U.S. Navy awards Lockheed ship deal for 2009

WASHINGTON (Reuters) - The U.S. Navy on Monday awarded Lockheed Martin Corp (LMT.N) a contract for a second fast, maneuverable

Littoral Combat Ship after wrapping up tough negotiations with the No. 1 U.S. defense contractor.

The Navy did not specify the amount of the contract because it includes options for up to three more ships in fiscal 2010. Lockheed is competing for that work against General Dynamics Corp (GD.N), which is also building a version of the new ship.

News of the imminent contract award was exclusively reported earlier on Monday by Reuters.

The Navy did say the new Lockheed ship, named USS Fort Worth, would cost less than the first, USS Freedom, built by Lockheed and its subcontractor Marinette Marine, a subsidiary of Italy's Fincantieri Marine group.

The Navy has not given a final cost for the first ship, which is based on a monohull design and went into service in November. However, its price was listed in the administration's fiscal 2009 budget proposal as $531 million.

"Affordability is a critical objective for the LCS program," said Navy spokesman Lieutenant Commander Victor Chen. He said the Navy and industry were working hard to reduce cost, achieve steady production, and improve execution.

Cost of the fiscal 2009 LCS ship was lower due to a "stable design, readiness of production facilities, an experienced build team in place and a fixed-price contract," Chen said.

The government's fiscal 2010 begins on October 1.

One source knowledgeable about the negotiations said the price of the newest LCS ship would be just under $500 million, putting it on a path to meeting a congressional cost cap of $460 million that takes effect in fiscal 2010.

But the price remains more than double the $220 million the LCS were initially projected to cost. The Navy eventually plans to buy 55 of the ships to build the U.S. naval fleet to 313 ships, but a massive increase in the cost has raised questions about whether it can afford all the ships it wants.

The ships are designed to counter threats in contested waters and have a maximum speed of more than 40 knots, compared with the 30-plus knots for the Navy's larger surface ships.

Navy officials recently launched a study of whether scaling back the ship's propulsion system and lowering the required speed could save money.

Lockheed welcomed Monday's contract, which is on fixed-price terms with an incentive fee.

Despite increased cost that stemmed mainly from Navy design changes, the LCS ship was still the "most affordable surface combatant in the current shipbuilding plan in the last four decades" and took only six years from concept to the fleet, said Dan Schultz, vice president of Lockheed's Integrated Defense Techologies business.

Navy officials hope to award two 2010 ships to one company and one to the other, but are reserving the ability to opt for just one model, depending on how the program moves along.

Navy acquisition chief Sean Stackley on Monday visited the Alabama shipyard owned by Australia's Austal (ASB.AX), which is building the first General Dynamics LCS ship, Chen said. He declined to characterize the Navy's negotiations with General Dynamics about its 2009 LCS ship.

Navy officials had been frustrated by both companies' proposals because they were above $500 million, sources knowledgeable about the talks have said.

General Dynamics now projects delivery of its first trimarin-designed LCS this summer, which would allow the ship to go into service around September.

Virginia-based defense consultant Jim McAleese said the Navy was seeking to cut the price of the fiscal 2009 ships below $500 million to assuage concerns raised by U.S. lawmakers, including Rep. Gene Taylor, who heads the seapower subcommittee of the House Armed Services Committee.

"This would clearly demonstrate a credible 'learning curve' down to the $460 million per hull cap set by Congress for LCS production orders," McAleese said. That would help accelerate production to at least four LCS orders per year during the 2010-2015 defense plan.

Lockheed's shares closed up $1.36, or 2 percent, at $69.14 on the New York Stock Exchange, while General Dynamics shares closed up $1.99, or 5.3 percent, at $39.64.

(Reporting by Andrea Shalal-Esa; Editing by Lisa Von Ahn, Gary Hill)