(Bloomberg Gadfly) -- Lockheed Martin Corp.'s cost-cut agreement with President Donald Trump may be just a drop in the bucket.
Trump on Monday said that his administration had been able to eliminate $600 million in expenses tied to Lockheed's F-35 Joint Strike Fighter. Lockheed had signaled in recent weeks that it was close to a deal with the president after he criticized the program for its "out-of-control" costs, but it had no statement at the ready, indicating Trump perhaps doesn't discriminate between praise and rants in terms of catching the business community off guard.
About an hour after Trump's comments, Lockheed said in a statement that it shared the president's "commitment to delivering this critical capability for our men and women in uniform at the lowest possible cost to taxpayers" -- but provided scant details as to what this supposed agreement actually entailed.
According to Trump, the $600 million reduction applies to 90 aircraft, which would suggest he's referring to the 10th production lot of the jets. The maximum value of the contract for that lot was $7.2 billion and Lockheed received a $1.3 billion down payment from the Pentagon in November while the two sides worked out the final details. It's not clear whether the $600 million reduction applies to that contract total, or to future sustainment and maintenance responsibilities as Lockheed CEO Marillyn Hewson indicated last week might be the focus of the negotiations.
Either way, $600 million isn't an insignificant reduction. But it's also important to put that figure in context and to wonder how much of that is really the result of efforts Lockheed Martin was already pursuing. As we've seen before, Trump and the companies he targets both have a way of using big numbers to make changes sound more significant than they are.
Consider that in November, defense officials said that they needed an extra $500 million-plus to finish the $55 billion development phase of the airplanes. There's no indication these are apples-to-apples dollars, but it gives you a sense of the magnitude of the funding involved here. The thought that $600 million in savings all of a sudden puts the F-35 program in "good shape", as Trump put it, is a bit baffling, especially given the progress Lockheed has already made.
In March, the government lowered its estimate for the cost of developing and acquiring the F-35 jets by about $12.1 billion to $379 billion. An affordability plan undertaken by Lockheed and its partners in conjunction with the government should generate $227 million of savings for the ninth and 10th lots of the F-35 aircraft.
And while Pentagon officials in March increased their estimates for the cost of operating and maintaining the F-35 jets to $1.12 trillion in inflation-adjusted dollars, that was primarily due to the fact that they now expected the planes to fly more hours and to be in service longer. The estimate for operating fighters that had already been built actually decreased by billions of dollars. Then, in a July statement, Lockheed and its F-35 partners committed to reducing sustainment costs by 10 percent between Fiscal 2018 and Fiscal 2022, resulting in a $1 billion cost reduction.
Lockheed CEO Hewson got peppered, understandably, with questions about the Trump negotiations when discussing the company's fourth-quarter earnings with analysts earlier this month. It's telling that she didn't stray from the company's oft-cited goal of reducing the per-unit cost of a version of the F-35 to $85 million by 2019 as production ramps up. If anything, she seemed to indicate Lockheed intended to just continue building on the cost-cutting initiatives it already had underway. One thing she said was discussed with the president was rethinking how the Department of Defense ordered planes. Packing more planes into an order lot creates manufacturing efficiencies that can reduce the per-unit costs.
Will Trump's negotiating efforts yield bigger cost cuts than might have occurred previously? Maybe. But this has a lot of the hallmarks of Trump's previous job creation announcements: lots of big numbers, little real change.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.
To contact the author of this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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