Pentagon, Lockheed agree deal for 32 more F-35 fighters

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By Andrea Shalal-Esa | December 1, 2012 6:14 AM EST

Lockheed Martin Corp and the U.S. Defense Department have reached an agreement in principle on a fifth batch of 32 additional F-35 fighter planes, the Pentagon said on Friday, bringing nearly a year of negotiations to a close.

The deal is valued at around $3.8 billion (2.3 billion pounds) , although the two sides are still finalizing details, according to a source familiar with the agreement.

The agreement will also pave the way for talks about preliminary funding for a sixth batch of planes which Lockheed, the Pentagon's largest supplier, has been building at its own cost for some time.

Shares of Lockheed were up 0.4 percent to $93.41 in afternoon trading, outperforming the Arca Defense Index <.DFII> which was down 0.6 percent.

Pentagon spokesman George Little said details on the cost per aircraft would be released once the final contract is signed.

People familiar with the process said both sides expected to sign a final deal before the end of the year, which will safeguard those funds from cuts if Congress is unable to avert $52 billion in automatic budget cuts to the Pentagon's fiscal 2013 budget that are due to take effect on January 2.

The contract includes the actual planes, but will also pay for manufacturing support equipment, instrumentation for flight testing and other mission equipment needed for the new stealthy warplanes. The Pentagon is negotiating a separate contract with Pratt & Whitney, a unit of United Technologies Corp , which builds the engine for the single-seat, single-engine F-35.

The agreement with Lockheed removes a cloud that had been hanging over the $396 billion F-35 program, the Pentagon's costliest procurement program. Both sides have been trying to reach an agreement on this batch of planes since last December.

In September, Major General Christopher Bogdan, who will be the top overseer of the program starting next week, said he was surprised that the negotiations were taking so long, and described relations between the two sides as "the worst" he had three variants of the F-35 for the U.S. military ever seen in decades of working on big acquisition programs.

Retiring F-35 program executive director, Vice Admiral Dave Venlet, said in a statement on Friday that the deal included lower production costs and set the stage for "improving business timelines for the greater good of all the nations partnered with us."

Lockheed is building and eight countries that are helping fund the development effort: Britain, Italy, Turkey, Norway, Australia, Canada, Denmark and the Netherlands. Together, they plan to buy more than 3,100 fighters in coming decades.

Israel and Japan have also ordered the new fighter jet, and South Korea is weighing competing bids from Lockheed's F-35 and Boeing Co's F-15 fighter.

Lockheed spokesman Michael Rein said the company expected to reduce its labour costs for the fifth batch of planes by more than 10 percent from the actual costs on the fourth lot.

He said each plane in the fifth batch of planes would cost less than 50 percent of the cost of the first production planes, which cost $220.8 million each, and were delivered to Edwards Air Force Base in California in May 2011.

The fifth F-35 order includes 22 conventional takeoff and landing variants for the U.S. Air Force, three B-models that can land vertically for the Marine Corps, and seven C-models to be used on aircraft carriers for the Navy.

Production of the fifth lot of F-35 jets began in December 2011 under a preliminary contract. This order for 32 planes comes on top of 63 production jets that are already under contract.

Lockheed has so far delivered a total of 29 low-rate production planes and 19 developmental planes.

The Pentagon's chief weapons buyer, Frank Kendall, told Reuters on Wednesday that the two sides were "getting close" to an agreement after what he described as a "very productive" meeting with Lockheed President Marillyn Hewson.

Hewson said Lockheed and the Pentagon were also making progress in talks about additional funding for early work on the sixth batch of F-35 jets.

Lockheed last month said it faced a potential termination liability of $1.1 billion on that sixth batch of planes, unless it received additional funding by year end.

The company did received some initial "long-lead" funding for advanced procurement of materials for the planes, but that money ran out a while ago. It has continued to work on the planes using its own money to keep production on track.

(Additional reporting by David Alexander in Washington; Editing by Leslie Gevirtz and Tim Dobbyn)

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