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Lockheed F-35 Cost Declines 1.1%, Pentagon Estimates

The development and production cost of Lockheed Martin Corp. (LMT)’s F-35 fighter, the Pentagon’s most expensive weapons program, has decreased by 1.1 percent, primarily because of reduced labor rates, according to the Pentagon’s latest cost estimates.

The $4.5 billion decrease, to $391.2 billion from $395.7 billion, includes the aircraft and the engines produced by United Technologies Corp. (UTX)’s Pratt & Whitney unit for an eventual fleet of 2,443 planes.

The latest F-35 projection is included among reports on cost estimates for major weapons that the Pentagon sent to Congress yesterday. The reports cover a portfolio of 78 weapons that the Pentagon now projects will cost a combined $1.66 trillion, an increase of $39.6 billion, or 2.4 percent, over a report published in March 2012.

Even with the improvement for the F-35 reported yesterday, the projected cost has increased 68 percent since the Pentagon signed its initial contract for the fighter with Bethesda, Maryland-based Lockheed in 2001. The revised estimate bolsters findings by government analysts that the military and the contractor are making progress in managing the jet’s simultaneous development and production.

“My immediate reaction is that it reflects the improvements that we found in manufacturing last year,” said Michael Sullivan, who is in charge of producing an annual report on the F-35 for the independent Government Accountability Office.

‘Right Direction’

In March, the GAO reported that “overall, the F-35 Joint Strike Fighter program is moving in the right direction after a long, expensive and arduous learning period. It still has tremendous challenges ahead.”

A summary issued by the Pentagon attributed the improved projection for the F-35 primarily to “decreases in the prime contractor and subcontractor labor rates and revised airframe and subcontractor estimates that incorporate the latest actual costs” from early production contracts instead of computer-model estimates.

The F-35 program “continues to make slow but steady progress and is moving forward in a disciplined manner,” according to the 92-page Pentagon report on the fighter. “There were many successes as well as challenges in 2012.”

Progress in holding down the F-35’s costs risks being reversed if Lockheed’s labor and overhead rates grow and the program encounters additional delays as it progresses into its most complicated phase of software testing.

‘Software Risk’

“Software risk remains the top development issue,” according to the F-35 report.

Pentagon analysts still estimate the potential 56-year cost of operations and support for the F-35 fleet at $1.1 trillion, according to the report yesterday. Officials said that estimate could decline as improved data accumulate on aircraft reliability, maintenance and flying hours.

The 2.4 percent increase projected for the $1.66 trillion portfolio of weapons is “relatively modest cost growth” that can be seen “as a good sign,” Moshe Schwartz, a weapons-cost analyst for the nonpartisan Congressional Research Service, said in an e-mailed statement.

“The question is whether this is a single data point, a temporary lull, or whether this is the beginning of a trend in improved cost estimating and cost management,” he said. “If cost growth over the next two years for the entire portfolio stays under 3 percent or even under 5 percent than this may be good news.”

Budget Cuts

Some of the weapons may face cutbacks if the automatic budget reductions called sequestration remain in place. Pentagon officials, who worked to lock in contracts for the F-35 before the cuts took effect in March, say reducing the number of weapons purchased would only increase the cost for each one purchased.

The new Pentagon cost projections are largely consistent with the GAO’s most recent annual weapons report. Both appraisals are free of criticism such as that in a report by the GAO in March 2009, when the agency said cost growth for what was then the top 96 weapons programs was “staggering.”

The 2.4 percent increase stems primarily from revised inflation estimates and higher costs to the Pentagon’s primary rocket program because of a projected increase in launches.

The projected cost of the Navy’s Littoral Combat Ship, produced in competing designs by Lockheed and Austal Ltd. (ASB), has decreased $3.4 billion, or 9 percent, to $33.9 billion because the service has cut three ships from what was a 55-ship program, according to the new data.

Acquisition Law

The documents indicate that, for the first time in years. no weapons program has experienced increases significant enough to trigger a 1982 law that mandates certification to Congress that it’s vital to national security, according to Pentagon officials.

The progress can in attributed in part to a 2009 weapons acquisition law, officials said.

“I can’t prove it but my belief is that they are” doing a better job because new procedures in the law “have kicked in,” Senate Armed Services Committee Chairman Carl Levin of Michigan, a cosponsor of the legislation, said today at a Bloomberg Government breakfast.

The 2009 law prevents the “add-on of additional bells and whistles,” said Levin, who hadn’t yet seen the new Pentagon estimates.

Separately from the portfolio of 78 weapons systems for which previous estimates were offered, the Pentagon offered first-time projections for four newer projects.

The largest is $31 billion for the Army-Marine Corps Joint Light Tactical Vehicle.

The Pentagon also offered projections for three Air Force programs: $3.4 billion for the Global Positioning System’s newest ground operational control station; $2.75 billion for the AWACS Block 40 Upgrade program; and $1.45 billion for the tail kit assembly for the extension of the B61 nuclear weapon.

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

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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