* Cutting number of planes would drive up costs
* F-35 has completed 727 flight tests
* More work needed to cut production costs (Adds comments on United Technologies engine)
By Andrea Shalal-Esa
WASHINGTON, April 21 The Pentagon's next challenge in the $382 billion Lockheed Martin Corp (LMT.N) F-35 fighter program will be cutting longer-term operating and maintenance costs and keeping unit production costs low.
Vice Admiral David Venlet, who runs the program, said a major restructuring of the United State's most expensive weapons program had put its development on a more realistic path, citing progress in flight testing and production.
He said no weapons program was above review, but warned that calls by the New York Times and other critics urging the Pentagon to buy half the planned 2,400 fighters could increase costs and have consequences for the U.S. military and the eight other countries helping develop the plane.
"If you're going to buy that fewer (planes), then your per unit price will be even higher, and now you're going to affect the affordability for other nations that are ... needing this for their own force structures," Venlet told reporters.
Pentagon acquisition chief Ashton Carter said on Wednesday there would undoubtedly be more cancellations of expensive weapons programs after President Barack Obama last week called for $400 billion in security-related spending cuts.
Defense analysts are anticipating possible cuts to the F-35 program, but Venlet said he had not been in any discussions about reducing the number of F-35s. He said military commanders and top Pentagon officials would make such decisions.
He said his job as program manager would be to analyze the consequences of any cutbacks, but added there was no way to cut the $4.6 billion added to the program's development in the fiscal 2012 budget.
Venlet said he told acquisition officials from partner countries Britain, Turkey, Denmark, Italy, Norway, Australia, Canada and the Netherlands last week that the program was making progress, but 2011 and 2012 would be pivotal years for showing that cost and production were under control.
He said Lockheed and its suppliers were making progress on production of the fighter, but more work was needed to shorten production times for key components and better manage costs and quality control on the F135 engine built for the fighter by Pratt & Whitney, a unit of United Technologies Corp (UTX.N).
Carter last week told lawmakers that he was dissatisfied with cost overruns on the engine that powers the F-35, saying that costs were growing too fast on both the engine and the overall aircraft program.
Venlet said Lockheed was due to submit its proposal in the coming days for the next batch of 35 airplanes.
Lockheed earned $7 million of $35 million in incentive fees available on the program in 2010 after missing four of five agreed milestones, Venlet said. He said a larger sum was at play in 2011, but he gave no details.
Defense Secretary Robert Gates last year vowed to withhold $614 million in fees from Lockheed until its performance improved. Venlet said milestones were set for about 60 percent of that amount, including last year's $35 million. The remaining 40 percent would be discussed during negotiations about a revamped development contract this summer.
He said the F-35 program office was launching a design review of operating and maintenance costs, including training, simulators, and repairs, to identify and deal with the biggest cost drivers.
Operating and maintenance costs had been estimated at around $443 billion, a figure he said had made service chiefs' "knees weak."
Venlet said the F-35 program had completed 727 flight tests, logging about 1,092 flight hours.
It takes Lockheed about 29 months to build one of the jets, and he said more work was needed to get to a 24 month target. When full production is reached later this decade, Venlet said Lockheed should be building 15 or more planes a month at its mile-long facility in Fort Worth, Texas.
The overall cost of the program would likely rise somewhat beyond the current projected cost of $382 billion given delays in production of test planes, but he gave no further details. (Reporting by Andrea Shalal-Esa; Editing by Lisa Von Ahn and Tim Dobbyn)