Pentagon Mulls Delay in Lockheed's F-35 Program

By Dow Jones Business News, June 28, 2013, 12:25:00 PM EDT

WASHINGTON--The Pentagon is weighing a delay to its most costly and controversial weapons program, the F-35 stealth fighter plane, as part of a short-term cost saving move, according to defense officials.

Defense Secretary Chuck Hagel is considering the delay as one option presented by a task force to cut Pentagon spending over the second half of this decade.

But officials stressed no decisions have been made and that senior advisers to Mr. Hagel are recommending against the option, noting that it would not save enough money to justify the move.

Defense analysts said delaying full production of the F-35 would save between $1 billion and $2.5 billion a year between 2015 and 2019, the time frame being examined by the Pentagon.

Any delay to the program could be a blow to the fighter plane and its prime contractor, Lockheed Martin Corp. ( LMT ), and comes at a time when many defense analysts say the once-troubled program has righted itself, overcoming various problems that have delayed the aircraft and added to its costs.

Delaying the program was an option raised by the Pentagon's Strategic Choices Management Review, a task force of senior leaders examining ways to reduce spending to comply with the across-the-board budget cuts mandated by Congress.

Officials declined to say how long the F-35 could be delayed under the proposed option or how much money the Pentagon estimates would be saved. Earlier, officials participating in the review had weighed a two-to-three year delay limited to the Navy variant of the fighter plane, but that option was rejected by the task force.

If Mr. Hagel opted to delay the program, the Pentagon likely would continue to purchase small numbers of the plane, but would hold off a move to full production in 2015, according to defense analysts. Because the Air Force plans the fastest increase in production for its variant of the plane, any slowdown would likely fall heaviest on that service, analysts said.

Jennifer Allen, a spokeswoman for Lockheed Martin, said it was not appropriate for the company to "speculate on internal DOD discussions and decisions."

Since the F-35 is the military's largest weapons program, many officials consider it the easiest to cut, said Jim McAleese, a defense analyst.

Richard Aboulafia, a defense analyst with the Teal Group, said delaying the F-35 from full production could cover about 30% of the reductions needed in the procurement budget under the mandatory spending reductions.

But analysts agreed short term savings will come with long-term costs.

"You are going to jeopardize the export market and that will keep costs high," said Mr. Aboulafia. "It is not a death spiral, but it is a pain spiral that could really damage the program."

Loren Thompson, a defense analyst who advises Lockheed, said the delay makes little sense, and over the long term will add to the costs.

"There is a reflex to look at the F-35 program as bill payer because it is the biggest program. But since it is the biggest, any change in the plan has outsized fiscal consequences," Mr. Thompson said.

The strategic review is considering delays to other weapons programs as well, although officials declined to outline specific proposals.

The senior advisors recommending against the delay are worried that slowing the program could discourage other countries from purchasing the plane, officials said. Fewer countries buying the advanced plane would make each one more expensive.

According to the military's most recent report to Congress, the Marine variant of the plane, the F-35B, is due to begin military operations in 2015. The Navy variant, the F-35C, is due to begin operations by 2019. The Air Force variant, the F-35A, will enter operations in 2016.

Slowing production would likely delay that timetable, particularly for the Navy and Air Force variants.

Originally designed to be a low-cost plane costing about $40 million a copy, costs have grown to about $122 million each for the Air Force version. The Pentagon estimates that the unit cost eventually will decline to $92 million.

But some officials worry that any cuts to the size of the program, or too long a delay, will drive up those unit costs, putting the entire program in danger.

Mr. McAleese said many of the F-35's past problems have been addressed, and the program seems stronger now than it has in the past.

The plane has encountered cost overruns, developmental delays and questions about the reliability

of its technology.