Lockheed Martin Balances F-35 Cost Reduction, Profit Goals

 - January 24, 2017, 4:42 PM
The red dots on this chart indicate U.S. government budget estimates for the cost of each F-35 fighter, while the yellow dots show the cost as delivered being below these estimates and on track to fall to $85 million per aircraft by 2019. [Chart: Lockheed Martin]

Lockheed Martin believes it can balance the cost-reduction expectations the new U.S. administration has set for the F-35 fighter program with its profitability goals. At a January 24 analysts call to announce earnings for the fourth quarter of 2016, company president and CEO Marillyn Hewson indicated that the latest round of talks with President Donald Trump on January 23 bolstered her expectation that Lockheed Martin will soon reach agreement for 90 F-35s under a contract for low-rate initial production (LRIP) lot 10, for which the unit cost of the aircraft is expected to fall below $100 million.

In response to questions from analysts as to whether Lockheed Martin may come under further pressure to cut program costs, Hewson said that meetings with Trump had been “productive” and that he had “asked very good questions.” She indicated that unit costs are on track to fall to $85 million by the time Lot 13 is in production around 2019. “This isn’t about slashing our profit margins,” said Hewson. “We’re bringing costs down in line with our Blueprint for Affordability plan.”

Hewson would not say if Lockheed Martin will take legal action to contest the terms of the $6.1 billion LRIP 9 contract for 57 F-35s that the Pentagon unilaterally imposed in November 2016. The company still has the option of appealing the terms of the contract to the Armed Services Board of Contracts Appeals. Lockheed Martin expects to deliver 66 F-35s during 2017, which would represent an increase of just over 40 percent on 2016 when it delivered 46 of the fifth-generation fighters—fewer than the original projection of 53.

Commenting further on expectations for the new U.S. administration, which has placed a strong emphasis on strengthening the military, Hewson said that it is hard to predict when ongoing “sequestration” limits imposed by Congress will continue to apply to the defense budget. However, she did suggest that there seems to be more bipartisan support for re-instituting a full budget and expressed hope that this might be achieved from 2018.

Hewson also mentioned the possibility of supplementary spending being added to the existing 2017 budget. She indicated that new business this year may include additional orders for the H-60M Black Hawk helicopters produced by its subsidiary Sikorsky.

Lockheed Martin reported improved net sales of $13.8 billion for the fourth quarter of 2016—up from $11.5 billion in the same period of 2015. Net earnings from continuing operations in the fourth quarter climbed by just over 17 percent to $959 million.