Two U.S. arms programs face live-or-die reviews after costs jump

(Adds comment from Northrop CEO)

By Andrea Shalal

WASHINGTON, April 17 (Reuters) - An unmanned U.S. Navy helicopter built by Northrop Grumman Corp and a precision ship-landing system built by Raytheon Co face mandatory reviews that could lead to their cancellation after quantity reductions drove unit costs sharply higher in 2013, the Pentagon announced on Thursday.

Senior defense officials said the cost increases were largely due to cuts in the numbers of items to be purchased, but federal law required a careful look at program performance and other factors.

The Nunn-McCurdy law requires a mandatory, 60-day live-or-die review if weapons systems see an increase of more than 25 percent in their unit costs. In order for programs to survive, top defense officials must certify that the program is needed for national security and meets other conditions.

In this case, senior defense officials suggested that both programs would likely survive since the cost spikes were due to reduced orders, but they said final decisions would not be made until the reviews were completed on June 17.

The Defense Department's annual "selected acquisition report" on the cost of major weapons showed a slight 0.3 percent, or $4.4 billion, drop in the combined cost of 77 programs for a total cost of $1.62 trillion.

The reduction was largely due to reduced quantities, changes in inflation rates, and reduced needs for support equipment, although they were partially offset by schedule delays and cost increases in other programs, including Lockheed Martin Corp's F-35 fighter jet, the report showed.

Senior defense officials said budget-driven reductions in arms programs had less effect on the program costs in 2013 than expected, although unit costs were likely to edge higher in coming years as mandatory spending reductions took effect.

"I just don't think we're out of the woods yet," said one official who was not authorized to speak publicly. "There will be effects on programs as budgets hold or come down further."

The Navy is buying 49 fewer Northrop Fire Scout helicopters after switching to a larger aircraft built by Bell Helicopter, a unit of Textron Inc, that can carry more than twice the fuel or cargo and can stay in the air for 12 hours. That compares to nearly five hours for the previous aircraft, which is no longer being produced.

Northrop Chief Executive Wes Bush said the program was going very well and the unit cost increase was due to the reduction in quantity. He said the Navy remained committed to the program and he expected it to survive the review now under way.

The cut in quantities of Raytheon's Joint Precision Approach and Landing System (JPALS) came after the Army and Air Force decided to pull out of the joint program, which resulted in the need for 10 fewer shore-based training systems, the report said.

The cost increase in the JPALS program also was partly due to an extension in the development program aimed at increasing the capability of the system, and higher material costs.

Two other programs showed cost increases of more than 15 percent, requiring notification to Congress, but not triggering the more arduous cancellation reviews, the report showed.

Boeing Co's upgrade of the U.S. E-3 Airborne Warning and Control System (AWACS) saw a 19 percent jump in average unit procurement costs, mainly due to a reduction of seven airplanes, but also due to schedule changes, the report said.

The cost of General Dynamics Corp's Joint Tactical Radio System (JTRS) to build handheld and other smaller radios, rose 19 percent due to a revised acquisition strategy, it said.

Lockheed's F-35 fighter jet saw a $7.4 billion increase in acquisition costs to $398.6 billion, largely due to postponed orders from the U.S. military and international partners. The report showed a decrease of nearly 9 percent, or $97 billion, in the estimated cost of operating the F-35 aircraft through 2065.

The Pentagon report estimated the total "lifecycle" cost of the U.S. F-35 fleet at $1.02 trillion, down from $1.11 trillion a year earlier, but the F-35 program office said improving reliability and other adjustments meant the number would be closer to $917 billion.

Other changes included a $2.2 billion, or 4.2 percent, drop in the cost of Boeing's KC-46A refueling plane, and a 9.5 percent rise in Boeing's program to remanufacture AH-64 Apache helicopters, due to higher labor and material costs.

The projected cost of the Navy's Littoral Combat Ship program dropped over 33 percent, or $11.3 billion, due to the Pentagon's decision to halt orders after 32 ships instead of buying all 52 that had been planned.

(Reporting by Andrea Shalal; Editing by Eric Beech and Bill Trott)