Lockheed’s F-35 Deals Barred Until Air Force Vouches for Fixes

1470734424_300154065

F-35

Photographer: Simon Dawson/Bloomberg
  • Secretary must certify improvements will come within 2 years
  • Company has spent $1 billion as contract negotiations drag on

As negotiations drag on over Lockheed Martin Corp.’s biggest U.S. contracts yet to build F-35 jets, one potential impediment hasn’t attracted public attention: a congressional requirement that the Air Force secretary certify the fighter will be in top shape within two years.

Lawmakers withheld $1 billion of about $5.3 billion the service requested for F-35s this year until the certification is made. The Air Force is the biggest buyer among the military services of the 2,443 aircraft planned for the U.S.

“We know it’s a lot of money and we’re working to get the appropriate level of information” so Secretary Deborah James “can feel comfortable” signing the certification, Lieutenant General Arnold Bunch, the service’s top uniformed acquisition official, said in an interview.

Lockheed hasn’t hidden its frustration over delays in completing negotiations that began last year on the ninth and 10th low-rate F-35 production contracts. The biggest U.S. defense contractor told investors last month that it has spent almost $1 billion of its own money to keep building the planes while awaiting the new contracts that the Pentagon says could have a combined value of as much as $14 billion. In the meantime, Lockheed said it has “incurred costs in excess of funds obligated.”

‘Significant’ Cash

“We expected to recover a significant amount of cash associated with the completion of negotiations” on the two contracts by now, Lockheed Chief Financial Officer Bruce Tanner told analysts during a July 19 earnings call.

While the requirement for certification applies to the 10th low-rate production contract for 90 aircraft and not a ninth one for 57, “we expect that the congressional notification” for both contracts “will be transmitted as one package,” Major Rob Leese, an Air Force spokesman, said in an e-mail. Joe DellaVedova, spokesman for the Pentagon’s F-35 program office, said it’s working with the Air Force so that the certification can be provided soon.

Lawmakers frequently include provisions that limit funding until certain conditions are met. Requiring a certification from a top service official or the secretary of defense puts that leader’s credibility on the line, giving lawmakers some assurance that it was made after a thorough review.

“Our goal and our intent is to have the secretary’s certification completed before they would sign the final” agreements, Bunch said.

For Bloomberg Intelligence’s primer on Lockheed, click here.

The stealthy, next-generation F-35 is America’s most expensive military weapons system, at a projected cost of about $379 billion. In part to help rein in per-plane costs and improve coalition military operations, the program depends on foreign sales to partners such as the U.K., Italy, Australia, Japan and Israel.

In its report on this year’s defense authorization measure, lawmakers withheld the $1 billion until the Air Force secretary certifies that F-35s delivered during fiscal 2018 “will have full combat capability,” including the most advanced “3F” version of software and the ability to carry a full range of weapons.

The Senate Armed Services Committee, which devised the certification requirement, said it supported the F-35 but was concerned that a planned increase in production of the Air Force version, to 44 aircraft from 28 in fiscal 2015, “presents an increased risk of cost growth and schedule delays.”

The program “continues development, testing and evaluation concurrently with production” so “any further software development delays or test and evaluation deficiency discoveries and deferments could incur increased retrofit costs for delivered aircraft, and delay required capabilities to the warfighter,” the Senate panel said in the report accompanying the bill, Public Law 114-92.

Even if the specified capabilities are delivered for the Air Force version in fiscal 2018, the three models of the F-35 won’t be declared to have full combat capability until they undergo vigorous operational exercises. Those won’t begin until August 2018 at the earliest and then will last as long as a year. That would be a year later than planned.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE