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Pentagon finalises $7.8 billion in F-35 contracts with Lockheed

Workers can be seen on the moving line and forward fuselage assembly areas for the F-35 Joint Strike Fighter at Lockheed Martin Corp's factory located in Fort Worth, Texas in this October 13, 2011 handout photo provided by Lockheed Martin. REUTERS/Lockheed Martin/Randy A. Crites/Handout

By Andrea Shalal-Esa

WASHINGTON (Reuters) - The Pentagon on Friday said it had finalized two contracts with Lockheed Martin Corp (NYS:LMT) valued at $7.8 billion (4.83 billion pounds) for 71 more F-35 fighter jets, citing what it called significant reductions in the cost of the new radar-evading warplane.

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

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

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

The U.S. government buys the engines directly from Pratt & Whitney, a unit of United Technologies Corp (NYS:UTX), under a separate contract.

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

The program is years behind schedule and nearly 70 percent over original cost estimates, but U.S. officials said last week the program is now making progress in flight testing, production and long-term operating costs.

Lockheed and the Pentagon announced an agreement in principle for the next 71 jets on July 30. Rear Admiral Randy Mahr, deputy director of the Pentagon's F-35 program office, had told reporters on Wednesday that he expected the contracts to be wrapped up within days.

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

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

"Working together with the Joint Program Office, our entire industrial team is focused on delivering the F-35's 5th-generation capabilities to our armed forces and partner nations at a 4th-generation price point," she said.

Industry executives use the phrase fifth-generation to refer to the jet's stealthy coatings and other features that make it nearly 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, and the Netherlands.

Israel and Japan have also placed orders for the jets.

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

Lockheed's main subcontractors on the program are Northrop Grumman Corp (NYS:NOC) and Britain's BAE Systems Plc (LSE:BA.).

The Pentagon said the price of the B-model that Lockheed is building for the Marine Corps, would drop to $104 million in the seventh group from $109 million in the sixth. It said the cost of the C-model variant, which will be able to land and take off from aircraft carriers, would drop to $116 million a jet from $120 million in the sixth lot.

The contracts also reduce the government's exposure to cost overruns, according to the Pentagon's statement, with Lockheed agreeing to cover any cost overruns. The government and Lockheed would share returns on a 20-80 split basis if costs come in below target, it said.

The two sides will share equally the costs of all known retrofits needed for the aircraft, while any newly discovered changes could result in higher contract costs, the Pentagon said.

(Reporting by Andrea Shalal-Esa; Editing by Gary Hill and Carol Bishopric)