July 30, 2013 / 4:57 PM / in 5 years

UPDATE 2-Lockheed, Pentagon set deal to buy full order of F-35 jets

* Deal valued at over $7 billion

* Airplane costs down 4 percent in sixth batch of jets

* Senate appropriators want to slow production ramp-up

By Andrea Shalal-Esa

WASHINGTON, July 30 (Reuters) - Lockheed Martin Corp and the Pentagon on Tuesday said they reached an agreement for 71 more F-35 fighter jets, with lower pricing to allow the U.S. government to buy all the planes it had planned despite budget cuts.

The deal, which will become final over the next month, came as a Senate appropriations panel proposed limiting funding for a ramp-up in production of the radar-evading warplane in fiscal 2015 to ensure the plane’s software and design are fully tested.

The agreement in principle covers 36 jets in a sixth batch, with each warplane to cost about 4 percent less than the previous lot, and 35 jets in a seventh batch, also at a 4 percent discount, Lockheed and the Pentagon’s F-35 program office said in a statement.

The statement did not provide an overall value for the two contracts, but analysts say they will be worth over $7 billion.

The agreement is good news for Lockheed, which generates about 15 percent of its revenues from the F-35 program, and its key suppliers: Northrop Grumman Corp and Britain’s BAE Systems Plc. At a projected procurement and development cost of $392 billion, it is the Pentagon’s biggest arms program.

The government is negotiating a separate contract with engine maker Pratt & Whitney, a unit of United Technologies Corp , and an agreement is also expected there soon.

The lower cost of the planes, coupled with lower prices on a number of other smaller contracts, “will allow the Pentagon to buy all the aircraft originally planned, including those that were in jeopardy of being cut” as a result of mandatory budget cuts imposed on the Pentagon in March, the statement said.

Earlier this year, defense officials had estimated they might have to reduce the planned purchases of F-35s by five to nine planes due to the across-the-board budget cuts imposed by sequestration.

“Improving affordability is critical to the success of this program, and by working together we were able to negotiate a lower cost F-35,” said Lieutenant General Chris Bogdan, who heads the Pentagon’s F-35 program office.

On Capitol Hill, U.S. lawmakers remain skeptical since any problems found in testing could lead to big retrofit costs later.

“Aggressive overlap in designing, testing and procuring this aircraft earlier in its history got us into serious trouble and wasted a lot of money. This committee doesn’t want to repeat that problem,” said Senator Richard Durbin, chairman of the defense panel of the Senate Appropriations Committee.

The panel proposed funding 29 F-35s in the 2014 fiscal year beginning Oct. 1 but moved to limit a production increase in 2015 to ensure the aircraft’s software and design are fully tested.

Durbin said the panel wanted to ensure the military focused on the “existing challenges we face honestly, both in testing as well as design and development, before ramping up.” The appropriations panel also put limits on the amount of research and development funding that could be used for the F-35.

The Senate is still in the early stages of finalizing its 2014 appropriations for the F-35 and other arms programs. The proposal must be considered by the Senate and reconciled with the House of Representatives’ plans before going to the president for his signature.

In the joint statement, Lockheed’s F-35 program chief, Lorraine Martin, said increasing production was imperative to help the military services’ meet their targets for operational use of the planes, beginning with the Marines Corps in 2015.

As negotiated, the contract will begin deliveries of 36 U.S. and partner nation aircraft in the sixth batch by mid-2014, with deliveries of 35 U.S. and foreign aircraft in the seventh lot to start a year later, according to the statement.

The planes produced under these contracts will join 95 F-35s already contracted. Lockheed has delivered 67 F-35s, including 14 test aircraft, from its sprawling plant in Fort Worth, Texas.

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