Trump Negotiates Bigger Price Drops In Pentagon-Lockheed Martin F-35 Deal

It looks like President Donald Trump is staying true to his word to keep manufacturing jobs in the United States. At a time when many US companies outsource the building of just everything, President Trump has somehow managed to get Lockheed Martin to cut the production costs of the new F-35 fighter jets in a new deal with the Pentagon which will lower the purchase price by roughly 8 percent.

“We’re pleased to have reached an agreement with the U.S. Department of Defense for the next 90 F-35 aircraft,” the contractor said in a statement. “The agreement represents $728 million in savings and a nearly 8 percent reduction in price over our last contract for the air vehicle delivered by Lockheed Martin and our industry partners.”
Lockheed Martin also added, “The increase in the number of aircraft in this agreement enables us to reduce costs by taking advantage of economies of scale and production efficiencies.”

Of course, this could not be possible if that reduction were not still profitable to the defense contractor. As such, analysts estimate the value of Friday’s agreement is worth about $8.7 billion, which will continue to put pressure on the company to keep cutting production costs for the F-35 Joint Strike Fighter; but that puts margin erosion at risk, too.

Indeed, Morningstar analyst Chris Higgins argues, “I’d say it’s pretty aggressive price reductions. The key is Lockheed needs to reduce the costs at a faster rate than they are cutting the price.”
Still, Lockheed maintains that they reached this agreement “in a matter of weeks” and that it represents “significant savings over previous contracts.” Time will tell how true this is, apparently.
Higgins goes on to discuss that the price reductions on the last lot were “on the high end of what they were talking about. They were talking about 6 to 7 percent price reductions compared with lot 9 and you’re looking at the price reductions above 7 percent (on the F-35A and F-35C).”

Now, Lockheed has been consistently reducing the recurring costs of this aircraft and the F-35 remains profitable. Analysts share concern, however, that this model is not sustainable, particularly in terms of margin expansion in the near future.
Higgins notes, for example, “They were expecting margin expansion on it. This could potentially put that in jeopardy.”