Sequestration deadline speeds F35 negotiations

Pentagon and Lockheed Martin leaders say a deal for F-35 production lots five and six is imminent.

Top Pentagon and Lockheed Martin leaders have confirmed the two sides are close to reaching a deal for the fifth, and possibly the sixth, production lots for the F-35 Joint Strike Fighter.

Lockheed Martin’s executives said Thursday they are “confident” the deal for lot five, which includes 32 aircraft, will be completed by the end of the year. Marillyn Hewson, the appointed successor to long time CEO Bob Stevens, said she’s also confident the framework for a deal for lot six will be completed by the end of December.

“We are progressing well with favorable dialogue and I do feel confident that we are going to get some closure on lot five this year,” Hewson said. “We want to line that up and I think our customer wants to line that up with quickly getting at least some contract on lot 6 even if it’s undefinitized.”

Hewson’s comments come a day after Defense Under Secretary Frank Kendall told Reuters at the Credit Suisse 2012 Aerospace & Defense Conference that he had a “very positive meeting” with Hewson and he thinks the two sides are “getting close” to a deal.

The Pentagon and Lockheed have spent the past year negotiating the F-35’s production lot five contract with talks becoming tense. Air Force Maj. Gen. Christopher Bogdan, who takes over as the F-35 program executive officer next week, said in September the U.S. military’s relationship with Lockheed’s F-35 program was “the worst [he’s] ever seen.”

The $500 billion in cuts to the defense budget stipulated by sequestration played a major role in motivating Pentagon and Lockheed Martin leaders to reach a deal for lots five and six before the end of 2012. Congress has until Jan. 2 to reach a deficit reduction deal or the sequestration cuts found in the Budget Control Act will be enacted. Those cuts include an across-the-board 10 percent cut to planned defense spending over the next decade.

However, the sequester cuts can’t touch previously obligated funds. If Lockheed and the Pentagon can agree to contracts for lots five and six, they could insulate funding for the 64 new Joint Strike Fighters in those production lots.

“I think it’s in all of our interests, the company’s as well as the government’s, to get that next tranche of funding for lot six in place before the end of the calendar year. And as I said here today I’m pretty confident that’s going to occur,” said Bruce Tanner, Lockheed Martin’s chief financial officer, who spoke with Hewson and Stevens at the Credit Suisse conference.

Lockheed Martin selected Hewson to lead the world’s largest defense company after Stevens’ previous successor,  Christopher Kubasik, resigned. She is scheduled to take over as CEO in January. She has already started to take part in the F-35 production lot negotiations.

Defense consultant Loren Thompson said the sequestration deadline has played the largest role in moving toward an agreement on the  production lots, but Hewson’s involvement can’t be underestimated.

“They were working against the dealine and it created the forcing function to get an agreement,” Thompson said. “However, Marrilyn can help break up log jams. Hewson is very good at dealing with customers and sub contractors. It has probably made a difference.”

Protecting the production lots is vital to keeping costs down for the Joint Strike Fighter program, Thompson said. As production progresses, the costs per plane drop. Pentagon officials hope that by the tenth lot, the Air Force version of the F-35 price tag per aircraft could drop to the level of a current F-16, Thompson said.

However, the sequestration cuts could put that progress in jeopardy unless the Pentagon and Lockheed Martin can insulate the funding by completing the lot five and six contracts before the end of 2012.

Tanner said the sequestration cuts pose the greatest risk to Lockheed Martin’s F-35 contracts compared to the rest of the company.

“I think where we have the most exposure is the current negotiation for the lot 5 contract for F35,” he said when asked about sequestration. “And the next tranche of funding for lot 6 of the F-35 program.”