Lockheed Martin reported lower quarterly earnings and margins for it aeronautics division Tuesday, reflecting a recent industry trend, but the program manager for its biggest project—the F-35—said there’s no government “war” on corporate profit. Rather, “we have a war on cost,” Lt. Gen. Christopher Bogdan said in a recent interview with Air Force Magazine. The Defense Department writ large is “not trying to reap savings of defense dollars by cutting profit,” he said, but shifting contracts away from straight fee payments to cost-reduction incentive approaches. “As they reduce costs, which is what we’re really after, we’ll share with them the added money saved” through efficiencies, “and the fee, plus the cost savings, becomes profit for them.” There’s “absolutely not” an anti-profit sentiment, Bogdan said, because “that doesn’t help the industrial base, that doesn’t help the supply chain, because they’ll pass that down to their suppliers.” He said contractors generally “have to recognize that part of their profit has to be earned, and not just given to them. And that’s where we are in the F-35 program, in balancing fee and cost reduction. … They have to complete things in order to earn that money.” Lockheed’s aeronautics unit saw a 12 percent reduction in earnings to $362 million, and about a one-percent drop in operating margin for the last quarter. The aeronautics division also reported lower C-130 sales numbers.
When the Air Force sets a new program baseline for the B-52 re-engining this fall, there will be “some” cost increase, because the project wasn't previously fully funded, and the Air Force has a better handle on actual supplier costs and knowledge from ground testing, program officials said.