Lockheed Martin and Pentagon agree on the largest purchasing agreement in history – The Motley Fool

Lockheed Martin (NYSE: LMT) has reached a preliminary agreement with the Pentagon on the next batch of F-35 fighters, and reduced the price by 8.8% on the base unit. Even with the discount, the order, which is valued at $ 34 billion, will be ranked as the largest single defense deal in world history.

The agreement, which comes after the months of negotiations, is expected to be completed in August. It "marks the biggest acquisition in departmental history and provides the best value for our warfighter and taxpayer, incentivizes the industry to continuously improve performance and achieves the lowest F-35 units per flight to date," Vice President Mathias Winter said. in a Pentagon statement to journalists.

The order, while expected, is important to Lockheed Martin. The total price is a healthy reminder to the shareholders, how valuable this program can be when the company finally hits up production. Perhaps more importantly, the rebate will help accelerate Lockheed's mission to get the base price below $ 80 million, helping it maintain demand in the United States and attracting more orders abroad.

Lower Price, Larger Audience

Lockheed Martin has long said it believes it can get the unit price of the base model F-35A below $ 80 million as the manufacturing process matures and it gets efficiency through larger orders. This batch of F-35A is priced at around $ 81[ads1].35 million, down from $ 89.2 million when the two sides last negotiated in August 2018.

The deal is officially for just one year's worth of orders because the Pentagon is not can buy equipment in the future to Congress approves a budget for the years that award the funds. But the deal includes two-year value of options assuming the US buys about 160 shots per year at a base price below $ 80 million at the end of the deal.

The Lockheed Martin F-35 program is approaching the goal. Image source: Lockheed Martin.

The lower price tag would also make F-35 more appealing to potential international customers. F-35 currently operates by half a dozen countries, but others, including Canada, have hit high aircraft costs. Lockheed Martin officials are hoping to sell 1,000 frames to international partners during the lifetime of the aircraft. The extra volume may be the difference between the F-35 as a modestly profitable program or a blockage for the company.

F-35 is currently involved in competitions in Switzerland, Finland and Germany. Pentagon officials have also identified allies, including Spain, Poland, Greece, Romania and Singapore as potential customers. If nothing else, several orders can help Lockheed Martin compensate for potential lost business if the United States blocks the export of the jet plane to Turkey.

Undo F-15

The lower price tag sends a message to a domestic audience. The US is close to buying thousands of F-35s, but the Pentagon this year has expressed a sudden and unexpected desire to diversify its fleet.

Air Force has proposed buying up to 80 revolutionized and modernized Boeing (NYSE: BA) F-15 fighters at a total cost of nearly $ 8 billion over the next five years. The F-15 was developed by possibly the Boeing acquisition target McDonnell Douglas in the late 1960s, but has not been purchased by the US military for nearly 20 years.

Boeings F-15 ready. Image source: Boeing.

The renewed interest in the F-15, according to defense officials, is inspired by the Pentagon's desire to push as much out of limited funding as possible. Although the F-15 would go against modern technology distributed by Russia and China, it is more than capable of fighting rebellious groups or other techno-techies.

Lockheed's best counter is to make the F-35 as affordable as possible. At $ 80 million per unit, the F-35 and the superior technology are within easy reach of the F-15 sticker price. It is probably not enough to end the Pentagon interest in the F-15, which at least is currently significantly more cost-effective to operate, but as it brings down the flight price, Lockheed Martin makes it more difficult to justify significant investments in the F-15 .

This plane can soar

F-35 has had a long and even troubled history. It wasn't long ago that investors asked if the plane was a dud.

There are still problems to be solved. Defense News reported this week that Pentagon officials continue to fight mistakes and glitches that, if not resolved, can put pilots at risk or prevent the F-35 from functioning as planned. But winter, vice-admiral serving as the Pentagon F-35 exec exec, told the publication there were no inconsistencies that put the program at risk.