WASHINGTON (Reuters) - The U.S. Defense Department and top suppliers on the $392 billion F-35 fighter program are developing a plan to drive down the cost of the Pentagon's most expensive weapons program, the head of enginemaker Pratt & Whitney told Reuters.
The project uses an "innovative" new mechanism to encourage companies to invest their own funds to lower production costs, Dave Hess, president of Pratt & Whitney, told Reuters in an interview on Thursday, ahead of his retirement at the end of the month. Pratt is a unit of United Technologies Corp (UTX.N)
He said the effort is spearheaded by F-35 prime contractor Lockheed Martin Corp (LMT.N) and its chief executive, Marillyn Hewson, but drew lessons from Pratt's own "war on cost" that used government- and company-funded investment to drive the engine price 40 percent lower in recent years despite a slowdown in U.S. orders.
Hess said the CEO-level effort is due to be unveiled early next year, with details still to be worked out. It's "a concrete plan with more concrete targets," he said, declining to elaborate.
Lockheed is building three models 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 ordered the jet.
Pratt builds the single F135 engine that powers the jet, while Northrop Grumman Corp (NOC.N) and Britain's BAE Systems Plc (BAES.L) are key subcontractors on the airplane.
The Pentagon estimates that it will cost $392 billion to develop the new planes and buy 2,443 jets over coming decades, about 70 percent more than initial projections. However, top Pentagon officials have said repeatedly that the cost of the program must come down from those levels, given tighter military spending budgets and other acquisition priorities.
Lorraine Martin, Lockheed's F-35 program manager, last week said all the companies involved in the program and the government were working on a "blueprint for affordability" to lower the cost of the new warplanes. She said the cost of the F-35 conventional takeoff A-model would be around $75 million in 2019, and possibly even lower, putting it on par with the cost of current fighter jets like the F/A-18.
One source familiar with the F-35 program said the target cost for the F-35 would be in a range around that price level.
Hess initiated Pratt's own "war on cost" after Ashton Carter, the Pentagon's acquisition chief at the time, challenged him during a high-level F-35 meeting in Fort Worth, Texas, asking "Why does the F135 engine cost so much?"
The question galvanized Hess, who had just taken over as president of Pratt a few months earlier, and he quickly launched a two-month effort to develop a plan for lowering the cost of the F135 engine.
ORDER DELAYS AFFECT COST CUTTING
As he prepares to leave Pratt, Hess said the concerted effort to drive down the cost of the F135 engine was one of the company's biggest accomplishments during his tenure.
He said Pratt had executed "nearly perfectly" on the cost reduction plan, but conceded that U.S. government decisions to delay a ramp-up in production had affected the company's ability to lower costs as quickly as expected.
"There's an impact when volumes get pushed to the right," he said, adding, "But we've got a plan to get back on the learning curve."
Hess said Pratt would also be able to apply new technology developments to the F135 engine, which could increase the engine's thrust and fuel efficiency by about 5 percent.
Pratt will deliver 56 F135 engines by the end of the year, and has built over 130 in total. The cost of the engine has come down 40 percent since the first engine was built.
Deliveries will rise slightly in 2014, and ramp up more significantly in 2015 and 2016, Hess said, noting that the company also expected to deliver its first F135 engine from a new line established at the company's West Palm Beach, Florida, facility by the end of the year.
The company hopes to complete negotiations with the Pentagon by the end of the year on operations and maintenance of the next batch of engines, with a larger contract for actual production to follow early next year.
Company officials have said they expect to match or beat the 2.5 percent reduction achieved on 32 of 38 engines that were included in a $1 billion contract for a sixth batch of jets. The company completed those negotiations with the Pentagon in August. It is now negotiating about the seventh and eighth batches of jets, each with about 40 jets.
(Editing by Matthew Lewis)