UPDATE 2-Pentagon finalizes $7.8 bln in F-35 contracts with Lockheed

Fri Sep 27, 2013 8:02pm EDT

By Andrea Shalal-Esa

WASHINGTON, Sept 27 (Reuters) - The Pentagon on Friday said it had finalized two contracts with Lockheed Martin Corp valued at $7.8 billion for 71 more F-35 fighter jets, citing what it called significant reductions in the cost of the new radar-evading warplane.

The U.S. Defense Department said it signed a $4.4 billion contract for a sixth batch of 36 F-35 aircraft, with the average cost of the planes down 2.5 percent from the previous deal. All but $743 million of that amount had already been awarded to the company under a preliminary contract.

The two sides also signed a $3.4 billion contract for 35 aircraft in a seventh batch, which reflected a 6 percent drop in the average price from the fifth group, it said in a statement.

The Pentagon's F-35 program office said the cost of each F-35 conventional takeoff A-model jet would drop to $98 million in the seventh batch of jets, excluding the engine, from $103 million in the sixth lot. It marks the first time the price of the jet will have dipped below $100 million.

The U.S. government buys the engines directly from Pratt & Whitney, a unit of United Technologies Corp, under a separate contract.

The Pentagon has projected it will spend $392 billion to buy a total of 2,443 stealthy F-35 fighter jets over the next few decades to replace F-16, F-15, F/A-18 and other warplanes used by the U.S. Air Force, Navy and Marine Corps.

The program is years behind schedule and nearly 70 percent over original cost estimates, but U.S. officials said last week the program is now making progress in flight testing, production and long-term operating costs.

Lockheed and the Pentagon announced an agreement in principle for the next 71 jets on July 30. Rear Admiral Randy Mahr, deputy director of the Pentagon's F-35 program office, had told reporters on Wednesday that he expected the contracts to be wrapped up within days.

Lorraine Martin, Lockheed's F-35 program manager, said production costs had declined with each successive lot of jets.

"That's a trend we look forward to continuing as this program moves toward full rate production and operational maturity," Martin said in a statement provided to Reuters.

"Working together with the Joint Program Office, our entire industrial team is focused on delivering the F-35's fifth-generation capabilities to our armed forces and partner nations at a 4th-generation price point," she said.

Industry executives use the phrase fifth-generation to refer to the jet's stealthy coatings and other features that make it nearly invisible to enemy radar.

Lockheed is building three variants of the F-35 for the U.S. military and eight countries that helped fund its development: Britain, Canada, Australia, Turkey, Italy, Norway, Denmark, and the Netherlands. Israel and Japan have also placed orders.

The F-35 remains in the running for a 60-jet South Korean fighter competition after Seoul this week rejected a bid by Boeing Co involving its F-15 Silent Eagle fighter jet.

South Korea would have to make a commitment by the end of 2013 to secure a place in the ninth low-rate production contract for F-35 jets and ensure delivery of the first planes in 2017, said one source familiar with the program.

The overall contract won't be negotiated for some time, but the Pentagon plans to award a contract for early procurement of materials for the jet in coming months, said the source.

South Korean officials have been in touch informally with the U.S. military to understand the timing question, said the source, who was not authorized to speak on the record.

A second source familiar with the F-35 program said it typically takes about two years to build a jet, and there might be ways to accommodate Seoul if it decided to order jets after initial "advanced procurement" funds were awarded to start ordering parts for the ninth batch of jets.

Lockheed's main subcontractors on the program are Northrop Grumman Corp and Britain's BAE Systems Plc.

The Pentagon said the price of the Marine Corps' B-model jet would drop to $104 million under the seventh contract from $109 million in the sixth. It said the cost of the C-model plane, which will land and take off from aircraft carriers, would drop to $116 million a jet from $120 million in the sixth lot.

The Pentagon said the contracts also reduce the government's exposure to cost overruns, with Lockheed agreeing to cover any cost overruns. The government and Lockheed would split returns on a 20-80 basis if costs are below target, it said.

The two sides will share equally the costs of all known retrofits needed for the aircraft, but any new discoveries could result in higher contract costs, the Pentagon said.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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