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Trump tweets that F-35 program—which involves Rolls-Royce—is too costly

December 12, 2016

Shares in Lockheed Martin Corp. slumped Monday morning after President-elect Donald Trump tweeted that costs for the F-35 fighter-jet program, the Pentagon’s most expensive weapons system, are “out of control.”

“Billions of dollars can and will be saved on military (and other) purchases after January 20th,” the Monday post continued, referring to inauguration day. The tweet followed similar comments the president-elect made on “Fox News Sunday.”

Lockheed makes the F-35 one-seat fighter aircraft for the U.S. and is a major defense contractor. The F-35 program made up 20 percent of Lockheed's total revenue last year.

The massive F-35 program involves several other major companies, including Rolls-Royce Holdings, which makes vertical lift systems for certain F-35 models in Indianapolis and Plainfield.

Rolls-Royce, which has about 4,000 employees in Indianapolis, landed a $216 million contract in July from Lockheed contractor Pratt & Whitney to make 13 lift systems for the F-35B Lightning II aircraft. The systems allow the fighter jet to perform short take-offs and vertical landings. Local operations of Rolls-Royce have worked on the lift system for more than a decade.

“It is a big significant local program for us,” Rolls-Royce spokesman George McLaren told IBJ in July.

Shares of Bethesda, Maryland-based Lockheed dropped 4.6 percent, to $247.43 each, Monday. Other defense stocks also dropped sharply.

Trump’s broadside reinforced his willingness to directly attack companies. He assailed Boeing Co. last week over the development budget for the new Air Force One and earlier badgered United Technologies Corp. over a plan to move some U.S. jobs to Mexico in its Carrier air-conditioning unit. Carrier later pared its workforce shift after getting state aid from Indiana.

By targeting Lockheed, Trump took aim at the country’s biggest government contractor, whose $379 billion F-35 is intended to be flown by the Air Force, Navy and Marines. Like many complicated military programs, the jet had been plagued by delays and cost overruns.

The Pentagon in October said it would need as much as $530 million extra to finish the fighter’s development phase. Approving the added funds probably would be the first F-35 decision to reach the desk of the next defense secretary.

The F-35, Lockheed’s largest source of revenue and international sales, is projected for a fleet of 2,443 U.S. planes, with more than 600 additional aircraft to be sold to partners such as the U.K., Australia, Japan and Italy.

Lockheed and defense officials have been locked in negotiations over terms for the 10th and largest yet order for the jets. The Pentagon provided the company with a $1.28 billion down payment in November to continue production while the two sides hammer out a contract valued as much as $7.19 billion for 90 aircraft, the biggest order yet.

Shares in Northrop Grumman Corp., another major contractor on the F-35, fell 7.3 percent. United Technologies, whose Pratt & Whitney unit makes engines for the plane, slipped less than 1 percent.

“Stating that costs are ‘out of control’ is wrong,” Byron Callan, a defense analyst at Capital Alpha, said in a note to clients. “Yes, there are affordability issues on the F-35 and there may be alternative ways to deliver capabilities offered by the F-35 through other platforms or weapons. However, unit prices have been declining, and the program has stabilized in recent years.”

“We don’t believe investors should panic over the program’s prospects based on a single Trump tweet,” Callan said.

Rolls-Royce directed questions about Trump's tweets to comments by Jeff Babione, executive vice president and general manager for the F-35 Program
at Lockheed Martin.

“We welcome the opportunity to address any questions the president-elect has about the program," he said Monday. "It’s an amazing program. Lockheed Martin and its industry partners understand the importance of affordability for the F-35 program.

"Since the beginning, we’ve invested hundreds of millions of dollars to reduce the price of the airplane more than 70 percent. We project the price of the aircraft will be $85 million [each] in the 2019 -2020 timeframe. When we get to that price, the F-35 will be less expensive than any fourth-generation fighter in the world. And it will be the premiere fifth-generation fighter. That’s an incredible value for anyone operating the airplane."

Babione said the company was also working to reduce the total cost of the aircraft.

"The cost doesn’t just include the acquisition price," he said. "Lockheed Martin and its industry partners are also investing in reducing the sustainment costs of the aircraft, recognizing that much of the cost of owning and operating an aircraft is after it’s delivered. We’re investing hundreds of millions of dollars to reduce the cost of sustaining the airplane over its 30-40 year lifespan. We understand the importance of affordability and that’s what the F-35 has been about."

He also touted the aircraft's capabilities.

"But more importantly, it’s amazing technology," he said. "Whoever has it will have the most advanced air force in the world, and that’s why we’re building the F-35. It’s important that the U.S. and our partners have this aircraft. It’s a great value and we look forward to any questions the president-elect may have.”

 

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