U.S. Air Force sticking to plans to buy 1,763 F-35 jets

The U.S. Air Force affirmed on Thursday its plans to buy 1,763 F-35 fighter jets built by Lockheed Martin Corp in coming years, as Lockheed and the government neared agreement on a multi-billion dollar contract for a fifth batch of planes.

Air Force Secretary Michael Donley told an investor conference that the service remained committed to the F-35 Joint Strike Fighter, which alone accounts for 15 percent of the service's annual investment spending, and had no plans to revise its projected purchase of 1,763 of the new radar-evading jets.

"I don't think there's any reason to revisit that anytime in the near future," Donley told the Credit Suisse conference, underscoring his support for the Pentagon's biggest weapons program.

He said it was not feasible to consider cutting orders or make other major changes to the $396 billion F-35 program, which has already been restructured three times in recent years to allow more time for technology development and to save money.

The Pentagon is looking closely at every aspect of its budget given mounting pressure to cut defense spending, and programs as large as the F-35 are always potential targets.

But Lockheed executives argue that the Defense Department has already reduced production of the new plane sharply from projected levels, cutting into the economies of scale that were supposed to make the new warplane more affordable.

Donley said he had heard proposals about cutting F-35 purchases to save money for other priorities, but said such ideas did not make sense at this point in the program.

"These are good theoretical discussions, but when you look at where we are in the program, it makes no sense to have these discussions until about 2025," Donley said. "There is nothing in the near-term about this program that will change; there is nothing that it will contribute to deficit reduction in the next ten years with the exception of its cancellation."

And cancellation of the program, he said, was something no one would recommend.

Donley said the U.S. government was "getting close" to an agreement with Lockheed about a fifth batch of F-35 jets.

Lockheed President Marillyn Hewson told the conference earlier on Thursday that talks with the Pentagon - which have been under way for about a year - were going well and an agreement was likely before the end of the year.

"Those negotiations are progressing well," she said at her first major presentation to Wall Street investors since being named Lockheed president and chief operating officer earlier this month. "I do feel confident that we're going to get to closure on Lot 5 this year," she said.

Lockheed and the Pentagon were also making progress in talks about additional funding for early work on the sixth batch of F-35 jets, said Hewson. She will become Lockheed's CEO in January, succeeding Christopher Kubasik, who was forced out after admitting to having an affair with a subordinate.

Lockheed Chief Financial Officer Bruce Tanner said Hewson had played a key role in the company's talks with the Pentagon, and the two sides had "closed a lot of our differences."

Details of the expected agreement were not immediately available, but sources familiar with the negotiations said they expected it to include a reduction in the cost for each F-35 fighter jet from the fourth production contract, although the number of jets to be ordered will not increase.

The Pentagon's chief weapons buyer, Frank Kendall, told Reuters on Wednesday that the two sides were "getting close" to an agreement on the fifth production contract.

He said he had "a very positive meeting" on Tuesday with Hewson about a range of issues, including the F-35.

Lockheed, the Pentagon's largest contractor, and its suppliers are already building the fifth batch of F-35 planes under a preliminary contract, but the two sides have been struggling since last December to finalize the deal.

In September, Air Force Major General Christopher Bogdan, who is moving up to head the F-35 program next week, said ties between Lockheed and the U.S. government were "the worst" he had ever seen in his years working on big acquisition programs.

Hewson told analysts earlier this month that the F-35 program would be one of her top priorities in her new job.

Agreement on the terms of the fifth F-35 contract would free up additional funding for early work on a sixth set of planes, which the company has been funding on its own for some time.

Lockheed last month told investors that it faced a potential termination liability of $1.1 billion on that sixth batch of planes, unless it received more funds soon.

The Pentagon has refused to release any more money for the sixth batch of planes until the two sides resolve their differences and sign a contract for the fifth batch.

(Reporting By Andrea Shalal-Esa; Editing by Gerald E. McCormick, John Wallace and Tim Dobbyn)