WASHINGTON (Reuters) - Lockheed Martin Corp (LMT.N) warned on Tuesday that the U.S. Navy’s plan to cancel an order for 29 MH-60 helicopters built by Lockheed and Sikorsky Aircraft would result in large termination fees because they are part of five-year agreements signed in 2012.
Lockheed Chief Financial Officer Bruce Tanner told reporters that work had already begun on cockpits and other equipment for the helicopters, which were to be ordered in fiscal year 2016, and a better option might be to finish building the aircraft and then sell them to allies.
“That would probably be a better deal for the taxpayer than paying close to 100 percent and not getting anything for it,” he said. “The cost to terminate partially built helicopters is pretty significant relative to the cost to actually finish those helicopters.”
Tanner did not provide details on the size of the expected termination fee if the Navy proceeds with its plan to “break” its five-year contracts with both Lockheed, which integrates the radars, cockpit and other equipment on the helicopters, and Sikorsky, the United Technologies Corp (UTX.N) unit which builds the aircraft.
The Navy uses the helicopters to hunt for submarines and attack surface ships, relaying information to parent ships using onboard data links.
U.S. Navy officials have said they are working closely with the companies and senior Pentagon leaders to understand the cost of cancelling the final 29 Navy helicopters covered by the agreements, but the process has not yet been completed.
They said the aircraft cuts were linked to lack of funding for the refueling of a nuclear-powered aircraft carrier, but would be revisited if Congress restored funding for the work on the carrier.
The Navy’s fiscal 2015 budget and five-year spending plan omitted funding for 29 MH-60 helicopters and other key weapons programs in fiscal 2016, when automatic budget cuts required under sequestration are due to resume.
Tim Healy, who heads maritime programs for Sikorsky, this month said any move by the Navy to break the agreements in fiscal 2016 could undermine the industry’s willingness to sign such cost-saving agreements in the future, and would likely raise the cost of 60 U.S. Army Black Hawk helicopters that are part of the deal. The cuts would also affect a host of companies that supply components used to build the helicopters.
Sikorsky signed an $8.5 billion contract with the Army and Navy in July 2012 to buy 653 Black Hawk and Seahawk helicopters through December 2017, a deal that generated significant discounts given the large size of the order.
Lockheed signed a $1.02 billion five-year contract in April 2012 to build new cockpits and other equipment for the aircraft.
Sikorsky is due to deliver the last of 24 helicopters being built for Australia in early 2016, and nine helicopters being built for the Danish navy in 2017, said spokesman Frans Jurgens.
He said the company would accelerate work on the Danish helicopters and complete them a year ahead of schedule if the Navy did not reverse its proposed cuts.
Reporting by Andrea Shalal