Pentagon delays JSF payments to Lockheed

Action is taken to correct snags in fighter program

December 28, 2004|By BLOOMBERG NEWS

WASHINGTON - About $283 million in potential payments to Lockheed Martin Corp. for the Joint Strike Fighter will be put off by the Pentagon as an incentive to fix schedule delays and cost overruns, the military program manager says.

The amount for the Joint Strike Fighter, the costliest U.S. weapons program ever, represents 20 percent of the profit that could have gone to Lockheed by the end of 2007. It will now be set aside for payment to Lockheed in 2008 or later, according to Pentagon figures released yesterday.

Delaying the payments will help put the $244 billion program back on track, Pentagon officials said. About 80 percent of the fighter's parts will be shared among three versions to reduce costs.

Lockheed, which is based in Bethesda, had to redesign one version because it was too heavy, extending development by a year. That prompted the Pentagon to reduce fees Lockheed otherwise would have earned during the development phase - as much as $2.7 billion.

"We are not giving the company any money until they demonstrate that the system works," Pentagon program manager Rear Adm. Steven L. Enewold said in an interview Dec. 13.

Payments will only be made if Lockheed meets "milestone wickets" in the development process, he said.

The decision reduces the so-called profit pool that the defense contractor can potentially earn to $1.22 billion from 2004 to 2007, and raises the pool to $1.15 billion from 2008 to 2013, when the current development phase ends, the Pentagon figures show. Plans call for building as many as 2,593 fighters.

Shares of Lockheed fell $1.56, or 2.7 percent, to $57.38 on the New York Stock Exchange yesterday. They have risen 12 percent this year.

The $283 million shift is part of a major reorganization approved last month to speed the redesign of parts and cut weight on the most complex Joint Strike Fighter model - the short-takeoff-and-vertical- landing aircraft for the Marine Corps, Air Force and the British Royal Navy. Lockheed said in September that it had shaved 2,700 pounds from the plane and increased engine thrust to compensate for another 600 pounds of excess weight.

"Earlier money is always better" because "there're some things to be put in place early in a program," said Robert T. Elrod, Lockheed manager of the Joint Strike Fighter program. "We have agreed with the plan and are going forward with it.

"A year ago, we were looking at a significant weight issue on the airplane," but that's now under control, he said.

"We've made a tremendous amount of progress," said Enewold, the Pentagon program manager. "We're in a lot better shape than we were last spring."

The next progress milestone is to occur during a Pentagon review of critical design features in April 2005, a year behind schedule, he said.

Resolving the problems will have a direct effect on how much Lockheed earns from the program, on which about $9.6 billion was spent as of June 30, the latest figure available.

The Pentagon usually sets a potential profit range for six-month periods during development, and bases the actual amount on how well the contractor performs during that time.

The Air Force and Navy versions of the fighter are scheduled to start operations in March 2013. The Air Force's plane is two years behind schedule, while the Navy's carrier version is a year behind.

Moving the fees back sends "a mixed message," said Byron K. Callan, a defense analyst for Merrill Lynch & Co. Inc. in New York. "A bull's stance on Lockheed is that there is margin upside in the out years, but if fees are low now, questions should be asked as to what could get them higher." He rates the shares "neutral" and doesn't own any stock in the world's largest defense contractor.

The Pentagon set aside about $2.7 billion in such fees on the $19.4 billion system development phase that began in October 2001. Since then, Lockheed has received 81 percent of potential profit, or $493.8 million of the $613 million set aside through October of this year. It shares the fees with program partners including Northrop Grumman Corp. and BAE Systems PLC.

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