Lockheed F-35 Projected Cost Rises 1.9% to $398.6 Billion

The projected cost to develop and produce Lockheed Martin Corp. (LMT)’s F-35 fighter, the Pentagon’s costliest weapons system, has risen 1.9 percent in the past year to $398.6 billion, according to estimates released today.

The $7.4 billion increase from $391.2 billion includes the aircraft and the engines produced by United Technologies Corp.’s (UTX) Pratt & Whitney unit for an eventual fleet of 2,443 U.S. planes. At the same time, the Pentagon’s independent cost-assessment office said its estimate for operating and supporting the F-35 over its projected 55-year service life has declined $96.8 billion, or 8.7 percent, to $1.02 trillion from $1.11 trillion.

The latest F-35 projection is among annual cost estimates for major weapons that the Pentagon sent to Congress today. The reports cover a portfolio of 77 weapons that the Pentagon projects will cost a combined $1.62 trillion, down from $1.66 trillion for 78 programs in last year’s compilation of Selected Acquisition Reports.

The increased cost of making the F-35 stems from revised labor rates for Bethesda, Maryland-based Lockheed and its subcontractors, a rise in engine production costs and adjusted forecasts for foreign exchange rates against the dollar, the Defense Department said in a statement. The cost of the airframe program rose $3.1 billion, while the engines’ price increased by $4.3 billion.

Italy, Turkey

The rising cost may give pause to other countries as they weigh whether to buy the F-35 or how many to acquire. Among eight original international partners, Italy, Turkey and Canada already have indicated that they’re re-evaluating their plans. Newer customers Israel, Singapore, Japan and South Korea also may be affected.

With the latest revision, the projected acquisition cost of the F-35 has climbed 71 percent in inflation-adjusted dollars since the Pentagon signed its initial contract with Lockheed in 2001, even as plans were adjusted to buy 409 fewer aircraft. Congress has approved spending $83.2 billion on the F-35 so far, according to the report.

Air Force Lieutenant General Christopher Bogdan, the F-35 program manager, told reporters today that the increase doesn’t reflect a “program out of control” or that “Lockheed is producing airplanes more poorly.”

He cited Air Force and Navy decisions to delay purchases of 37 aircraft beyond 2019 and delayed decisions by allies as reasons. He said exchange rate fluctuations are significant because almost 30 percent of the aircraft is built abroad.

Lockheed’s ‘Proud’

Lockheed is “proud of the continued progress it’s making in driving costs out of the program that led to an overall reduction in the program’s total cost for the second consecutive year,” spokeswoman Laura Siebert said in an e-mailed statement, referring to the reduction in projected operations and support costs.

Bogdan blamed Pratt & Whitney for failing to reduce engine costs as fast as promised, which he said accounts for $1.7 billion of the increase.

“Pratt’s not meeting its commitment,” he said. “It’s as simple as that. They told us years ago that the engine was going to come down at a certain rate in terms of price, and they haven’t met it. Not good. Not good at all.”

Matthew Bates, a spokesman for the Pratt & Whitney unit of Hartford, Connecticut-based United Technologies, said in an e-mail that the company “is committed to delivering an affordable” F-35 propulsion system.

Cost-Reduction Effort

“We have a very aggressive cost-reduction program in place,” he said, adding that the company has spent more than $65 million on an efficiency initiative that reduced the cost of the engine by more than 40 percent.

The cost of the full 77-weapon portfolio was reduced because the Defense Department plans to buy fewer of some major systems, such as the Littoral Combat Ship, the MQ-9 Reaper armed drone from General Atomics, based in San Diego, and Chicago-based Boeing Co.’s (BA) P-8 naval reconnaissance aircraft, according to the Defense Department statement.

Defense Secretary Chuck Hagel said in February that he’ll cut the Littoral Combat Ship purchase to 32 vessels, instead of the 52 originally planned, until the Navy develops options for a more survivable ship.

Buying the 32 ships, not including separate modules needed for different missions, is now estimated at $22.6 billion, down from $34 billion for 52. For the first time, the report projected the cost for the modules, setting it at $7.2 billion. The ship is made in two versions by Lockheed and Henderson, Australia-based Austal Ltd. (ASB)

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

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

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