March where the partners -- Britain, Canada, Denmark, Norway, Italy, Australia, Turkey and Canada -- will outline their revamped procurement plans.

Lockheed executives are now criss-crossing the globe to drum up other foreign orders and reassure the partner countries that the F-35 is making good progress in testing despite a constant stream of negative headlines and criticism from U.S. lawmakers.

Defense Secretary Leon Panetta endorsed the Marine Corps variant in late January and lauded progress on the overall F-35 testing program, but said a week later that he was slowing its production to avert costly retrofits.

Behind the scenes, the partners are frustrated by such mixed messages and Washington's new go-slow approach, which comes just as the program is showing real progress on flight tests and other technical issues, these sources said.

"They see progress in the test program and are scratching their heads why Washington is slowing down its orders," said one of the sources, who was not authorized to speak publicly. "If they're short of money, they should just say so."

Canada has tentatively scheduled a meeting of the partners at its embassy in Washington before the Australian meeting to get an update on the program and better coordinate their approach

SLOWING PRODUCTION HAMPERS DRIVE TO CUT JET'S COST

The F-35 program was conceived in the frugal post-Cold War era and cost overruns were more easily absorbed when budgets were increasing during the Iraq and Afghanistan wars. But the situation is different now, when as the top U.S. Air Force general put it this week, "there ain't no more money."

Lockheed says slowing production will hamper its efforts to lower the cost of the plane. The F-35 will generate about 20 percent of Lockheed's revenues once it hits full production.

So far, the company still expects steady downward movement in the price of the planes, but some analysts question whether further delays in orders could actually drive the price up.

The Pentagon last year estimated the average cost of each F-35 warplane will be about $90 million, up from early estimates of $50 million, based on current plans to buy 2,443 jets. Early production models cost more, and the government paid $111.6 million for each of 11 Air Force variants it bought in a fourth production contract, but that sum does not include the engine.

U.S. officials have already warned of grave consequences for the F-35 if U.S. lawmakers do not reverse further big cuts to defense spending that are due to take effect in January 2013.

Given the uncertainty, Lockheed is also trying to woo more foreign buyers like South Korea and India, after winning Japan's fighter competition in December. Every additional order will help drive down the price per plane for all buyers.

Closely following every move are Northrop Grumman, which is responsible for about 25 percent of the F-35 program, Britain's BAE Systems , which has about 17 percent, and engine maker Pratt & Whitney, a unit of United Technologies Corp .

"Everybody says they're committed to this program, but when Washington changes its orders, it destabilizes everybody," said one industry official who was not authorized to speak publicly.

PENTAGON SAID POSTPONING ORDERS FOR 179 PLANES

The Pentagon will provide details on Monday about the latest restructuring. Sources familiar with the plans say it will delay U.S. orders for another 179 jets until after 2017, bringing the total number of U.S. jets delayed to over 400.

The new plan calls for the United States to buy 244 jets over the next five years, with the partner countries and Israel and Japan slated to buy 285 planes, although it is clear that the international orders will likely drop from that level.

The Pentagon's initial plans called for Lockheed to quickly move toward production levels of more than 100 jets a year, with the resulting economies of scale to generate big savings in material costs and overhead. Instead its production rate will ramp up at a much slower rate through fiscal 2014.

Each U.S. restructuring has consequences for the partners, which have already chipped in hundreds of millions of dollars for development of the fighter, which was sold as an affordable way to replace a dozen older jets in use around the world.

"The situation is increasingly becoming a fiasco. People are pulling out, pulling back ... reassessing what they're going to do," Matthew Kellway, a legislator with Canada's opposition New Democratic Party, told Reuters on Friday.

He said the Pentagon had given Canada every reason to step back, by stepping back itself.

Britain, the biggest contributor to the joint development program, said in a 2010 defense review that it would cut its planned order of 138 F-35 fighter jets and decided to pull out of the short-takeoff variant completely.

This week, a U.K. official said the government would not decide until 2015 how many F-35s it will buy.

Turkey has already halved its initial order of four planes and Australia is rethinking when to buy the next 12 of its initial order of 14, given the U.S. delays.

Italy, the only other buyer of the short-takeoff version of the F-35, has hinted at possible "significant" reductions in its overall buy of 131 planes, with Italian media reports citing a cut of 30 planes.

Norway's parliament approved the purchase of four F-35 training jets last summer and is slated to decide this year on plans to buy up to 52 more planes.

Dutch Defense Minister Hans Hillen visited Lockheed's mile-long F-35 factory in Fort Worth, Texas last month, telling Radio Netherlands after the visit that a stream of negative reports about the program was causing him political headaches at home.

"The price, the rumours about technical shortcomings. Are they true, and if they are not: why is it that they keep doing the rounds?" he said. The Netherlands plan to buy 85 F-35s in total, but has put off a final decision until a new cabinet takes office, which may not happen until 2015.

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