Report suggests US offers Lockheed 'multiyear' deal for F-35 joint strike fighter

Reports say a multiyear deal between Lockheed and the U.S. government is on the table

Lockheed Martin is getting offered a multiyear block buy for its F-35 aircraft in exchange for not objecting to its rival Boeing getting new orders from the Navy for the F/A-18 fighter, according to a report.

"It is common knowledge within the defense industry that Lockheed Martin employees are not to complain about the Navy's plans to purchase another batch of Boeing F/A-18 Super Hornets because of a deal worked out by the president to push for a multiyear block buy of Lockheed Martin F-35s," Dan Grazier, a defense industry expert at the Washington watchdog group Project On Government Oversight, wrote in a blog post Monday.

A Lockheed spokesman called the report "100 percent false." Boeing and the Pentagon declined comment for this story.

Analysts have previously said a multiyear block buy could help Lockheed change the economics on the aircraft and help improve margins and lower costs. It also would give the company more leverage with its partner companies and supply base by providing a steady flow of work over several years.

Yet Grazier said the F-35 joint strike fighter program "legally does not qualify for a block buy. That's the big problem with this."

The analyst said he hasn't seen any figures on a block buy price for the F-35.

"If this [F-35] block buy goes through, the United States taxpayers will be committed to buying about 33 percent of the planned buy of F-35s," said Grazier. "We're talking nearly 800 aircraft."

To date, more than 200 F-35s are in operation by the U.S. armed forces and seven partner nations. Earlier this year, Lockheed estimated that more than 3,000 of the aircraft would be purchased, with about 600 jets going to international allies.

Until now, the government has purchased F-35 stealth aircraft under a series of so-called low-rate initial production agreements.

"They're moving beyond low-rate initial production, but they're just not saying that they're doing it," Grazier said. "That's kind of the fuzzy gray area of legality that's going on here."

The F-35A variant, a conventional takeoff and landing plane, is expected to represent the majority of the aircraft produced. There's also the F-35B variant for the Marines capable of short takeoffs and vertical landings, while the F-35C for the Navy is a carrier variant.

Last month, Lockheed and the Department of Defense agreed on a deal involving the 10th batch of F-35 aircraft, resulting in a savings of $728 million — a nearly 8 percent reduction in the price on the F-35C variant of the joint strike fighter.

Even so, the F-35C Navy variant under the 10th batch deal still was priced at $121.8 million, while the F-35A, or Air Force variant, was $94.6 million.

Grazier said his source within the defense industry indicated that there's been a "tonal change" due to "a much larger deal worked out by President Donald Trump with Lockheed Martin and Boeing."

The F-35 joint strike program, the largest weapons acquisition program in Pentagon history, is expected to cost more than a $1 trillion over its life cycle of an estimated 50-plus years. While Lockheed is the prime contractor on the F-35, one of the major partner companies is Northrop Grumman. In all, more than 1,300 supplier companies are involved in the F-35 program.

Since December, Trump has met several times to discuss the F-35 program with Lockheed Martin CEO Marillyn Hewson. He's also met with Boeing CEO Dennis Muilenburg to discuss the company's F/A-18 fighter and Air Force One replacement contact. Trump has criticized both programs for the costs.

"The decision to purchase weapons should be based solely on the performance of the system, not on backroom political and business deals," Grazier said in his blog.

If Boeing secures a new deal for its F/A-18 or gets an update on the plane, it could be good news for the company because it would be a shot in the arm for its tactical aircraft business and extend production of the jet.

"Heavy F-18 use and F-35 delays are straining the Navy fighter fleet and so we could see the service seeking perhaps a dozen more F-18's annually over the next couple of years," JPMorgan analyst Seth Seifman said in a research note Friday.

According to Grazier, the F-35 doesn't legally qualify for a multiyear block buy because it fails to meet all the required criteria. Specifically, one area it falls short in is a "stable design" requirement, the analyst said.

The F-35 has not completed the development phase yet so the design "is inherently unstable," Grazier told CNBC in an interview. As an example, he said the F-35C engineers are having to "redesign the nose gear" due to a "vertical oscillation problem" during carrier launches. "It bounces a whole lot ... and gives the pilots whiplash."

In January, Defense Secretary James Mattis ordered a review of the F-35 program and how the government can reduce costs and options it might have with Boeing's F/A-18. He also ordered a review of Boeing's presidential plane replacement program.

Reports suggest an upgraded F/A-18 — sometimes dubbed the Advanced Super Hornet — could come in at a cost lower than the F-35C and feature new sensor technology and more range, among other things.

But in testimony last week at her Senate confirmation hearing, Air Force secretary nominee Heather Wilson questioned whether the F/A-18 can provide stealth features such as the fifth-generation F-35.

"The real thing I don't think you could do with an F-18 or a F-15 or a F-16 is give it stealth capability retroactively," Wilson said.

She pointed out that the Chinese are developing stealth capability in fighters and added, "I don't see how we can stop modernizing and expect to win a near-peer fight. I'd rather have that fight be unfair and be on our side."