Defense Cuts Could Cost Rolls-Royce
Britons Bristle Over Pentagon's Recommendation to Drop Company's Jet Engine

By Renae Merle
Washington Post Staff Writer
Thursday, February 2, 2006

During a regularly scheduled video conference with President Bush just before Christmas, British Prime Minister Tony Blair raised a sensitive issue -- a Pentagon budget-cutting proposal that could cost Rolls-Royce PLC, one of Britain's premier companies, billions of dollars.

Word had leaked that the Defense Department was recommending the elimination of one of two engines it is developing for the Joint Strike Fighter, the F-35 jet expected to become the most widely used fighter in the world. The move would save the Pentagon about $1.8 billion over the next several years, according to Loren Thompson, an industry official familiar with the proposal. But it has upset Britain, a close ally that has invested $2 billion in the project and is set to buy more than 100 of the planes.

Canceling the engine would be an insult to British officials, who have stood by the United States during the Iraq war, said Sir Digby Jones, director general of the Confederation of British Industry, a large business lobby group. "At the moment, except for Australia, the United Kingdom is about the only friend America's got," said Jones in a phone interview. "A lot of Brits, we would not blame the British government from thinking you got a funny way of showing your gratitude."

The Pentagon's increasing reliance on allies for help buying expensive weapons is complicating the Joint Strike Fighter's budget. The F-35 is the Pentagon's largest weapons program, a nearly $250 billion giant. To help fund it, the Pentagon asked allies for money, collecting $4.5 billion from eight countries, including Britain, that hoped to secure work for their companies.

To further keep costs down, the Pentagon pitted two teams of engine manufacturers against each other. Rolls-Royce teamed with General Electric Co., the Connecticut-based conglomerate, to compete against Pratt & Whitney, a unit of United Technologies Corp. Rolls-Royce has a 40 percent interest in its team, which signed a $2.4 billion contract in August to continue developing the competing engine.

Elimination of its team would be a costly loss for Rolls-Royce, which could generate $10 billion in new revenue from the program over the next 20 years if its team wins 50 percent of the orders, industry analysts said. "It's a big program for us, no doubt about it," said Mike Ryan, the company's executive vice president of government business.

The idea of having two engines became more of a luxury than a necessity, industry analysts said, as the cost of developing the Joint Strike Fighter increased and the Pentagon's budget came under pressure. In December, the Pentagon recommended canceling the Rolls-Royce-General Electric engine, said Thompson, a defense industry consultant for the Lexington Institute who has discussed the proposal with senior Pentagon officials. "The program is being terminated to save money in the near term; there is no other reason for doing it," he said.

The move "hands Pratt & Whitney a monopoly on the most popular fighter engine in the world for the next 30 years," Thompson added.

Blair followed up his talk with Bush with a letter a few days later, according to a source familiar with the communications who spoke on the condition of anonymity because the communications are considered private. The Financial Times has reported on the communications. Blair's office and the White House declined to comment.

Neither the Pentagon nor the Office of the Management and Budget, which is to release the 2007 defense budget next week, would comment. The recommendation could be a Pentagon maneuver to force Congress, which has supported the two-engine model, to appropriate more money, said Richard Aboulafia, aviation analyst for the Teal Group Corp., a research firm.

The proposal to ax the second engine feeds simmering foreign concerns about the difficulty some countries, including Britain, have had gaining access to sensitive technology and work associated with the F-35 fighter jet. In 2004, Norway threatened to abandon the program if more of its companies didn't get work. Lockheed Martin Corp., the prime contractor, has guaranteed no-bid contracts to some countries that struggled to gain work on the plane.

"In some respects, these international partners have put up with a lot more than many U.S. firms would put up with," said Brett Lambert, a defense industry consultant with the Densmore Group.

The Pentagon's Joint Strike Fighter program office is negotiating with partner countries a memorandum of understanding that will address technology transfer and industrial participation, said office spokeswoman Kathy Crawford.

There is also concern that eliminating one of the engine manufacturers could ultimately increase costs. Several industry watchers pointed to a monopoly Pratt & Whitney once held on an earlier fighter program, which was broken when General Electric was brought in as a competitor. "By abandoning the sole-source model and creating a competitive environment . . . taxpayers benefited from less expensive, more powerful and more reliable engines," said Christopher Bolkcom, national defense specialist at the Congressional Research Service.

Staff writer Mary Jordan in London contributed to this report.