Lockheed Poised to Get $11 Billion F-35 Contract Despite Delays

(Bloomberg) -- Lockheed Martin Corp. continues to deliver its next-generation F-35 aircraft late because of production flaws, even as the Pentagon is poised to award the company a potential $11 billion contract that’s the biggest yet.

The contractor for the costliest U.S. weapons system has been “late to contract requirements” in providing 209 of 308 of the planes to U.S. and international customers through June 30, the Defense Contract Management Agency said in a statement to Bloomberg News. While Lockheed and the Pentagon’s F-35 program office said they expect on-time delivery of all 91 F-35s due this year, the contract agency predicted seven won’t make that deadline.

“The government expects and needs better performance by Lockheed Martin and its suppliers,” Mark Woodbury, a spokesman for the Defense Contract Management Agency, said in the statement. Major improvements on the assembly floor will be “more difficult to achieve since many of the easy corrections have already been made,” he added.

While the Pentagon’s F-35 office concurs with most of the contract agency’s concerns, according to Joe DellaVedova, a spokesman, he said Lockheed “remains on track” to deliver all 91 jets this year. Carolyn Nelson, a Lockheed spokeswoman, said the company is making steady progress in eliminating production-line failings.

September Award

By early September, the Defense Department is expected to complete the award of a potential $11 billion contract for 141 F-35s for the U.S. and allies, the 11th production batch. A $5.6 billion down payment was awarded in July 2017. The Pentagon and Lockheed have also been negotiating a larger “block buy” of 440 aircraft for international partners.

The F-35 accounted for 27 percent of second-quarter sales for Bethesda, Maryland-based Lockheed and is expected to be its main source of growth as production increases to about 160 aircraft a year by the early 2020s.

Both the Pentagon and Lockheed have invested “considerable funding to improve the capacity and quality of the F-35 manufacturing process but aircraft are still being produced behind schedule with a high number of defects,” the contract management agency said.

Although previous U.S. fighter jet programs have encountered similar difficulties, Lockheed’s production line “has a considerably larger amount” of assembly floor issues, the agency said.

“There’s really no way of slowing down F-35 funding, no matter what problems arise,” said Richard Aboulafia, a military aircraft analyst who follows the program for the Teal Group of Fairfax, Virginia. “It’s the only game in town for the U.S. Air Force and the Marines, and for much of the industrial base and for exports, so any kind of delay would have unpleasant consequences for everyone involved.”

Asked what leverage the Pentagon has to improve Lockheed’s performance, Aboulafia said “wish I knew.”

‘Exceptional Capability’

Nelson, the Lockheed spokeswoman, said “as we ramp up production, each year we have lowered cost, reduced build time, improved quality and on-time delivery. F-35 production is stable, costs are coming down and the 310-plus aircraft in the fleet are delivering exceptional capability every day.”

She said delivery of 91 aircraft this year will represent a 40 percent increase from 2017. Next year, she said, the company intends to deliver 131 F-35s.

Defects, or “quality variances” per delivered aircraft have dropped with each lot, and “our time required” for reworking and repairs has decreased by 79 percent since the first early production contract.

Despite a history of performance setbacks, the stealthy F-35 retains strong support in Congress as a next-generation fighter and as a job creator. Lockheed boasts that it uses 1,500 suppliers in 46 states and more internationally.

This week, the Senate is debating a fiscal 2019 defense appropriations measure (H.R. 6157) that would add $1.2 billion for 12 more F-35s than the 77 the Pentagon requested. Earlier the House approved adding 16 F-35s in its version of the measure. The added jets would be delivered in early 2020, Nelson said.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net, Larry Liebert

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