Army Ends Lockheed Contract for New Spy Plane

By Renae Merle
Washington Post Staff Writer
Friday, January 13, 2006

The Army canceled its contract for a new spy plane yesterday after the Lockheed Martin Corp. program developed technical problems that military officials determined were too expensive to fix.

Bethesda-based Lockheed, the nation's largest defense contractor, spent months trying to save the plane, known as the Aerial Common Sensor, which was supposed to detect enemy signals and track enemy troop movements from 37,000 feet in the air. But Lockheed struggled to fit all of the required technology on the aircraft it picked for the job, a regional jet from Embraer SA of Brazil.

"After carefully evaluating Lockheed's proposals [to save the program], we decided that the prudent course of action at this time was to terminate the contract," Claude M. Bolton, the Army's acquisition chief, said in a written statement. The Army is headed back to the "drawing board," he said. In a letter to Congress, the Army said it would open a new competition for the plane in 2009.

For Lockheed, the loss of the $879 million development contract was embarrassing, though not an immediate financial blow. Building the more than 50 aircraft the Pentagon planned to order was potentially worth $8 billion. The Army canceled the contract for "convenience," which means Lockheed will receive a termination fee.

"We regret but respect the government's decision to terminate" the contract, Lockheed spokeswoman Judith B. Gan said in a written statement. The company has "made significant progress in the development of the multi-intelligence sensor system but encountered technical challenges with the integration of this state-of-the-art system into the aircraft platform."

The Pentagon will begin a six-month study of its intelligence, surveillance and reconnaissance aircraft, the Army letter to Congress said. The planes that the Aerial Common Sensor was to replace, the Army's Guardrail Common Sensor and Airborne Reconnaissance Low and the Navy's EP-3E, will continue to operate.

It is important that the Army invest in these aging systems, the letter said, "to ensure they remain safe to operate and relevant to counter current and future threats."

Industry analysts said the decision to cancel the Lockheed contract reflects both the difficulty of developing the increasingly technical weapons the military demands and the Army's budget pressures. "The Army has plans that are too expensive and can't afford all of them," said Steve Kosiak, research analyst at the Center for Strategic and Budgetary Assessments. "They have to make cuts somewhere. The days of the very large increases in defense spending are over."

Part of the problem, analysts said, was that while the services have different needs, the military wanted to put both Navy and Army technology on one plane, and Lockheed underestimated how much it would weigh. For example, while the Army wanted the plane to monitor the battlefield, the Navy wanted its version to intercept overseas communications in the Western Pacific and the Middle East, said Loren B. Thompson, a defense industry consultant at the Lexington Institute.

The Army was expected to order 38 of the planes, with the Navy buying 19.

The military faced two choices, according to the Army's letter to Congress. It could use the aircraft Lockheed originally proposed and have less capability or switch to a larger plane and more than double development costs. Moving to a larger plane would probably have triggered complaints from Northrop Grumman Corp., which lost the competition for the program in 2004 and had planned to use a larger aircraft.

After considering the alternatives "we found that we could not provide the value that tax payers and our war fighters would expect under the existing contract," Lt. Col. Steven Drake, the product manager, said in a written statement. "Although our initial costs for the research and development were substantial, the long term costs of continuing this contract would not have fallen within acceptable parameters. As a diligent manager of its resources, the Army chose this sensible time to terminate this contract."

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