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Pentagon, Lockheed "getting close" on next F-35 contract: Kendall

A F-35 Lightning II Joint Strike Fighter is seen at the Naval Air Station (NAS) Patuxent River, Maryland January 20, 2012. REUTERS/Yuri Grip
A F-35 Lightning II Joint Strike Fighter is seen at the Naval Air Station (NAS) Patuxent River, Maryland January 20, 2012. REUTERS/Yuri Grip

By Andrea Shalal-Esa

NEW YORK (Reuters) - Lockheed Martin Corp and the Defense Department are nearing agreement on a long-delayed contract for a fifth batch of F-35 fighter jets, the Pentagon's chief weapons buyer told Reuters on Wednesday.

"I think we're getting close," Defense Undersecretary Frank Kendall told Reuters after a speech to an investor conference hosted by Credit Suisse.

Kendall said he had "a very positive meeting" on Tuesday with Lockheed President Marillyn Hewson about a range of issues, including the $396 billion F-35 program, the Pentagon's largest weapons program.

Hewson will become the company's CEO in January after the company forced out Christopher Kubasik, who admitted to having an affair with a subordinate.

Lockheed spokeswoman Jen Allen declined comment on Hewson's meeting with Kendall. "We do not discuss customer meetings and consider them proprietary," she said.

Lockheed, the Pentagon's largest contractor, and its suppliers are already building the fifth batch of planes under a preliminary contract, but the two sides have been struggling to finalize the terms of the deal since last December.

"The two sides have been arguing over what the plane should cost for the better part of a year. It appears they have now agreed on a price that is midway between their original goals, which means a significant reduction in the cost of each plane from the previous contract," said defense consultant Loren Thompson, who has close ties to Lockheed.

Thompson said Hewson's increased engagement in the F-35 negotiations had helped defuse tensions that had mounted between the company and the Pentagon over the past year.

In September, Air Force Major General Christopher Bogdan, who is moving up to head the F-35 program next week, said ties between Lockheed and the U.S. government were "the worst" he had ever seen in his years working on big acquisition programs.

Hewson told analysts earlier this month that the F-35 program would be one of her top priorities in her new job. "We won't miss a beat on F-35," she said at the time.

Hewson is due to speak at the Credit Suisse conference on Thursday.

Agreement on the terms would free up additional funding for early work on a sixth set of planes, which the company has been funding on its own for some time.

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

Lockheed received some initial "long-lead" funding for advanced procurement of materials for the planes, but that money ran out a while ago.

The Pentagon has refused to release any more money for the sixth batch of planes until the two sides resolve their differences and sign a contract for the fifth batch of planes after nearly a year of negotiations.

(Reporting By Andrea Shalal-Esa; Editing by Tim Dobbyn, Bernard Orr)

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