September 17, 2009 / 12:24 AM / 11 years ago

UPDATE 2-US Navy, in shift, plans winner-take-all ship deal

* Cancels split-buy, seeks economies of scale

* Move could favor Lockheed, analyst says (Adds Navy announcement, Lockheed comment)

By Andrea Shalal-Esa and Jim Wolf

WASHINGTON, Sept 16 (Reuters) - The U.S. Navy said on Wednesday it would award a winner-take-all contract for up to 10 new ships designed to fight close to shore as part of a revised acquisition strategy.

The Navy canceled a split-buy approach after concluding that economies of scale would be necessary to afford all 55 “littoral combat ships” or LCS it aims to buy.

Lockheed Martin Corp (LMT.N) and General Dynamics Corp (GD.N) are building separate models of the ship, which the Navy plans to use for mine detection, anti-submarine warfare and combat against small surface craft such as pirates.

The decision to pick just one design and shipyard in fiscal 2010 could be bad news for General Dynamics, which started later on its version of the ship, said Loren Thompson, a defense industry consultant at Lexington Institute, an Arlington, Virginia research group.

Thompson advises Lockheed and General Dynamics among other arms makers, but is not involved with either company on the LCS program.

“Right now, the obvious ship to downselect is the Lockheed Martin ship. They have worked through their problems and the ship is performing very well. The GD ship really isn’t ready for prime time because it started so much later,” he said.

Sean Stackley, assistant Navy secretary for acquisition, told reporters the new buying strategy boosted affordability by competitively awarding a larger number of ships across several years to a single contractor.

He said the Navy had no “reasonable basis” to assume that it could acquire the projected 55-ship fleet under the old procurement strategy, based on the rivals’ latest bids.

Both teams will have the opportunity to submit proposals for the revised deal the Navy plans to award next spring, Stackley said. The contract will cover two ships in fiscal 2010 and options through 2014, for a total of 10 ships.

In addition, the winning team will provide combat systems for up to five additional ships to be built by a second source chosen after a competition in 2012.

Finally, the Navy plans to hold yet another competition in 2015 to select a team to build LCS ships in the outyears, Stackley said.

“We are going to sustain competition throughout this program,” he said. “If I’m making it complicated, that’s because it is.”

Lockheed, the Pentagon’s No. 1 supplier by sales, welcomed the revised plan.

“We believe the U.S. Navy’s approach will make it possible to further enhance the affordability of this important new class of ship and we fully support the initiative,” said Jen Allen, a spokesman for Lockheed’s Maritime Systems & Sensors business unit.

General Dynamics had no immediate comment.

Vice Admiral Barry McCullough, a deputy chief of naval operations, said the Navy was “absolutely sure” designs already being built by rival teams led by Lockheed and General Dynamics would meet U.S. operational requirements.

Lockheed’s first LCS ship successfully completed a second round of builders’ trials earlier this month.

General Dynamics’ first ship had been going through its builders’ trials, but ran into several problems.

Lockheed shares closed up 46 cents at $76.16, while General Dynamics shares gained 16 cents to close at $63.29. (Reporting by Andrea Shalal-Esa and Jim Wolf; Editing by Carol Bishopric, Phil Berlowitz)

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