US, Lockheed talks for more F-35s move to senior level-sources

Tue Oct 2, 2012 7:14pm EDT

* Two sides whittled differences to just over $100 mln

* New F-35 official, Navy arms buyer visited Lockheed plant

* Lockheed reluctant to accept too ambitious cost goals

By Andrea Shalal-Esa

WASHINGTON, Oct 2 (Reuters) - Talks between the Pentagon and Lockheed Martin Corp about a fifth order of F-35 fighter planes have been elevated to a senior level as the two sides debate the last $100-million-plus dividing them, according to multiple sources familiar with the discussions.

"We're not that far apart," said one of the sources, who was not authorized to speak publicly about the negotiations, which have been underway for 10 months. "We should be able to close this. It's not intractable."

The comments suggest the two sides are moving closer to a contract agreement just two weeks after a key Pentagon official said the relationship between the U.S. government and the company were the worst he'd ever seen.

Lockheed and the Pentagon both declined comment on the negotiations, saying only that discussions were still under way. Both sides had hoped to reach agreement on a contract long before now, paving the way to begin negotiations on the next contract -- which links the sixth and seventh orders.

They are under pressure to clinch a deal and "obligate" the funds for the fifth batch of planes since unobligated funds are vulnerable to additional budget cuts due to start taking effect in January.

Lockheed is already building the fifth batch of planes under a contract that provided some preliminary funds, but it needs to finalize the contracts to finish the job. It also recently started building the first of the jets in the seventh order, using preliminary funds awarded for long-lead purchases of materials included in an earlier contract.

Senior Pentagon and Lockheed officials are always briefed on contract negotiations, but now the discussions are being held mainly at that more senior level, the sources said.

One of the key players in the talks is Navy acquisition chief Sean Stackley, whom industry executives see as a tough, but fair negotiator, who is also known for his decisiveness.

Stackley is due to take over as the senior acquisition executive on the program later this year, relieving Air Force Secretary Michael Donley. The switch will happen when Navy Vice Admiral David Venlet retires as program manager and hands the reins to Air Force Major General Christopher Bogdan, who took over as deputy F-35 program manager in August.

Control of the multinational, multi-service program toggles between Navy and Air Force leaders. If a Navy official is serving as program manager, then an Air Force official holds the top acquisition post, and vice versa.

Bogdan made headlines in September at the annual Air Force Association conference when he said relations between Lockheed and the U.S. government were the "worst I've ever seen."

He criticized Lockheed's performance on the $396 billion F-35 Joint Strike Fighter, but also took aim at the Pentagon's own handling of the program. Last week the Pentagon moved to open the operations and maintenance of the new fighter to competition from other companies.

Deputy Defense Secretary Ashton Carter quickly endorsed Bogdan's remarks, but Defense Secretary Leon Panetta last week assured reporters that the two sides were not at a dead end and said he was confident they would ultimately reach a deal.

When Bogdan spoke in September he acknowledged that he was new to the job and had not yet visited Lockheed's Fort Worth, Texas, plant or met some of the top corporate executives.

Bogdan had his first trip to the Lockheed plant last Thursday when he accompanied the Navy's Stackley for a regular set of briefings and meetings on various aspects of the program.

The all-day meetings included Larry Lawson, executive vice president in charge of Lockheed's aeronautics division, and Orlando Carvalho, F-35 executive vice president.

The talks were not directly related to the separate contract negotiations, or a simultaneous visit to the plant by a team of South Korean pilots evaluating Lockheed's bid to build 60 fighter jets for Seoul, the sources said.

Negotiations over the fifth batch of low-rate production planes have dragged on for much longer than expected, with the government pressing Lockheed for far more information on its cost structures than ever before.

Lockheed Chief Executive Robert Stevens told investors earlier this year that the company had been asked to provide thousands of pages of additional information beyond what the already extensive bid it submitted.

Pentagon officials argue that Lockheed was late in providing some of that data, and has held out on providing the level of detail government officials require.

Most of the issues have been resolved, but the two sides are still at odds over a little more than $100 million in costs.

Under pressure from government negotiators and shareholders, Lockheed last year reluctantly accepted terms it considered too ambitious for the fourth batch of jets, but it is resisting such terms this time around, worried that the government cost goals simply cannot be achieved and it will be left with a deficit.

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