Nov. 7 (Bloomberg) -- The U.S. Navy may terminate its participation in Lockheed Martin Corp.'s spy-plane program if the company can't demonstrate the aircraft will meet naval reconnaissance needs, the service's head of acquisition said.

A withdrawal would mean scrapping plans to buy 19 of the planes for more than $2 billion as part of a 57-aircraft joint program led by the U.S. Army. The program's on hold while Army officials evaluate whether Lockheed can meet requirements that it stay within the original budget and schedule. Lockheed is to submit a revised program by Nov. 14, officials said.

The Aerial Common Sensor project is intended to meet Army and Navy needs for reconnaissance and intelligence gathering. Joint programs are key tenets of Defense Secretary Donald Rumsfeld's plan to transform the military into a more mobile, affordable force linked with digital communications.

``In a tough budget environment the Navy is going to have to understand where ACS is going,'' the Navy's outgoing Assistant Secretary for Acquisition John Young said in a Nov. 3 interview. Young has won Senate approval to become the Pentagon's head of research and engineering.

Before the latest problems, the Army had estimated each aircraft would cost about $121 million to develop and build, calculated in inflation-adjusted dollars. Edward Bair, the Army's top official for electronic warfare, said Oct. 26 that the plane is too small to carry the 15,000 pounds of needed equipment.

`Time Out'

The program's $1.2 billion development phase, without any changes, was estimated to increase by $600 million and slip by two years, Army officials told reporters in September. The Army wanted its first aircraft by 2010, the Navy by 2012.

``The trend was clear -- it's going to be behind schedule, it's going to be over cost so `Time Out' on both sides,'' Army Secretary Francis Harvey said in an Oct. 26 interview.

``The Navy was already anxious'' that the spy plane would meet its needs before the program was halted over concerns the Embraer EMB-145 airframe Lockheed planned to use would not be able to carry the equipment needed for battlefield and maritime intelligence and surveillance missions, Young said.

Bethesda, Maryland-based Lockheed, the largest U.S. defense contractor, led a group last year that beat Northrop Grumman Corp. and General Dynamics Corp. for the program. Lockheed shares rose 9 cents to $59.25 at 9:33 a.m. in New York Stock Exchange composite trading. They've risen 6.5 percent this year.

Lockheed is operating under an $879 million development contract that includes Brazil's Empresa Brasileira de Aeronautica SA, Argon Engineering Associates Inc., BAE Systems Plc, Harris Corp., L-3 Communications Holdings Inc. and Raytheon Co. More than 40 percent of the work will be performed at Lockheed's facility in Littleton, Colorado, and as much as 17 percent outside the U.S.

``We will provide the government with a number of options on the 14th'' Lockheed spokesman Keith Mordoff said. He declined to comment on Young's remarks.

`Total Re-Look'

If the Army stays with the smaller Embraer 145 airframe ``and has lesser capability in order to meet their budget and schedule, the Navy is going to have to take a total re-look at whether that can meet our requirements,'' Young said.

``My strong preference is to do things jointly but today I'm not sure I know exactly where ACS is going,'' he said. ``It could be very hard to meet all the Navy's requirements.''

The program was put on hold so Army officials could re- evaluate the aircraft's requirements and determine whether they were realistic, Army Secretary Francis Harvey told Bloomberg News in an Oct. 26 interview.

He also wanted Lockheed ``to re-evaluate what they can do to about getting the electronics back in the original aircraft -- put your best brains in this thing,'' Harvey said.

Harvey said nothing has been decided on whether to terminate Lockheed's contract.

``I can't tell you,'' he said. ``I don't have enough information to make that decision. All I can tell you is that major restructuring is going on -- on both sides of the house.''

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net.

Last Updated: November 7, 2005 09:37 EST