Lockheed Martin Facing Twin Pressures on F-35 Price
January 12 2017 - 10:53AM
Dow Jones News
By Doug Cameron
As President-elect Donald Trump's nominee as defense secretary,
retired Marine Corps Gen. James Mattis, started his confirmation
hearing Thursday, Lockheed Martin Corp. executives were sitting
down again with Pentagon officials to thrash out terms for the next
multi-billion dollar batch of 90 F-35 combat jets.
Mr. Trump this week again took aim at the cost and delays to the
Pentagon's most expensive weapons program, briefly denting defense
stocks that have wavered since he unleashed a series of tweets in
December against the F-35, as well as the Boeing Co. jets that will
serve as Air Force One .
While Mr. Trump has already wrestled personal commitments from
the chief executives of both companies over the cost of the F-35
and Air Force One, and pledged to remain closely involved,
contracting experts said he has no formal power to negotiate
deals.
His interventions could even open the Pentagon to legal
challenges from defense companies, as the officials who negotiate
deals have legal independence from the Pentagon hierarchy and
lawmakers.
"The president doesn't have the authority just by fiat to
negotiate a contract or the terms of a contract," said Sandy Hoe, a
veteran contract lawyer at Covington & Burlington LLP in
Washington, D.C.
Statutory authority rests with the 30,000, mostly civilian staff
which negotiate military deals, a group that's been a focus of
Pentagon-led reform efforts over the past six years to improve
their skills.
Even Lt. Gen. Chris Bogdan, the military head of the F-35
program who met with Mr. Trump in late December, lacks the official
authority, which rests with a member of the Senior Executive
Service on his team who carries a civilian rank akin to that of a
general.
Lockheed and other big F-35 contractors including Northrop
Grumman Corp. and BAE Systems PLC have invested in efforts to cut
the cost of the plane, but investors are concerned Mr. Trump's
moves will erode profit margins that are already under
pressure.
Bethesda, Md.-based Lockheed has pledged to raise margins on the
F-35 to the 10%-plus level of existing jets such as the F-16 from
what analysts estimate is around 8%. Northrop executives have said
margins on the program are not where they want them to be. The F-35
already accounts for 23% of Lockheed sales, a level that's also set
to rise as production expands.
"New attention from President-elect Trump and adverse pricing on
subsequent contracts could keep F-35 margins below the company
average for longer than expected," said RBC Capital Matt McConnell
as he initiated coverage of Lockheed Martin this week.
The civilian F-35 negotiators and Gen. Bogdan were already at
loggerheads with Lockheed even before Mr. Trump's intervention.
More than a year of talks failed to secure agreement only on the
price of the last batch jets. So the Pentagon in November imposed a
deal worth $6.1 billion covering 57 jets, pricing the F-35A model
used by the Air Force at $102 million apiece, some 4% lower than
the previous bundle of planes.
Gen. Bogdan said in late December that he expects the next batch
now under negotiation to be 6% to 7% cheaper than the last. That
would take the price of each plane below $100 million in
current-year dollars for the first time, on track with the
Pentagon's existing plan for them to cost around $85 million apiece
by 2019 in then-year dollars.
The F-35 program office declined to comment on Gen. Bogdan's
meeting with the president-elect or the latest Lockheed talks, but
said it continued to target the lower price outlined in
December.
Lockheed has until the end of the month to launch a legal
challenge against the price imposed by the Pentagon for the last
batch of jets. The company declined comment.
Mr. Trump's continuing focus on the defense sector has seen the
sector give up around half of their post-election rally when shares
reached record levels on investor expectations that defense budgets
were set to rise more quickly. Lockheed opens the sector
fourth-quarter earnings' season on Jan. 24.
Write to Doug Cameron at doug.cameron@wsj.com
(END) Dow Jones Newswires
January 12, 2017 10:38 ET (15:38 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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