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UPDATE 3-Pentagon scrapping Army helicopter program

(Adds company reaction, paragraphs 7-9)

WASHINGTON, Oct 16 (Reuters) - The U.S. Defense Department said it will scrap an Army helicopter being built by Textron Inc's TXT.N Bell Helicopter unit, after the cost of each aircraft soared nearly 70 percent to $14.5 million.

Chief Pentagon weapons buyer John Young said on Thursday it would be better for the Army to start from scratch rather than continue with the troubled $6.2 billion Armed Reconnaissance Helicopter program, citing the massive cost overrun and a four-year delay in the helicopter’s delivery until 2013.

Young announced his decision after the program’s costs triggered a congressionally mandated review that can lead to a program’s termination.

Analyst Jim McAleese said it was the Pentagon’s first cancellation under the Nunn-McCurdy law in several years, and signaled the start of leaner times for the defense industry.

“This vote of no-confidence is an obvious wake-up call for the rest of the defense community for at least the next four years,” McAleese said.

The Pentagon's decision opens the door to a possible bid for future business from Boeing Co BA.N, which had lost out to Bell in the original competition in 2005.

Bell Helicopter said it was “extremely disappointed” in the decision and it still believes ARH-70A was the best replacement for the Kiowa Warrior.

Bell spokesman Joe LaMarca said the test aircraft built for the program had accumulated over 1,400 flight hours and accomplished several program milestones.

LaMarca said Bell would continue to work closely with the Army to support the existing older aircraft and was evaluating the impact of the termination decision and what further steps it could take.

The contract with Bell will be terminated for “convenience,” rather than cause, a move that could make Bell eligible for some termination fees.

The Army said its drive to replace 375 Bell OH-58D Kiowa Warrior helicopters, the most heavily used fleet in Iraq and Afghanistan, remained a top priority, especially since it lost about six aircraft each year.

“Rather than continue this program ... the best course of action is to provide the Army with an opportunity to define a coherent, disciplined Kiowa Warrior helicopter replacement program, and to obtain more rigorous contract terms for its development,” Young said in a statement.

SOARING COSTS

Young said the overall program’s development costs were projected to reach $942 million, nearly three times the original estimate of $359 million, despite the fact that it was to be a modification of a commercially available helicopter.

Army Secretary Pete Geren vowed to move ahead quickly to get new helicopters to troops as soon as possible.

Lt. Gen. James Thurman, Army director of operations, said the Army hoped to quickly restart the acquisition process, and would also invest in the current Kiowa Warrior fleet.

Under the contract it won in 2005, Bell Helicopter was supposed to build 512 helicopters for the Army over 10 years. The Army's initial replacement for the Kiowa Warrior, the $14.6 billion RAH-66 Comanche program run by Boeing and United Technologies Corp UTX.N, was canceled in 2004.

The Pentagon decision came on the same day Textron reported a 19 percent drop in quarterly profit and its long-term credit ratings were placed on credit watch by Standard & Poor’s ratings service.

Textron, which also makes Cessna aircraft, blamed the profit decline on troubles at its finance arm.

The Army first announced that it might cancel the Textron helicopter program in July, and Army officials last week acknowledged they were weighing alternatives.

Geren said the Army had a duty to “move ahead with an alternative course of action to meet this critical capability for our soldiers at the best price and as soon as possible.”

The Nunn-McCurdy law requires the Pentagon to cancel any weapons program that sees costs rise more than 25 percent unless it can show the program’s importance to U.S. national security, the lack of a viable alternative, how reasonable new cost estimates are, and proof that the problems that led to cost overruns are now under control. (Reporting by Andrea Shalal-Esa and Andrew Gray; Editing by Tim Dobbyn, Gary Hill)

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