Lockheed says more orders key to cutting F-35 cost

WASHINGTON Tue Jun 19, 2012 7:52pm EDT

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WASHINGTON (Reuters) - Senior executives at Lockheed Martin Corp (LMT.N) said they were working hard to reduce the cost of the F-35 Joint Strike Fighter program, the Pentagon's biggest weapons program, but ultimately needed bigger order volumes to make the program affordable.

"Volume will ultimately drive the affordability of this program," Lockheed Chief Operating Officer Chris Kubasik told reporters on Tuesday, adding that recent foreign orders for the radar-evading warplane from Japan and Norway had given the program some "positive momentum."

Lockheed submitted a proposal on Monday to build 60 of the planes for South Korea, Kubasik said, noting that winning that order would further help lower the price of the airplane.

Lockheed Chief Executive Bob Stevens said the company was "fully dedicated" to lowering the cost of the F-35, but told Reuters that it was not clear that Lockheed could meet the Pentagon's expectation of an 18 percent price cut from the fourth to fifth batches of production planes.

Stevens said Lockheed had offered the Pentagon a lower price in its proposal to build a fifth batch of 32 F-35 fighters, even though the order number was not rising, as initially projected. The negotiations have dragged on for over six months, and neither side is projecting when an agreement may be reached.

A new report by the Government Accountability Office released last week cited continuing concern about the high level of overlap between development, testing and production on the program, despite a third Pentagon restructuring this year that slowed the program to allow more time for development.

The report noted that since 2002, the total quantity through 2017 has been reduced by three-fourths, from 1,591 to 365.

Stevens last month told investors that the Pentagon's demands for ever more cost data were adding to the very overhead the government wants to see lowered because Lockheed needed more workers to process the requests.

On Tuesday, Stevens said the requests were continuing even though Lockheed had already provided 7,000 pages of additional data on top of 6,000 pages submitted in the company's proposal for the fifth batch of production planes.

He said the government's expectations were not "entirely aligned with what we're able to do as an industrial team."

He reiterated the company's resolve to drive down overhead costs and make the F-35 program more efficient, but he said some of the government's expectations were unprecedented.

"There is no precedent for some of the expectations that people have as a result of the 'should cost' conversations," Stevens told Reuters. "I know what the airplane costs, I know what the industrial base is capable of doing."

The company is also grappling with a nine-week strike by 3,650 members of the International Association of Machinists and Aerospace Workers at the Fort Worth, Texas plant where it builds the F-35, and at two military bases in California and Maryland.

Lockheed and the union are due to meet with federal mediators on Wednesday afternoon to try to resolve the strike, which was largely triggered by Lockheed's bid to scrap a defined benefit pension plan for future workers.

Larry Lawson, head of Lockheed's aeronautics division, told Reuters in a separate interview that the company could not back off its demand to halt defined benefit pension plans for future workers, a policy already implemented in nearly every other corporate sector. "We're not out of line with the national trends," he said.

Stevens told reporters on Tuesday that Lockheed had used the strike to think about making certain parts of the F-35 assembly line "more efficient." He did not elaborate.

Lawson said Lockheed was also working hard to lower the current rate of 16 percent for scrap, rework and repair on the F-35 production line, although he rejected the Pentagon's view that the rate exceeded that of other aircraft programs at this point in their development.

"I don't want to leave anybody with the impression that we're satisfied with 16 percent non-conforming. It's not a satisfactory place to be," Lawson said.

He said the scrap, repair and rework rate had not risen as a result of the strike, despite the use of temporary workers.

Lawson echoed Kubasik's remarks about needing larger order volumes to drive down production costs, calling it "the most powerful leverage" to meet cost targets on the program.

He said the government's own cost models showed that cost of the plane would go down as orders increased, noting that Lockheed had beat the government's cost estimates for each successive batch of production planes.

He said the company could not back off its demand to halt defined benefit pension plans for future workers. "We're not out of line with the national trends," he said.

Lockheed is developing and building the next-generation F-35 fighter for the United States and eight development partners - Britain, Italy, Turkey, Denmark, Norway, Canada, Australia and the Netherlands - plus two other countries, Israel and Japan.

The Pentagon projects it will spend $396 billion to develop and buy 2,443 of the new radar-evading, supersonic warplanes, with projected operating and maintenance costs likely to drive the program's total lifetime cost to $1.51 trillion.

(Reporting By Andrea Shalal-Esa; Editing by Phil Berlowitz)

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