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Lockheed's F-35 gets South Korea nod, but momentum slower than hoped

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[March 25, 2014]  By Andrea Shalal

WASHINGTON (Reuters)  South Korea on Monday became the 10th country to choose Lockheed Martin Corp.'s <LMT.N> F-35 fighter jet to replace aging warplanes, a boost for the Pentagon's biggest weapons program at a time when Italy, Canada and other countries are rethinking their procurement plans.

Lockheed executives hope to reel in a large number of foreign orders this year to offset budget-driven delays in U.S. purchases, but sales have proven elusive.

"It's steady progress, but slower than hoped. The international orders are not coming in as fast as we hoped," Steve O'Bryan, Lockheed vice president and the company's main international F-35 salesman, told Reuters.

Current plans call for the U.S. military and other countries to order 57 F-35 fighters in a ninth production batch of the new jets, short of the roughly 72 orders once expected. The Pentagon estimates it will spend $392 billion to develop the jet and buy 2,443 planes over the coming decades.

News that South Korea expects to spend 7.34 trillion won ($6.79 billion) for 40 F-35s is a plus for Lockheed, said Richard Aboulafia, aerospace analyst with the Virginia-based Teal Group, but the company needs more orders to help drive down the unit cost of the new warplanes.

"The risk is that it stays too expensive to order in large quantities, and the lack of large quantities means that it stays too expensive," he said.


Lockheed is developing three models of the radar-evading jet for the U.S. military and eight countries that help fund its design: Britain, Australia, the Netherlands, Norway, Turkey, Italy, Denmark and Canada.

From the start, the program was aimed at quickly ramping up production to 200 jets a year. But budget pressures have not been confined to the United States, and technical challenges have slowed that momentum as well.

Pentagon officials are preparing new estimates, expected in mid-April, for the projected cost of the jet over the life of the program, factoring in costs to operate and maintain the planes.

Current plans call for U.S. orders to ramp up to around 96 jets in fiscal 2019, when Lockheed will be building a 13th batch of jets, according the F-35 program office.

Most of the initial partners on the development have already ordered jets, but Canada and Denmark have wavered.

Canada is expected to decide this year on whether to proceed with plans to buy 65 F-35s, or launch a fresh competition. Denmark has already launched a competition, but is not expected to announce a decision this year.

That gives Lockheed rivals Boeing Co <BA.N>, with its F/A-18 Super Hornet, Airbus Group <AIR.PA> and BAE Systems <BAES.L>, with their Eurofighter Typhoon, and Sweden's SAAB <SAABb.ST> with its Gripen, another shot at more orders.

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Italy, which has built a large assembly plant for F-35s, last week said it may halve its plan to buy 90 jets. Italy already cut its orders by 30 percent two years ago to trim state spending during the euro zone debt crisis.

Further big cuts could jeopardize the share that Italian firms have in building parts of the F-35m, since industrial participation is tied to the size of a country's orders.

Britain is expected to announce an order for 14 more F-35s during a visit by its defense minister to Washington this week. But it is unlikely to add orders at this point, according to sources familiar with the program.

South Korea will be the third country, after Israel and Japan, to buy the jets outside the original partnership. Israel is also due to finalize plans for a second batch of F-35 jets this year.

Sources familiar with South Korea's plans said Seoul hoped to sign a letter of agreement for its F-35 purchases by August, with the first jets to be delivered in 2018, when Korean pilots will start training at Luke Air Force Base in Arizona.

Singapore has also expressed interest in the F-35s. The country's defense minister said in December that Singapore was in no rush to replace its F-16s, but the number of meetings on the issue has increased in recent weeks, said a second source familiar with the F-35 program.

Matthew Bates, spokesman for Pratt & Whitney, the United Technologies Corp <UTX.N> unit that builds the F-35's engine, welcomed South Korea's selection and said it demonstrated the program's growing stability.

He said the orders would also help lower costs. "As production increases, costs will come down," he said.

(Additional reporting by Joyce Lee in Seoul and Steven Scherer in Rome; editing by Ros Krasny and Dan Grebler)

[ 2014 Thomson Reuters. All rights reserved.]

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