Pentagon May Slash Boeing Contract

The Pentagon is on the verge of taking away from Boeing Co. most of its multibillion-dollar contract to build the nation’s next generation of spy satellites because of cost overruns and delays, government and aerospace industry sources said Friday.

It would be a blow to the company’s space operations in Southern California, as Pentagon and intelligence officials are finalizing plans to transfer much of the work to Boeing rival Lockheed Martin Corp., three sources familiar with the talks said. The sources requested anonymity because of the classified nature of the program.

The spy satellites are part of a highly classified program known as Future Imagery Architecture. The Pentagon’s National Reconnaissance Office has not disclosed the program’s cost, the kind of satellite being developed or how many people are working on it.

But since awarding the satellite contract to Boeing in 1999, the government has spent more than $10 billion on the program, including about $4 billion in cost overruns, industry analysts estimated. About 5,000 people are thought to be working on it, most of them in windowless Boeing offices in Seal Beach and at its sprawling satellite-making operations in El Segundo.

It is unclear how many jobs would be affected in the event Boeing loses the contract, but analysts said it would provide a boost to Lockheed’s satellite manufacturing operations in Sunnyvale, Calif. For decades, Lockheed built virtually all of the nation’s spy satellites until it lost out to Boeing in a major upset six years ago.

“It appears that Boeing’s effort to make off with a huge franchise from Lockheed has faltered,” said Loren Thompson, a Lexington Institute defense policy analyst. “It’s potentially a very big gain for Lockheed.”

As a new entrant to the spy satellite business, Boeing may have promised too much and ultimately could not deliver, he said. Until recently, much of Boeing’s space expertise was in making rockets to launch satellites and developing commercial telecommunication satellites. It had little experience manufacturing satellites with optical lenses that can take close-up pictures from space of objects on the ground.

“Boeing bid very aggressively even though it didn’t understand the technology as well as Lockheed,” Thompson said.

Boeing spokeswoman Marta Newhart said Friday that the Chicago-based company had not been notified of any changes to the contract. She declined to comment further.

Lockheed spokesman Tom Jurkowsky declined to comment and deferred all questions to the government. The Pentagon said it could not respond to questions about the program.

Two months ago, a special panel reviewing Boeing’s program recommended to the Pentagon that it stop work on these next-generation electrooptic satellites, concluding that Boeing’s proposal was too challenging, industry and government sources said.

An electrooptic satellite is a spacecraft fitted with lenses that can take digital pictures of objects as small as a notepad from thousands of miles in space. It is similar to the star-observing Hubble Space Telescope, except that a spy satellite faces the Earth.

These spy satellites make up the largest component of the military’s Future Imagery Architecture network, a constellation of satellites that would gather clearer and more-frequent images -- even at night and when there is a cloud cover -- of enemy military activity than current satellites can.

On Friday, Defense Secretary Donald H. Rumsfeld and National Intelligence Director John D. Negroponte discussed the possibility of taking away the electrooptic satellite work from Boeing, Pentagon sources said.

Under this plan, the Pentagon would award a contract to Lockheed to build a similar satellite. Lockheed, in addition to manufacturing spy satellites, built the complex Hubble telescope.

Boeing would be allowed to continue developing radar satellites, a less complex and smaller portion of the spy satellite program, one Pentagon source said.

Boeing appears to have been bracing for the possibility. A longtime Boeing executive in charge of its Future Imagery Architecture division abruptly announced his retirement last month, and this year the head of its satellite-manufacturing business resigned to take a job at Northrop Grumman Corp.

Boeing shares closed down 28 cents Friday to $64.80. Lockheed rose a penny to $62.38.