UPDATE 2-GAO denies Raytheon protests on US Navy deal

(Adds details on program, analyst comment, byline)

By Andrea Shalal-Esa

WASHINGTON, Dec 23 (Reuters) - The Government Accountability Office has denied three protests filed by Raytheon Co (RTN.N) after the U.S. Navy decided to pursue a sole source contract for Aegis combat systems with Lockheed Martin Corp (LMT.N).

"We are disappointed with the GAO decision," said Raytheon spokesman Jonathan Casle, adding Raytheon remained convinced a competitive process would lead to more affordable products.

Lockheed Martin welcomed the decision and was ready to continue working to meet the Navy's schedule, said company spokesman Ken Ross. The work is expected to be worth billions of dollars over the coming years.

The GAO, the nonpartisan congressional agency that rules on federal contract disputes, did not issue a statement explaining its decision. The GAO typically issues a redacted version of its decisions several weeks after they are announced.

Raytheon in September protested the award of contracts to Lockheed for modernization of the Aegis combat system, a system Lockheed built, saying the decision was flawed and violated the most basic U.S. competition laws.

The Navy rejected Raytheon's arguments, saying Raytheon did not demonstrate that it could meet the Navy's requirements, and relied instead on a "speculative promise" to team up with Lockheed. Lockheed said at the time that Raytheon had not approached it about any teaming agreement.

Raytheon has said the Navy repeatedly assured industry that it would open the Aegis modernization work to competition, but then suddenly decided to let Lockheed remain the sole source contractor.

The Navy said it had little choice, given a tight timetable for installing the upgraded equipment and software on board its DDG-51 destroyers. It said it still planned to open the next phase of the modernization program to competition.

The Navy also rejected Raytheon's argument that the Navy had refused to provide additional Aegis software and technical data to potential offerers, saying it could have given Raytheon millions of lines of source code if it had asked for the data.

Raytheon is also battling to revive the DDG-1000 destroyer, for which it is building the combat system, after the Navy decided in July to truncate the program and switch back to the DDG-51 destroyers, which come with Lockheed's Aegis system.

Defense consultant Jim McAleese said the loss of the protests was painful for Raytheon, but not catastrophic.

He said the main trigger for Raytheon's protest may have been an effort to team with Lockheed after the Navy recommended termination of the DDG-1000 program after just three ships, instead of the seven initially planned.

Raytheon had stood to receive over $700 million a year from the DDG-1000 program for electronics and combat systems, but should still get at least $400 million to $450 million per year in continuing research and development funding for work on the DDG-1000 and future cruiser programs, McAleese said.

"While painful, this short-term loss will not prevent the Navy from having two long-term combat systems integration competitors," he said. (Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)