Pentagon weighs cuts to F/A-22 program

Orders for Lockheed plane may drop to 160 from 277

December 30, 2004|By BLOOMBERG NEWS

NEW YORK - Shares of Lockheed Martin Corp. fell nearly 2.7 percent yesterday on concern the Department of Defense may cut production of Lockheed's F/A-22 stealth fighter-bomber to reduce costs.

Shares of Lockheed, the world's No. 1 defense contractor, fell $1.51 to close at $55.25 on the New York Stock Exchange, after dropping to $54.66 earlier in the day.

At about $256.8 million each, the F/A-22 Raptor is the most expensive fighter ever.

Defense Secretary Donald H. Rumsfeld and Deputy Defense Secretary Paul Wolfowitz met with lawmakers recently to discuss "long-term modifications to the tactical fighter programs," department spokesman Eric Ruff said in a statement that confirmed comments made to The New York Times. Such cuts would help cover the rising costs of the war in Iraq, the Times reported yesterday, quoting analysts.

"There is a strong likelihood that some production will be curtailed," analyst Patrick J. McCarthy, of Friedman, Billings, Ramsey & Co. in Arlington, Va., said in a note to clients. "Initial estimates are for the program to potentially be scaled back to 160 aircraft from current program production of 277."

Lockheed spokesman Thomas Jurkowsky and Air Force spokesman Douglas Karas declined to comment on any potential cuts to the F/A-22 program. "Once the president's budget is submitted to Congress early next year, we'll be able to discuss specifics," Karas said in a telephone interview.

The F/A-22 is intended to replace the F-15C as the top U.S. air-to-air fighter. It has been in development since 1991 and has cost an estimated $42.2 billion, well beyond the congressionally mandated $36.8 billion, according to the Government Accountability Office.

The program "remains the No. 1 priority of the U.S. Air Force" because of the aircraft's unique capabilities, including super-cruise, thrust vectoring and stealth, Legg Mason analyst Troy J. Lahr said in a note. He rates Lockheed a "buy."

Congress must approve cuts to the $71.8 billion program before they could become final.

Rumsfeld may have difficulty pushing program cuts through Congress, given the support of lawmakers from 43 states where parts of the aircraft are produced and considering recent bipartisan criticism of Rumsfeld's handling of the Iraq war, said Loren B. Thompson, an industry consultant and chief operating officer of the Lexington Institute, a national security think tank in Arlington, Va.

"This is not a done deal," Thompson said. "It's going to be very unpopular on Capitol Hill, and Rumsfeld's political fortunes are at a low ebb."

This month, an F/A-22 crashed after takeoff from Nellis Air Force Base in Nevada, the plane's first accident in two years of tests. Michael Wynne, acting acquisitions chief for the Pentagon, said the Air Force needed to investigate the crash before any decisions were made about the program.

Lockheed, which has its headquarters in Bethesda, Md., has been relying on the F/A-22 and another combat aircraft, the F-35 Joint Strike Fighter, for sales growth. Aircraft accounted for $10.2 billion, or 32 percent, of its $31.8 billion in sales last year.

The Pentagon has announced it is delaying about $283 million in payments to Lockheed for the Joint Strike Fighter as an incentive to fix schedule delays and cost overruns.

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