Lockheed Joint Fighter Development Cost Up 17 Percent

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Lockheed Joint Fighter Development Cost Up 17 Percent

By Tony Capaccio
Bloomberg.com, January 5, 2004

Lockheed Martin Corp.'s F-35 Joint Strike Fighter is projected to cost $5.1 billion or 17 percent more than budgeted, forcing a one-year delay and a cut in the number of planes produced, according to Pentagon documents.

Two years into the program, the cost of developing what's to be the main fighter plane for the U.S. Air Force, Navy and Marines has increased to $40.5 billion from about $35 billion "due to an approximate one-year extension for additional design work'' and a more realistic cost estimate, Comptroller Dov Zakheim said in a Dec. 22 "Budget Decision Memorandum'' on the Pentagon's fiscal 2005 budget.

To keep within the program's overall budget, Zakheim approved shifting $5.1 billion from production to the ongoing research phase and he approved reducing to 90 from 160 the total aircraft purchased through 2009. In addition, the first production models will be a year later than promised.

"This is not good news for JSF advocates,'' Christopher Bolkcom, a military aircraft analyst for the non-partisan Congressional Research Service, who's studied the program, said.

"Cost is an independent variable in the F-35 program, so anything that raises costs is particularly harmful to the original concept'' of a low-cost family of aircraft for the Air Force, Navy and Marine Corps, he said.

The Joint Strike Fighter is the Pentagon's most expensive weapons program and one that -- along with the F/A-22 fighter -- Lockheed Martin is counting on for increased backlog. In October, Lockheed said aeronautics programs accounted for $39 billion, or more than half, of its $74 billion backlog.

The Navy now manages the program. It will be turned over to the Air Force in April.

Revenue Impact

It's not clear what impact if any of the reduced production will have on sales at Lockheed Martin's Fort Worth, Texas-based Aeronautics sector.

Lockheed Martin in the third quarter increased its 2003 sector sales projections by about $300 million to about $10.3 billion largely on the strength of Joint Fighter revenue. It projected a "substantial'' increase in 2004 sales for the sector of up to $11.4 billion, with the majority coming from the JSF program.

Lockheed's shares fell 11 percent in 2003, the largest decline among the nine members of the Standard and Poor's 500 Aerospace and Defense Index, which rose 21 percent. The drop was larger than all but 10 members of the Standard and Poor's 500 Index, which climbed 26 percent this year.

Shares of Lockheed have commanded a price-to-earnings ratio at least 24 percent higher than any of the other top five U.S. defense companies in each of the prior three years. The shares lost their premium this year as investors speculated that the company's earnings growth might slow.

`Backlog is Ephemeral'

In October, Lockheed President Robert Stevens said he wasn't aware of any "particular threat'' to funding the $200 billion multinational program. In November, U.S. President George W. Bush and U.K. Prime Minister Tony Blair "reaffirmed a "strong commitment'' to the project.

Doubts about funding for this program and Lockheed's F/A-22 fighter programs was one reason Integrity Asset Management LLC in October sold all the Lockheed shares it held as part of its $10 million under management, said Adam Friedman, senior portfolio manager.

"The concern with Joint Strike Fighter and F/A-22 is that the backlog is more ephemeral than people thought,'' Friedman said. "It's a huge piece of their backlog and it's vulnerable.''

80 Percent Common Parts

The Pentagon spent $9 billion through Sept. 30 2003 on what's estimated to be a $199 billion program to develop and purchase 2,443 aircraft designed to have about 80 percent common parts. The U.K. plans to buy about 150 additional aircraft.

The fiscal 2004 budget requested about $4.3 billion for the program. The Navy and Air Force will request about $4.5 billion in fiscal 2005, including the first $168 million of money shifted from production, Zakheim said in his memo to Pentagon and Navy budget officials and the Joint Strike Fighter program office.

Lockheed spokesman John Smith had no immediate comment. Kathy Crawford, spokeswoman for the Joint Strike Fighter program office, said that office "cannot comment on specifics of the budget until after it has been submitted to Congress in early February.''

"Hardly Unexpected"

Zakeheim approved delaying until after 2009 the purchase of 35 Marine Corps short-take-off-and-landing versions of the plane and 35 conventional model Air Force models. He also delayed by one year to 2007 entry into the program's initial production phase for the Marine and Air Force aircraft. Navy fighter production will commence as planned in 2008, the memo said.

"Stretching out the program will clearly add costs, and moving money from procurement to development doesn't appear to be a step forward,'' Bolkcom said. "On the other hand, close observers of the program argue that this move was hardly unexpected.''

"Last year the Department of the Navy announced a reduction in planned F-35 purchases by 409 aircraft,'' Bolkcom said. "JSF advocates will likely say that another reduction was inevitable, and a cut of only 70 aircraft is good news.''

The new Joint Strike Fighter plan reduces production 10 aircraft in 2006, 13 in 2007, 23 in 2008 and 24 in 2009.

Translating Paper Designs

The cost growth reflects that the JSF program and Lockheed Martin -- two years into a 10-year development effort -- are moving from a paper design to actual assembly of the first test models, Acting Acquisition Under Secretary Michael Wynne told Bloomberg News.

"The translation into a produceable design is taking longer and is more complex than we had originally anticipated,'' Wynne said. The memo "reflects our current best budgetary estimate of requirements to make sure the program remains executable.''

The current issue "is a deterioration in the weight margin that we need to resolve'' between current aircraft estimates and their final combat weight that can't be exceeded without failing to meet their key performance goals, Wynne said in a statement.

Most of the weight challenges have centered on the Marine Corps short-takeoff-and-landing version that's generally acknowledged to be the most difficult of the three models to build. The program office estimates the final STOVL version will weigh about 30,500 -- or only 586 pounds less than the weight at which the aircraft might not meet one of its key takeoff criteria.

"We believe this problem to be very solvable within normal parameters of design fluctuation, and we have taken steps necessary to manage these issues,'' Wynne said.
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