April 11, 2018 / 11:43 PM / in 2 months

Exclusive: Pentagon stops accepting Lockheed F-35 jets over repair cost dispute

WASHINGTON (Reuters) - The U.S. Department of Defense has stopped accepting most deliveries of F-35 jets from Lockheed Martin Corp (LMT.N) because of a dispute over who will cover costs for fixing a production error, three people familiar with the matter said.

Lockheed Martin's logo is seen during Japan Aerospace 2016 air show in Tokyo, Japan, October 12, 2016. REUTERS/Kim Kyung-Hoon

Lockheed confirmed on Wednesday that the Pentagon had halted deliveries of the jet over a contractual issue, but did not give further details.

Last year, the Pentagon stopped accepting F-35s for 30 days after discovering corrosion where panels were fastened to the airframe, an issue that affected more than 200 of the stealthy jets. Once a fix had been devised, the deliveries resumed, and Lockheed hit its target aircraft delivery numbers for 2017.

But deliveries were paused again over a dispute as to who will pay for what will likely be a complex logistical fix that could require technicians to travel widely to mend aircraft based around the world, said the people, who spoke on condition of anonymity because they were not authorized to speak publicly about the matter.

When the Pentagon stops taking delivery of F-35s, foreign customers can also be affected. So far at least two foreign governments have stopped accepting F-35s as a result of this issue, two of the sources said.

A Lockheed spokeswoman said on Wednesday: “Production on the F-35 program continues and we are confident we will meet our delivery target of 91 aircraft for 2018. While all work in our factories remains active, the F-35 Joint Program Office has temporarily suspended accepting aircraft until we reach an agreement on a contractual issue and we expect this to be resolved soon.”

It was not clear when the suspension of deliveries began.

The Pentagon did not immediately respond to a request for comment.

The fastening issue on the F-35 fleet was not affecting flights, nor was it a safety concern, the Pentagon said last year.

The delivery pause is the latest of several production issues that have arisen in the Pentagon’s most expensive weapons program, and comes at a time when the administration of President Donald Trump has criticized the cost of the fighter.

In 2016, a fix for insulation problems in the fuel tanks and lines of the jets caused a slowdown in deliveries.

Shares of Lockheed erased a 2.7 percent gain on the day after Reuters reported the suspension. They closed flat at $339.44.

GOVERNMENT INSPECTION

At the heart of the dispute is the government’s inspection of the planes during Lockheed’s production, which failed to discover problems with the fastenings, the sources said. Because neither party caught the issue at the time each is pointing the finger at the other to pay for the fix.

Two jets were received by the Pentagon despite the suspension because of specific needs in the field, one of the people said.

During routine maintenance at Hill Air Force Base in Utah last year, the Air Force detected “corrosion exceeding technical limits,” where the carbon fiber exterior panel is fastened to the aluminum airframe.

A lack of protective coating at the fastening point that would have prevented corrosion was identified as the primary problem, the Pentagon said at the time.

The F-35 business accounts for about a quarter of Lockheed’s total revenue. During the third quarter, sales at Lockheed’s aeronautics business increased 14 percent to $4.7 billion, led by higher sales of the F-35 and highlighting the program’s importance to Lockheed’s profitability.

Reporting by Mike Stone; Editing by Chris Sanders and Rosalba O'Brien

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