Jan. 7 (Bloomberg) — Defense Secretary Robert Gates has ordered a delay in the Lockheed Martin Corp. F-35 program, cutting the Pentagon’s planned purchases by 10 aircraft in fiscal 2011 and a total of 122 through 2015, according to a budget document.

More than $2.8 billion that was budgeted earlier to buy the military’s next-generation fighter would instead be used to continue its development.

The delay is a setback for both Gates and Lockheed.

The defense secretary said last year he wanted to accelerate jet purchases to complete the military’s most expensive weapons program sooner and possibly save money.

For Lockheed, the world’s largest defense contractor, accelerated purchases would be more profitable because a program’s production phase brings in more revenue than research and development. In addition, the Bethesda, Maryland-based company faces negotiations that may require it to absorb a share of cost overruns during what will likely be an extended development phase. The company now absorbs no overrun costs.

Along with the delay in Lockheed’s program, Gates is calling for spending a total of $2.4 billion in 2011 and 2012 to buy 26 F/A-18E/F planes that are capable of jamming enemy radar. Those aircraft are produced by Boeing Co., the second-largest defense contractor.

Navy officials had said previously that if the F-35 program slipped, they would press for more F-18s to mitigate a “fighter gap” caused by their aging, carrier-based jets.

Cuts Itemized

Gates’s order is in an unreleased document he signed Dec. 23 that is the basis for the new defense budget to be released Feb. 1. The document was widely distributed within the Pentagon.

He directed the shift from the procurement budget to development of $320 million in fiscal 2011; $544 million in 2012; $716 million in fiscal 2013; $872 million in fiscal 2014 and $356 million in 2015, according to the document.

The document gives no indication that the program’s target quantity would be cut. The planes bought through 2015 would be used for training, testing and to fill the first operational squadrons.

The F-35 is intended to replace the F-16, A-10, AV-8 Harrier jets and earlier model F-18s.

2,456 U.S. Planes

The F-35 program’s current projected cost is $298.8 billion. The plan is to build by 2034 at least 2,456 U.S. aircraft with common parts for the Air Force, Navy and Marine Corps.

Gates’s decision appears to have been influenced by several independent assessments commissioned by the Pentagon, said Thomas Christie, who was in charge of the Defense Department’s weapons testing from 2001-2005.

One recent study agreed with a similar one from a year earlier that predicted a 2 1/2 year delay in development beyond the current target of October 2014 and an added cost of $16.5 billion. The new estimate recommended the Pentagon add $314 million to the five-year plan to beef up testing. Gates did so.

A separate review of Lockheed’s manufacturing raised questions about the company’s ability to meet its schedule for assembling the plane.

Production Rate at Issue

The deferral of buying 122 aircraft reflects concerns “about Lockheed Martin’s ability to produce aircraft at the previously planned rate,” Christie said in an interview.

“I have to compliment” Gates “for stepping up to the plate as opposed to once again letting the program go on as previously planned, with its clearly unexecutable cost and schedule profile,” he said.

Gates’s decision was made in parallel with a review by the Pentagon’s top weapons buyer, Ashton Carter.

Carter is assessing whether the program’s development phase should be lengthened beyond October 2014 because of delays in delivering 10 of 13 test aircraft needed to fly the 5,000 sorties required by the test plan.

“Senior leadership may have changes” to the schedule when the fiscal year 2011 budget is submitted, F-35 program manager Major General David Heinz said.

“The test aircraft are late to the schedule that was published more than a year ago and an update is currently part of the deliberation,” Heinz said in an e-mailed statement.

Carter is also preparing contract proposals that would require Lockheed to assume some of the financial risk for cost overruns. Its current “cost-plus” contract doesn’t require that.

Lockheed Martin spokesman Chris Giesel said in an e-mail the company understood the Pentagon was revaluating F-35 program funding and “this may have implications” for purchases in “fiscal 2011 and beyond.”

Pentagon spokesman Bryan Whitman declined to comment on what he said was pre-decisional budget material.

Source: businessweek.com (Tony Capaccio)