F-35 cost overruns threaten Lockheed program

Design and manufacturing problems with the fighter jets jeopardize the Pentagon's largest contract.

By Trefis Mar 23, 2012 2:43PM
Lockheed Martin (LMT) has run into serious cost overruns in its quest to deliver the first 63 F-35 fighter jets under its flagship program with the Pentagon. 

There have been cost excesses from the Pentagon's side, as well, resulting in combined overruns of more than $1 billion in the Defense Department's costliest program to date. 

Lockheed Martin is the largest defense contractor in the U.S., competing with companies such as Boeing (BA) and Raytheon (RTN).


Lockheed Martin Stock Break-Up

The cost overruns have raised questions about the effectiveness of the program. The Pentagon and Lockheed Martin had earlier claimed that the Joint Fighter Jet is an "affordable, higher common fifth generation" aircraft that can be purchased in large quantities due to its cost effectiveness. But these claims seem to be losing ground, even before the first four congressional contracts are complete. 


Independent U.S. congressional auditors have claimed that the program lacks reliable design and efficient manufacturing. Lockheed Martin is absorbing $328 million of the overrun costs while the Pentagon is absorbing $672 million.


This outcome has the potential to create many problems for Lockheed Martin. While on one hand, its profitability has been hit, on the other hand, future contracts from the Pentagon are on the line. The Government Accountability Office (GAO) has stated that far too many engineering changes are taking place at high costs and more changes will be required, going forward. It is also doubtful about the manufacturing processes and performance indicators. While the indicators have shown some progress, the performance of the first low-initial production contracts has not been good.


The past and current performance by software in the industry has not always been up to the mark, and it is important that Lockheed Martin demonstrates that the F-35 is a creditable and stable platform. Nonetheless, the GAO has given Lockheed Martin and the program some credit for testing and manufacturing process improvements in 2011.


Lockheed US Aeronautics Share of Total DoD NASA and HS Contracts

The cost overruns have put the Pentagon's entire program, which calls for the purchase of 365 aircraft by 2017 with an estimated cost of $69 billion, into the spotlight.


The program initially incurred a loss worth $373 million due to deficiencies discovered in flight testing. Now, with an additional $1 billion for the first 63 aircraft, the Pentagon and Lockheed Martin will have to deliver solid results to allay Congress' fears and instill confidence to go ahead with the contract.

Tags: BALMTRTN
5Comments
Mar 24, 2012 1:56PM
avatar
Low bid the contract to get the job and then up the charges as the job goes on. Isn't that how things work with government contracts now days? Screw the tax payers. They are dumb and just put up with it.
Mar 24, 2012 1:23AM
avatar
Too bad Boeing didn't win the Joint Strike Fighter competition instead of Lockheed. At least Boeing got the tanker contract despite John McCain's attempts to give it to the Europeans instead.
Mar 25, 2012 4:37PM
avatar
Despite the high cost, we need this to keep ahead of the Taliban's fighter jet program
Mar 23, 2012 7:18PM
avatar
What's the problem? Roll the presses!!!
Mar 25, 2012 4:50AM
avatar
1 billion for our future defense or billions for Obama's personal gain....Which is more imoprtant? .I will take the F35 any day
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

113
113 rated 1
279
279 rated 2
416
416 rated 3
647
647 rated 4
548
548 rated 5
513
513 rated 6
669
669 rated 7
516
516 rated 8
317
317 rated 9
113
113 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
KOGKODIAK OIL & GAS Corp10
UPLULTRA PETROLEUM Corp10
TAT&T Inc9
COPCONOCOPHILLIPS9
DVNDEVON ENERGY CORPORATION9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.