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Lockheed, Pentagon reach deal on 71 more F-35s: source

Three F-35 Joint Strike Fighters (rear to front) AF-2, AF-3 and AF-4, can be seen flying over Edwards Air Force Base in this December 10, 20
Three F-35 Joint Strike Fighters (rear to front) AF-2, AF-3 and AF-4, can be seen flying over Edwards Air Force Base in this December 10, 20

By Andrea Shalal-Esa

WASHINGTON (Reuters) - Lockheed Martin Corp and the Pentagon have reached agreement on orders for the next two batches of F-35 fighter jets, a deal worth over $7 billion, a person briefed on the discussions told Reuters on Monday.

The deal covers 71 of the radar-evading planes, with 36 jets to be purchased in the sixth production lot, and 35 in the seventh. The total includes 60 F-35s for the U.S. military, and 11 for Australia, Italy, Turkey and Britain.

The agreement is good news for Lockheed, which generates about 15 percent of its revenues from the F-35 program, and its key suppliers: Northrop Grumman Corp and Britain's BAE Systems Plc. At a projected procurement and development cost of $392 billion, it is the Pentagon's biggest arms program.

The agreement was negotiated without factoring across-the-board budget cuts imposed on the Pentagon in March, said the source, who was not authorized to speak publicly.

Lockheed officials last week said the Pentagon was trying to minimize the impact of the budget cuts on the output quantities in the seventh batch of low-rate production jets, which is funded under the fiscal 2013 budget.

A second source familiar with the negotiations said Pentagon acquisition chief Frank Kendall had approved the broad outlines of the deal, which includes further reductions in the cost of the planes from the previous contract.

Neither source had details on the cost per plane.

The government negotiates separately with Pratt & Whitney, a unit of United Technologies Corp, for the plane's engines. Those talks are also expected to wrap up soon.

Lockheed is building three models of the F-35 for the U.S. military and eight international partner countries: Britain, Australia, Canada, Norway, Turkey, Italy, Denmark and the Netherlands. Israel and Japan have also ordered the jet.

Lockheed Chief Executive Marillyn Hewson last week cited good progress in the negotiations and said the company expected to reach a deal in the near term.

Given the size of the program, Pentagon officials have been pushing for lower prices to ensure its future, given mounting budget pressures and mandatory budget cuts that could slice the Pentagon's budget by $500 billion over the next decade.

The Pentagon reached agreement with Lockheed on the fifth batch of F-35s last December, agreeing to buy 32 of the advanced warplanes for $3.8 billion.

FURLOUGHS TAKE TOLL ON TESTING

Furloughs of civilian defense workers will likely result in a month-long delay in flight tests of the fighter plane, according to Joe DellaVedova, a spokesman for the Pentagon's F-35 program office.

He said the program had caught up with its testing schedule after two separate flight grounding actions earlier this year, but he added the furloughs were taking a toll.

Civilian employees affected by the furloughs work on flight test controls at Edwards Air Force Base in California and Patuxent Naval Air Station in Maryland, so their absence is shaving a day per week off the schedule of possible flight tests.

"We don't know yet what the final impact will be," DellaVedova said. "We think we'll be at least a month behind."

He said the program office had planned some flexibility into the testing schedule for the year, but that had been used up by the two earlier groundings. "We are working hard to muscle through as best we can," he said.

The Navy is also resurfacing a runway used by government officials for "check out flights" when each jet comes off the assembly line at Lockheed's adjacent Fort Worth, Texas, plant. The work will close that runway for about a month, said Lockheed spokesman Michael Rein, beginning on August 1.

The U.S. military is keen to complete flight testing of the already delayed F-35 program, the Pentagon's largest weapons program, so that it can begin to use the new jets for military operations. Other factors, including weather conditions, can also affect flight testing.

Civilian defense workers across the United States began taking unpaid leave on July 8 as part of an austerity plan that is expected to save $1.8 billion through September 30, the end of the 2013 fiscal year. The furloughs are part of nearly $37 billion in automatic across-the-board budget cuts that hit the Pentagon this year as part of a process known as sequestration that is aimed at curbing the U.S. government's nearly trillion-dollar deficit.

(Reporting by Andrea Shalal-Esa; Editing by Carol Bishopric and Ken Wills)

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