Probers Allege Profit Bonanza by Lockheed

Lockheed Corp. stands to earn $1 billion in excess profits on the controversial C-5B cargo aircraft program and has repeatedly rejected efforts by Air Force officials to renegotiate its contract, congressional investigators said in a document released Saturday.

In an exchange of letters earlier this year, Lockheed executives told Air Force officials demanding a price reduction on the aircraft that the company has no intention of reducing a $2.2-billion contract option that covers 21 C-5B’s in fiscal year 1987, according to a memorandum released by the House Energy and Commerce’s investigation and oversight subcommittee.

The lucrative C-5B contract, the subcommittee says in its memorandum, will give Lockheed a profit of “several hundred percent” on its investment in the program. In addition, the subcommittee charges that more than 90% of the $17.5 million that Lockheed gave its top executives in 1985 bonuses was paid by the taxpayers through C-5B contracts.

The Air Force awarded Lockheed a contract in 1982 to produce 50 of the giant C-5B cargo planes for a total of $7.8 billion, a figure designed to take the projected rate of inflation into account. The Pentagon insisted on a fixed price contract to prevent massive cost overruns of the type that occurred on the earlier C-5A program, which was cut short because of Lockheed’s cost overruns.

But the fixed price contract has proved to be a long-running embarrassment to the Air Force, because Lockheed’s costs have been running at below original projections. As a consequence, the firm is earning profits higher than those expected by the Air Force when it signed the 1982 agreement.

In December, 1984, Lockheed agreed to cut $439 million out of its C-5B program revenues, because inflation had been running at lower-than-projected rates.

Lockheed delivered the first of the new C-5’s, the West’s largest cargo-carrying aircraft, last year and subsequently has received options for 29 of the planes. At issue in the current dispute is the final option covering 21 aircraft for fiscal 1987.

Air Force officials said Friday they will not accept the previously negotiated price of the C-5B, despite Lockheed’s continued resistance to reopening the firm fixed price contract. Air Force spokesman Col. David J. Shea declined to say how much money the Air Force will seek to cut from the program.

But Lockheed officials already have denied Air Force and Defense Department assertions that they are earning an unfair return on the program. Last month, Lockheed rejected a contention by Pentagon auditors that the company had pumped up the C-5B cost by $500 million by submitting inflated estimates of its future labor costs at its factory in Marietta, Ga.

“This is supposed to be a firm fixed price contract, in which we were told at the outset we were going to lose our shirt,” said Lockheed Vice President H. David Crowther. “We now have those same people coming around and saying that this contract is neither firm nor fixed and if we don’t give up whatever profits we make, then we are monsters.

“A firm fixed price contract these days seems only to mean that a contractor is free to lose money,” he added.

Subcommittee Chairman Rep. John D. Dingell (D-Mich.) said in a letter to Defense Secretary Caspar W. Weinberger that the C-5B program threatens to become a “potential scandal of monumental proportions.”

“We are very concerned that if the issues raised in the enclosed staff memorandum are not addressed immediately by you, the Defense Department will waste another $1 billion of taxpayer money,” Dingell wrote.

The subcommittee also charged in its memorandum that Air Force Gen. Lawrence Skantze struck a secret deal with Lockheed Chairman Lawrence Kitchen that set up conditions favorable to Lockheed in a financial review of what the C-5B should cost. However, no details or evidence of the alleged deal were provided.

“It appears that the ‘should cost’ study was nothing more than a grand scheme by the Air Force to justify exercising the 1987 option without embarrassing themselves because of Lockheed’s refusal to negotiate,” the memorandum said.

A “should cost” study is an intensive review of a corporation’s cost in building a product. The Pentagon uses such reviews to determine whether a contractor is overcharging on a weapon whose price is not comparable to that of a commercial product.

The subcommittee charges that senior military leaders in the Air Force, including Skantze, attempted to prevent civilian Air Force officials from seeing the “should cost” study.

Those civilian officials include A. Ernest Fitzgerald, the Air Force’s financial management systems deputy who gained reknown for blowing the whistle on the original C-5 cost overrun scandals of the 1970s.

Air Force officials dismissed the charges, saying that Skantze had never made a secret agreement that favored Lockheed and that Fitzgerald was given the “should cost” study last week.

Shea said Skantze met with Kitchen in April, but that the subcommittee had misinterpreted the meeting. During the meeting, Lockheed agreed to submit a new proposal for the remaining 21 C-5B aircraft, that the new proposal would cover all Lockheed work on the C-5B and that Lockheed would review all subcontracts on the C-5B, Shea said.