Italy Slashes Lockheed Martin F-35 Order in Defense Shakeup

Italy will reduce its planned order for Lockheed Martin Corp. (LMT) F-35 fighter jets by about 40 and trim the size of the military as part of a program to reduce defense spending, Defense Minister Giampaolo Di Paola said today.

Italy will purchase 90 F-35s rather than the planned 131, Di Paola said in Rome before a joint defense committee of both houses of parliament. The nation will also slash military manpower by about 30,000 soldiers and 10,000 civilians, he said.

The cuts come amid a drive by Prime Minister Mario Monti to tame Italy’s public finances after contagion from the sovereign debt crisis drove borrowing costs to record highs, and are a blow for the F-35, the world’s costliest defense project. The Pentagon will cut $1.6 billion from the program, canceling 13 jets next year, under proposals sent to Congress Feb. 13, while customers including Australia are reviewing their requirements.

“Italy’s decision won’t have a huge impact on the program, but it’s probably symptomatic of lower F-35 sales overall,” said Paul Brant, a defense analyst at Collins Stewart in London, who predicts that production may drop by 15 percent. “I imagine most nations will bring down their numbers. The U.S. will probably cut the total it orders by about 500 from the original 2,400.”

Delays

The Pentagon is the largest customer for the F-35, which is five years late and will cost an estimated $382 billion for development and purchases. Three variants are being built: a conventional fighter, one to operate from aircraft carriers, and another capable of short takeoffs and vertical landings.

Before today, Lockheed also had about 700 orders from eight partner nations, the U.K., Australia, Italy, the Netherlands, Turkey, Norway, Denmark and Canada. Israel and Singapore also have a lower-level involvement in the plane. The plane won its first competitive tender, from Japan, in December, overcoming the Boeing Co. (BA) F-18 Super Hornet and Eurofighter GmbH Typhoon.

Australia is reviewing deliveries following the U.S. review, the Associated Press reported Jan. 30, citing Defense Minister Stephen Smith, while Canada has convened a meeting to discuss the program, Ottawa’s Globe and Mail said Feb. 13. Even orders from the U.K., the biggest partner with an investment of $2 billion, are in flux, with no final total yet stipulated.

‘Key Role’

Di Paola said today that Italy had spent 2.5 billion euros ($3.3 billion) on the F-35, and that a review had indicated one- third fewer planes would suffice. Lockheed, the world’s biggest defense contractor, said it understood the financial challenges facing global defense budgets and appreciated Italy’s continued commitment to the jet, also known as the Joint Strike Fighter.

“Italy plays a key role as a partner in the program,” Lockheed said in e-mailed comments. George Standridge, the Bethesda, Maryland-based company vice president of business development, said separately at the Singapore Airshow that government spending cuts will have a minor impact on costs and that there are “budget pressures everywhere, not just on F35.”

The reduction in Italy’s military headcount can be achieved over the next decade by curbing recruitment and transferring personnel, the minister said, with a 30 percent cut in “defense structures” planned over the next five years. He said yesterday that 70 percent of the Italian defense budget goes on staff.

Finmeccanica Impact

Prime Minister Monti pushed through 20 billion euros in austerity cuts in December and the European Central Bank loaned banks unlimited funds for three years. That’s prompted a fall in Italian bond yields that suggests improved confidence in the country’s ability to repay its debts.

The cut in orders is “not good news” for Finmeccanica SpA (FNC), Italy’s top defense contractor, which, though a Eurofighter partner, contributes F-35 parts and is expected to undertake final assembly in Cameri, near Milan, according to Christophe Menard, an analyst at Kepler Capital Markets in Paris.

Still, the “rebalancing of spending toward equipment is a positive for Finmeccanica,” though will take time to impact orders at the Rome-based company, Menard said in a note.

Finmeccanica traded 1.2 percent higher at 3.45 euros as of 11:26 a.m. in Milan, taking gains this year to 21 percent.

To contact the reporters on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net; Sabine Pirone in London at spirone@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net; Jerrold Colten at jcolten@bloomberg.net

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