Australian F-35 suppliers fret over potential order cutbacks

Fri Mar 1, 2013 3:10am EST

* Australian suppliers risk losses on F-35 delays

* $5.5 bln in contracts could be slashed if Australia reduces orders

* Australia has said it plans to buy 100 jets, analysts expect less

By Jane Wardell

AVALON, Australia, March 1 (Reuters) - Some Australian defence contractors say their involvement in building the Pentagon's F-35 warplane has turned into a nightmare because of its development setbacks, delays and now speculation that Canberra will cut orders for the jet.

Contracts could be worth $5.5 billion for the 18 Australian companies that are part of the F-35's global supply chain.

But among eight Australian contractors interviewed by Reuters at an airshow near Melbourne this week, most were critical of the $396 billion F-35 program.

"At this point, we'll be happy if we break even by the time the program is over," said one supplier, who declined to be identified.

The Pentagon program chief for the F-35 sought to convince Australian lawmakers and generals this week to stick to a plan to buy 100 of the jets, an exercise complicated by two groundings of the plane this year and looming U.S. defence cuts.

Contractors were not optimistic about the prospects for orders of the F-35, or Joint Strike Fighter (JSF), a futuristic radar-evading jet.

"It's been devastating," said a second Australian contractor, who spoke on condition of anonymity because he feared losing business from the project.

"The JSF business is moving to the right and shrinking," he added, using industry jargon for when potential buyers shy away from making early orders and wait until production is fully ramped up in the hope the price will come down.

Big U.S. companies and the Australian government approached local defense contractors just over a decade ago to help build the world's most expensive combat aircraft.

Australia, a close American ally, is one of eight partner countries helping the United States fund development of the F-35.

It is also one of the largest foreign customers, with plans to buy up to 100 F-35s to replace its ageing fleet of Boeing Co F/A-18 Super Hornets and already retired F-111 strike bombers, at a cost of A$16 billion ($16.38 billion).

That status gave Australian companies a leg-up in the warplane's development program since contracts are linked to orders. The prime contractor is Lockheed Martin Corp with Pratt & Whitney, a United Technologies Corp unit, building the engines.

But defence analysts predict Australia might end up buying only 50 to 70 of the fighters given Canberra is expected to decide in June to double its fleet of Super Hornets to prevent a frontline gap until the F-35 is delivered later in the decade.

The Australian companies are supplying parts ranging from wing components to cockpit technology. The eight contractors all said they did not know how many planes Canberra would order.

Steve O'Bryan, Lockheed Martin vice-president for F-35 business development and customer engagement, said Australian companies were entitled to $5.5 billion of work over the life of the program, based on current orders for the partner countries that include 2,443 aircraft for the United States.

O'Bryan said that could rise by another $2.5 billion based on recent and anticipated orders from Israel and Japan.

"Taken over the life of the program annually, that's around 13,000 direct and indirect jobs," O'Bryan told reporters at the airshow, where the F-35 and its problems were one of the hottest topics.

But the agreement with partner countries cuts both ways. If orders drop, so too does the business directed to each nation.

The cost of picking up the extra Super Hornets will almost certainly force Australia to cut its F-35 purchases, defense analysts say.

That would follow Canada's announcement in December that it could cut plans to buy 65 of the F-35s, a scaling-back of orders by Italy and a two-year delay in purchases by Turkey.

PROBLEM-PLAGUED PROJECT

The F-35 program has suffered a string of problems since Lockheed Martin was granted the development contract in 2001. Software glitches, engine problems and parts malfunctions are among the issues that have grounded test flights numerous times, most recently last week, and blown out both the project's cost and schedule.

An email from Air Vice-Marshal Kym Osley, program manager for new air combat capability for the Royal Australian Air Force, to Australian supply companies in late January acknowledged the many problems plaguing the program.

In the email, which was seen by Reuters, Osley wrote that media reports on a U.S. Defence Department assessment of the program had a "more negative tone" than the U.S. Joint Program Office in charge of the project would like, but acknowledged the reports were generally "in line" with reality.

Tensions between the Pentagon and its main contractors have also burst into the open.

At the airshow on Wednesday, the Pentagon program chief for the F-35, U.S. Lieutenant General Christopher Bogdan, slammed Lockheed and Pratt & Whitney, accusing them of trying to "squeeze every nickel" out of the U.S. government and failing to see the long-term benefits of the project.

SOME SUPPLIERS IN LUCK

Some Australian suppliers said they could channel funds invested in planned production for the F-35 into other projects.

Chemring Australia, a unit of British-based Chemring Group Ltd, which is manufacturing air-launched expendable countermeasure flares for the F-35, has invested A$35 million in a facility outside Melbourne to produce the flares.

Production of the F-35 flares is not expected to begin until the last third of this decade while Chemring is still making flares for the F/A-18 Super Hornet, the Australian government's alternative purchase to the F-35.

"We are not seeing yet any adverse effect from the Australian position," said Giles Willoughby, business development manager at Chemring. "For us, it's the export opportunity we will lose."

Others remain confident in the program.

"I think the JSF will be very successful," said Ari Vihersaari, Vice-President of Global Business Development at Quickstep Holdings Ltd, which makes the composite used by BAE Systems to build the vertical tailing.

Quickstep has invested A$10-11 million so far in equipment linked to the JSF program, which it joined in 2008, around the time the program schedule was restructured to build in funds and time for further delays.

Quickstep expects the program to generate revenues of up to A$700 million over the next two decades.

"The offer was very tempting for us and well within our capability," Vihersaari said.

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