Lockheed, Pentagon set lower-cost F-35 deal to allow full order

WASHINGTON Tue Jul 30, 2013 12:57pm EDT

Three F-35 Joint Strike Fighters (rear to front) AF-2, AF-3 and AF-4, can be seen flying over Edwards Air Force Base in this December 10, 2011 handout photo provided by Lockheed Martin. REUTERS/Lockheed Martin/Darin Russell/Handout

Three F-35 Joint Strike Fighters (rear to front) AF-2, AF-3 and AF-4, can be seen flying over Edwards Air Force Base in this December 10, 2011 handout photo provided by Lockheed Martin.

Credit: Reuters/Lockheed Martin/Darin Russell/Handout

WASHINGTON (Reuters) - Lockheed Martin Corp (LMT.N) and the Pentagon on Tuesday said they reached an agreement for 71 more F-35 fighter jets, with lower pricing allowing the U.S. government to buy all the planes it had planned despite budget cuts that took effect in March.

The agreement, which was first reported by Reuters on Monday, covers 36 jets in a sixth batch, with each warplane to cost about 4 percent less than the previous lot, and 35 planes in a seventh batch, also at a 4 percent discount, Lockheed and the Pentagon's F-35 program office said in a statement.

The statement did not provide an overall value for the two contracts, but analysts say they will be worth over $7 billion.

The agreement is good news for Lockheed, which generates about 15 percent of its revenues from the F-35 program, and its key suppliers: Northrop Grumman Corp (NOC.N) and Britain's BAE Systems Plc (BAES.L). At a projected procurement and development cost of $392 billion, it is the Pentagon's biggest arms program.

The government is negotiating a separate contract with engine maker Pratt & Whitney, a unit of United Technologies Corp (UTX.N), and an agreement is also expected there soon.

The lower cost of the planes, coupled with lower prices on a number of other smaller contracts, "will allow the Pentagon to buy all the aircraft originally planned, including those that were in jeopardy of being cut" as a result of mandatory budget cuts imposed on the Pentagon in March, the statement said.

Earlier this year, defense officials had estimated they might have to reduce the planned purchases of F-35s by 5 to 9 planes, due to the across-the-board Pentagon budget cuts imposed under a process known as "sequestration."

"Improving affordability is critical to the success of this program, and by working together we were able to negotiate a lower cost F-35," said Lieutenant General Chris Bogdan, who heads the Pentagon's F-35 program office.

"There is still work to be done, but these agreements are proof the cost arrow is moving in the right direction," he said.

Lorraine Martin, who heads the F-35 program for Lockheed, said increasing production was imperative to help the military services' meet their targets for initial operational use of the planes, beginning with the Marines Corps in 2015.

Deliveries of 36 U.S. and partner nation aircraft in the sixth batch would begin by mid-2014 with deliveries of 35 U.S. and foreign aircraft in the 7th lot to start a year later, according to the statement.

The planes produced under these contracts will join 95 F-35s already contracted under the first five production lots. Lockheed has delivered 67 F-35s, included 14 test aircraft, from its sprawling plant in Fort Worth, Texas.

(Reporting by Andrea Shalal-Esa; Editing by Gerald E. McCormick and Andrew Hay)