Lockheed Seeks Relief From Money-Losing Navy Pact

Lockheed is asking the Navy to release it from provisions of its contract for the P-7A patrol aircraft that could result in multibillion-dollar losses during production, it was learned Wednesday.

The Calabasas-based aerospace firm has been in negotiations with the Navy for the past several weeks, seeking to “restructure” its January, 1989, contract for the aircraft, company officials said.

The troubled aircraft program already has experienced a $300-million overrun on development that was charged against profits last year.

But an even bigger concern has emerged recently with production options contained in the Navy contract that could cause Lockheed to sell the aircraft at a price reportedly below its estimated cost. It is unclear whether the Navy can or will enforce those options.

The company is committed to build its Navy P-7A at a price of $38 million each, but internal estimates are that the cost is more than $60 million, according to Paul Nisbet, aerospace analyst at Prudential-Bache Securities.

The Navy is planning to buy 125 P-7As, and if Lockheed falls short by Nisbet’s estimate of $22 million per aircraft, Lockheed would be facing $2.7 billion in pretax losses.

Last week, Navy Secretary H. Lawrence Garrett told the Senate Appropriations Committee that the P-7A is two years behind schedule and that the Navy hoped to keep the P-7 price at “relatively close to what we projected.” But Garrett declined to be specific about the cost and said it was under negotiation.

Lockheed spokesman James Ragsdale acknowledged that the company is negotiating with the Navy to restructure the P-7A contract, but he declined to discuss details of those negotiations or the firm’s internal cost estimates to produce the aircraft.

“If they are willing to have full-scale engineering development restructured, that would affect the way production would start and that would have an effect on what each aircraft is priced at,” Ragsdale said. “Now because that has not been settled, we are not prepared to state what the costs of those aircraft are going to be.”

Separately, Lockheed said it is preparing to lay off a number of its workers at its Lockheed Aeronautical Systems Co. but declined to say how many. Union officials said Lockheed notified them last week that as many as 2,600 workers will be furloughed by June, a cutback related to declining defense business and an effort to improve efficiency.

The P-7A was originally supposed to have been a simple derivative of the longstanding P-3 anti-submarine patrol aircraft. The firm agreed to a $600-million fixed-price contract to develop the new aircraft, but after signing the contract it discovered that its assumptions were faulty. Rather than being virtually identical to the P-3 structure, the P-7 would require a new airframe.

Not surprisingly, the additional changes to the aircraft in development have boosted the production cost, as well. The program has now been put on a virtual hold and all development work has been halted while the restructuring is negotiated, Ragsdale said.

Lockheed faced similar problems in the C-5A program in the 1970s when it agreed to produce the giant cargo jets at a fixed price and then encountered a $2-billion cost overrun that nearly bankrupted the company.

It isn’t clear how forgiving the Navy is going to be now.

“If the Navy says there isn’t going to be any restructuring and we have to live by the 1989 contract, I don’t know what Lockheed would do next,” Ragsdale said.

“We are not under contract to produce the airplane,” Ragsdale said. “So the question of whether we lose money or make a profit is a bridge that hasn’t been crossed yet.” Nonetheless, Ragsdale acknowledged that the cost provisions in the development contract could affect later production.

Nisbet called the P-7 contract “a total package procurement” and described it as the same sort of agreement that got Lockheed into trouble on the C-5A program.

“There isn’t any easy solution to this problem,” he said.

Meanwhile, Lockheed officials told officials of District 727 of the International Assn. of Machinists last week that it would cut 2,000 salaried workers and 500 to 600 hourly workers, said Don Nakamoto, a spokesman for the union.

Ragsdale acknowledged that layoffs will be made, but said he could not provide any estimate of their size. He blamed the layoffs on a decline in business and an effort by the company to cut its costs by 30%.

The Lockheed operation in Burbank has encountered a number of major setbacks over the past year. McDonnell Douglas threw the firm off a $1-billion program to build wings for the Air Force C-17 cargo jet because Lockheed’s costs were too high.

In addition, Lockheed’s production activity will decrease sharply when it completes the final two F-117A Stealth fighters this year, a $7-billion program whose work force numbers are still secret.