August 12, 2008 / 8:10 PM / 11 years ago

UPDATE 1-Lockheed lauds LCS trials, but cost pressure ahead

(Adds Winter comments)

By Andrea Shalal-Esa

WASHINGTON, Aug 12 (Reuters) - Lockheed Martin Corp (LMT.N) said two weeks of company-run tests of a new shore-hugging combat ship revealed no significant issues, and it was upbeat about the Navy’s own trials starting next week.

Fred Moosally, president of Lockheed Martin Maritime Systems and Sensors, said on Tuesday the company’s work on one of two rival designs for the Navy’s Littoral Combat Ships was on cost and schedule after a restructuring in November 2007, but the program still faced inflationary pressures in the future.

That restructuring adjusted the previous baseline cost of $220 million — what the Navy initially expected follow-on ships in the LCS class to cost — but Moosally declined to give any details about the current baseline price.

Inflationary pressures, including a 21 percent increase in steel prices, would make it tough for Lockheed or its rival General Dynamics Corp (GD.N) to build the 55 ships planned in the new Navy class under a $460 million per ship cost cap imposed by Congress.

The cap does not allow for inflation and includes Navy program costs, Moosally said, adding: “I don’t see how the $460 million is going to hold up very long.”

Moosally declined to give details about the final cost of LCS-1, noting that Lockheed and General Dynamics were locked in an intense competition for a Navy contract to build the next three LCS ships — one authorized in the fiscal 2008 Navy budget, and two included in the fiscal 2009 budget.

Navy officials last month said the LCS ships were now expected to cost around $550 million a piece.

The winner of the competition will build two of the new hulls, while the loser will build the other. The Navy had hoped to announce the contract awards in early August, and it was not immediately clear when an announcement would be made.

Moosally said the companies needed to start building more ships before the price, per ship, could come down significantly. But he called the 3,100-ton ship a bargain, given its capabilities.

The Lockheed team was also concerned about maintaining continuity of production at the Wisconsin shipyard where the ship is being built, if the Navy did not act soon to award a contract for the next three LCS ships. “There’s going to be a gap if we don’t get a contract soon,” he said.

The prices quoted in the Lockheed bid also had a deadline, Moosally said, although he declined to give any specifics.

The Navy canceled an order for the second LCS ships to be built by Lockheed and General Dynamics after massive cost growth on the first ships, and the refusal of both firms to sign a fixed-price contract while development continued.

Both companies ultimately decided to meet the Navy’s demand for fixed-price terms in the current competition, aided in part by long-lead items already purchased under the previous order.

Navy Secretary Donald Winter has said the Navy will not rush to pick one of the two rival LCS designs and could decide to use a mixture of the two different ships, a spokeswoman said, confirming a report by Inside the Navy.

Moosally said Winter got a ride on the LCS ship last week and seemed “very pleased” with its performance.

Moosally said Lockheed was upbeat about its plan to be a minority investor in a deal by Italy’s Fincantieri SpA to buy Manitowoc Marine Co, which includes the Wisconsin shipyard building the Lockheed LCS ship, from Manitowoc Co (MTW.N).

He said the Italian firm planned to invest about $100 million in new tooling and equipment for the shipyard, which should help make its LCS team even more competitive, especially in terms of international sales.

Moosally said he expected Israel to sign a deal for LCS ships sometime next year. Saudi Arabia had also expressed interest, but it appeared to be waiting for the Navy’s next contract before finalizing its choice of the LCS design.

Moosally said the Lockheed team was “tweaking” certain features ahead of four days of Navy sea trials in Lake Michigan next week, but no significant issues had arisen during the company-run tests over the past two weeks. (Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)

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