UPDATE 1-US Navy encouraged by cost trend on LCS

* Ship assembly faster, which lowers costs

* General Dynamics' ship begins builders' trials
(Recasts, adds details, comment from General Dynamics)

By Andrea Shalal-Esa

WASHINGTON, June 30 (Reuters) - Costs have nearly
stabilized on a second set of shore-hugging Littoral Combat
Ships (LCS) being built by Lockheed Martin Corp (LMT.N) and
General Dynamics Corp (GD.N) after huge cost overruns for the
first ships, a senior U.S. Navy official said on Tuesday.

Chief of Naval Operations Admiral Gary Roughead told
reporters he was encouraged by the cost trends on the two ships
under construction and that the Navy would try to avoid adding
new requirements that could drive costs higher.

Lockheed and General Dynamics were now each building a
second ship, and there were signs that assembly times for ship
components were coming down, which should help lower costs,
said Roughead, the top uniformed officer in the Navy.

"We've turned the corner on that important capability," he
said.

The Navy wants to buy 55 LCS ships to operate in coastal
areas for mine detection, anti-submarine warfare and combat
against small surface craft such as pirates, and help the Navy
expand its fleet from 283 ships to 313 over time.

But costs have more than doubled from an original
projection of $220 million and the program is subject to a
congressional cost cap of $460 million on each new ship,
beginning in fiscal 2010, which begins Oct. 1.

Last year, lawmakers agreed to waive the cap on fiscal 2009
ships, and have it take effect from 2010 on.

The House last week passed a defense authorization bill
that would stick with the $460 million sum for the cap, but
would exclude certain items and adjust for inflation, bringing
it more into line with caps on other shipbuilding programs.

Roughead said the Navy was in discussions with Congress
about adjusting the cap for ships to be bought in fiscal 2010.

The cost of the LCS ships must be stabilized at an
affordable price longer-term because of their importance in
boosting the overall size of the Navy fleet.

Separately, General Dynamics began builders' trials of its
first LCS ship on Monday. Kendell Pease, a General Dynamics
spokesman, said things were going well and the trials should be
completed early next week.

Roughead said the Navy faces increasing funding challenges
going forward, given growing demand for U.S. naval vessels in a
wide range of activities, including combating piracy,
humanitarian missions and missile defense.

He cited the Navy's decision to truncate the DDG-1000
destroyer program run by Northrop Grumman Corp (NOC.N) and
General Dynamics at just three ships, based on needs
articulated by Navy commanders. Building more of the
older-model DDG-51 ships would lower costs in the future, he
said.

Roughead said he also recently canceled work on a new
developmental weapons program, as well as an underwater
developmental project, because of other, more pressing needs.

"I will not hesitate for an instant to make those kind of
decisions," he said.

Rising fuel costs are also hitting the Navy's shipbuilding
budget, forcing it to explore alternative energy sources
including solar, geothermal and tidal energy. "We've got to get
serious about it, and now is the time," Roughead said.

Roughead said the Pentagon was now looking more broadly at
the cost to own weapons -- including fuel efficiency, operating
costs and staffing levels -- not just the procurement cost to
buy new ships, airplanes and submarines.

RELATED NEWS:

* Navy awards Lockheed LCS ship for 2009 [ID:nN23235744]

* Navy studies slower, cheaper LCS ships [ID:nN20507971]

* Navy pressures Lockheed, GD to cut price [ID:nN10403316]
(Reporting by Andrea Shalal-Esa, editing by Matthew Lewis)