November 3, 2010 / 8:28 PM / 9 years ago

UPDATE 3-U.S. Navy seeks to buy warships from both bidders

* Navy move seen as good news for all parties

* Company executives notified on Wednesday

* Navy plans to buy 55 coastal warships over time (Recasts with Navy statement; adds Alabama senator)

By Andrea Shalal-Esa

WASHINGTON, Nov 3 (Reuters) - The U.S. Navy said it is in talks with lawmakers and industry about buying 10 new warships from each Lockheed Martin Corp (LMT.N) and Australia’s Austal (ASB.AX) instead of buying just 10 ships from one company, a move that would expand the U.S. naval fleet faster.

Navy spokesman Commander Danny Hernandez, confirming reports by sources familiar with the plan, said the new approach would help stabilize the Littoral Combat Ship (LCS) program and the shipbuilding industrial base, while also expanding prospects for sales to foreign countries.

He said the Navy would proceed with its current plan to buy a single design of the new ships if Congress or industry were unwilling to support the new approach, adding: “Either approach will ensure the Navy procures affordably priced ships.”

Sources familiar with the matter said the Navy decided to change course given lower-than-expected pricing in the competing bids for the new warships. They said the new approach would give the Navy more bang for its buck and help avert any time-consuming contract protests by the losing bidder.

The Navy ultimately plans to buy 55 of the new modular warships that will operate close to shore, a key part of its drive to expand the naval fleet to at least 313 ships.

The current plan to buy 10 ships from one bidder, plus computer systems for five more to be built by a second shipyard, had been valued at well over $5 billion. The sources said the Navy now believed it could buy 20 ships for the price it had expected to pay for those 15 ships.

MOVE SEEN AS GOOD NEWS

“This is good news for all the parties involved,” said Loren Thompson with the Virginia-based Lexington Institute.

“Both of the contractors are going to get the 10 ships they were competing for and the Navy is going to get its future warships much faster and at a much lower price.”

Lockheed is offering a more traditional steel monohull design, while the U.S. unit of Austal, teamed with General Dynamics Corp (GD.N), is offering an aluminum trimaran.

The Navy has been pressing both companies to trim any fat from their proposals, coming back again and again for additional concessions on the cost of the new fast warships, but company executives were not formally informed about the new plan to buy both ships until Wednesday, the sources said.

“The pricing is so good that they think they can build 20 ships,” said one source familiar with the decision.

Lockheed and Austal both submitted bids based on the Navy’s request for 10 ships and computer systems for five more. Now the Navy wants to skip buying the five combat packages, using the money to buy 20 ships instead, the sources said.

It was not immediately clear if the companies would seek to revise their bids as a result of the changed strategy, but Thompson expected both companies to welcome the new plan given the dearth of other big shipbuilding projects in coming years.

INITIAL REACTION POSITIVE

Senator Richard Shelby, a Republican from Alabama, home to Austal’s shipyard, underscored the importance of the new warship to the Navy, and said the contract would result in creation of nearly 2,000 new jobs in his state.

He remained concerned whether the new plan would increase the overall cost of the program and hoped to get more details from the Navy in coming days.

Lockheed said it was aware of the Navy’s discussions with Congress and would review the details once it received them.

Austal had no immediate comment.

Analysts said the Navy move would help both companies by ensuring orders for at least five years at a time when other contracts are being cut or delayed. Lockheed shares closed 71 cents lower at $70.93, while Austal shares were set to open at A$2.60, up 4.4 percent from Tuesday’s close.

The new ships are designed to execute a variety of missions and can be reconfigured within a day to fight pirates or sweep for mines or look for submarines.

The ships were initially slated to cost just $220 million each, but costs have more than doubled in the early phase of the program, raising concerns about whether the Navy would be able to buy all 55 ships over time.

One source said the companies were able to offer substantially better prices in this competition, given that the Navy planned to buy 10 ships over a five-year period.

The changed approach may reflect fears of a protest from the loser that could require a rematch. A successful Boeing Co (BA.N)> protest in a marathon U.S. Air Force effort to buy refueling planes, for instance, prompted a new competition with EADS EAD.PA for a potential $50 billion contract.

Maren Leed, a former assistant to the vice chairman of the Joint Chiefs of Staff, said the Navy may also be trying to avert possible cuts amid growing pressure to cut government spending after big Republican gains in Tuesday’s election.

The Navy’s thinking may well be that “anything that’s on the books but for which they’re not yet bending steel could be at risk,” said Leed, now at the private Center for Strategic and International Studies in Washington.

Admiral Jonathan Greenert, vice chief of naval operations, told reporters on Monday he hoped a contract could be signed before the end of the year. He said the Navy was pleased with the performance of both the Lockheed and Austal designs. (Additional reporting by Jim Wolf; editing by Andre Grenon and Bernard Orr)

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