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Rocky Mountain News January 13, 2006

Army cancels Lockheed contract

Government says spy plane too costly; Jeffco jobs cut

By Roger Fillion

The U.S. Army pulled the plug on a Lockheed Martin Corp. contract to build a next-generation spy plane that proved too heavy to fly and too expensive.

Experts had reckoned the contract could have created up to 500 jobs at Lockheed's Jefferson County facilities, where the troubled program was being managed. And it could have been worth up to $8 billion over 20 years.

After the Army told Lockheed in September to stop work on the spy plane, the nation's No. 1 defense contractor unsuccessfully pitched new ideas to Uncle Sam - such as use of a bigger jet to carry the eavesdropping gear.

"After evaluating all of the alternatives, including those proposed by Lockheed Martin, we found that we could not provide the value that the taxpayers and our war fighters would expect under the existing contract," Lt. Col. Steven Drake said in a statement.

The overall program was not scrapped and will go "back to the drawing board," the Army added.

About 250 employees had been assigned to the Aerial Common Sensor surveillance plane at Lockheed's Deer Creek facilities in Jefferson County.

Lockheed spokeswoman Judy Gan said "the majority" have been reassigned to other projects.

"We have laid off five employees so far," she said.

Gan added that a "small number" of additional employees could be cut over the next two months.

Asked whether anyone had been fired over the failure, Gan replied: "Not to my knowledge."

The unusual rejection is an embarrassment - though not a crippling blow - to Lockheed, which has supplied Uncle Sam with spy planes and other aircraft for decades.

Lockheed was the builder of the two most famous spy planes in U.S. aviation history: the U-2 - still used for high-altitude research but reportedly to be retired - and the SR-71, which last flew in 1998 and for many years was the world's fastest aircraft.

"It's certainly a blow to their pride," analyst Paul Nisbet of JSA Research in Rhode Island said of Lockheed's loss of the ACS contract. "They're quite culpable in this along with the Army."

Nisbet said the initial proposal "should have been better scoped in the first place. The proposal proposed something that couldn't be done."

The high-profile deal began to unravel last year. The Brazilian-made jet Lockheed wanted to use was too small to carry the sensors and radar that were to go aboard.

Lockheed proposed alternatives to the military, including use of a larger jet made by Brazil's Empresa Brasileira de Aeronautica SA. Lockheed also proposed switching to Canadian company Bombardier Inc.'s Global Express business jet. But Army brass nixed that proposal, too.

Army spokesman Timothy Rider said use of the larger Bombardier jet would have "more than doubled" development costs, delayed the plane's deployment by four years and resulted in fewer aircraft produced.

Switching to a new jet also could have opened up the Army to a lawsuit from Northrop Grumman Corp., which lost out to Lockheed in the initial bidding.

"If you allowed a larger plane, you'd have legal challenges from Northrop, at least, saying that wasn't what was bid," said JSA Research's Nisbet.

Lockheed also had proposed continuing work on the electronics without making a commitment to a particular jet.

In a statement, Lockheed's Gan said, "We regret but respect the government's decision."

"While this was a very complex program with a unique set of challenges," Gan added, the company accepts "responsibility for the execution issues that arose during the course of this contract."

Lockheed and partner Embraer had landed the initial $879 million contract in August 2004 to design the jet for the Army and Navy.

Each piloted jet aircraft was supposed to be equipped with state-of-the-art sensors to detect enemy communications, radar and troop movements.

Experts said Lockheed's job was complicated because it was building the plane for the Army and the Navy, which had differing needs. That apparently contributed to the electronics being too heavy for the initial Embraer jet.

"You were trying to satisfy both Army and Navy requirements," said John Pike, director of GlobalSecurity.org.

Pike said the Army's decision not to cancel the entire program means "it's still not clear what is going to happen as a result of this."

Copyright 2006, Rocky Mountain News