Pentagon finalizes $7.8 bln in F-35 contracts with Lockheed


By Andrea Shalal-Esa

WASHINGTON, Sept 27 (Reuters) - The Pentagon on Friday saidit had finalized two contracts with Lockheed Martin Corp valued at $7.8 billion for 71 more F-35 fighter jets, citingwhat it called significant reductions in the cost of the newradar-evading warplane.

The U.S. Defense Department said it signed a $4.4 billioncontract for a sixth batch of 36 F-35 aircraft, with the averagecost of the planes down 2.5 percent from the previous deal. Allbut $743 million of that amount had already been awarded to thecompany under a preliminary contract.

The two sides also signed a $3.4 billion contract for 35aircraft in a seventh batch, which reflected a 6 percent drop inthe average price from the fifth group, it said in a statement.

The Pentagon's F-35 program office said the cost of eachF-35 conventional takeoff A-model jet would drop to $98 millionin the seventh batch of jets, excluding the engine, from $103million in the sixth lot. It marks the first time the price ofthe jet will have dipped below $100 million.

The U.S. government buys the engines directly from Pratt &Whitney, a unit of United Technologies Corp, under aseparate contract.

The Pentagon has projected it will spend $392 billion to buya total of 2,443 stealthy F-35 fighter jets over the next fewdecades to replace F-16, F-15, F/A-18 and other warplanes usedby the U.S. Air Force, Navy and Marine Corps.

The program is years behind schedule and nearly 70 percentover original cost estimates, but U.S. officials said last weekthe program is now making progress in flight testing, productionand long-term operating costs.

Lockheed and the Pentagon announced an agreement inprinciple for the next 71 jets on July 30. Rear Admiral RandyMahr, deputy director of the Pentagon's F-35 program office, hadtold reporters on Wednesday that he expected the contracts to bewrapped up within days.

Lorraine Martin, Lockheed's F-35 program manager, saidproduction costs had declined with each successive lot of jets.

"That's a trend we look forward to continuing as thisprogram moves toward full rate production and operationalmaturity," Martin said in a statement provided to Reuters.

"Working together with the Joint Program Office, our entireindustrial team is focused on delivering the F-35'sfifth-generation capabilities to our armed forces and partnernations at a 4th-generation price point," she said.

Industry executives use the phrase fifth-generation to referto the jet's stealthy coatings and other features that make itnearly invisible to enemy radar.

Lockheed is building three variants of the F-35 for the U.S.military and eight countries that helped fund its development:Britain, Canada, Australia, Turkey, Italy, Norway, Denmark, andthe Netherlands. Israel and Japan have also placed orders.

The F-35 remains in the running for a 60-jet South Koreanfighter competition after Seoul this week rejected a bid byBoeing Co involving its F-15 Silent Eagle fighter jet.

South Korea would have to make a commitment by the end of2013 to secure a place in the ninth low-rate production contractfor F-35 jets and ensure delivery of the first planes in 2017,said one source familiar with the program.

The overall contract won't be negotiated for some time, butthe Pentagon plans to award a contract for early procurement ofmaterials for the jet in coming months, said the source.

South Korean officials have been in touch informally withthe U.S. military to understand the timing question, said thesource, who was not authorized to speak on the record.

A second source familiar with the F-35 program said ittypically takes about two years to build a jet, and there mightbe ways to accommodate Seoul if it decided to order jets afterinitial "advanced procurement" funds were awarded to startordering parts for the ninth batch of jets.

Lockheed's main subcontractors on the program are NorthropGrumman Corp and Britain's BAE Systems Plc.

The Pentagon said the price of the Marine Corps' B-model jetwould drop to $104 million under the seventh contract from $109million in the sixth. It said the cost of the C-model plane,which will land and take off from aircraft carriers, would dropto $116 million a jet from $120 million in the sixth lot.

The Pentagon said the contracts also reduce the government'sexposure to cost overruns, with Lockheed agreeing to cover anycost overruns. The government and Lockheed would split returnson a 20-80 basis if costs are below target, it said.

The two sides will share equally the costs of all knownretrofits needed for the aircraft, but any new discoveries couldresult in higher contract costs, the Pentagon said.

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