The F-35 is preparing for key operational tests that will allow Lockheed Martin (LMT) to begin full-rate production on the stealth fighter and massively boost its growth.
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Acquisition rules require the completion of combat testing certification, or Initial Operational Test and Evaluation (IOT&E), before Lockheed can crank out F-35s at full tilt.
The F-35 underwent cold-weather testing at Eielson Air Force Base, Alaska, in February, as part pre-IOT&E activity. Then last month, the F-35 went through more pre-IOT&E tests at Edwards Air Force Base, Calif., to evaluate close air support and combat search and rescue capabilities.
Actual IOT&E, which includes rigorous combat testing, is scheduled to start in September (more than a year behind schedule) and finish by May 2019. That event will also test the F-35's 3F software package, which provides 100% of the coding needed for full warfighting capability.
It will also pit the F-35 against the venerable A-10 in a close air support matchup that Congress mandated amid a fierce debate over the A-10's future.
The F-35 is supposed to fill the close air support role left by the A-10, but critics say the stealthy fighter doesn't have the same amount of firepower or survivability in combat and instead called on the Air Force to put off the planned retirement of the so-called Warthog.
Lockheed has a lot riding on the tests.
The F-35 program is key to Lockheed's growth as it accounts for about 25% of total revenue. The company has been steadily boosting its production rate, but getting to full output would nearly double the pace.
Lockheed delivered 66 F-35s last year, and sees production and delivery of 91 jets this year. By 2023, the company expects to reach 160 jets per year.
Other defense stocks will also see a lift when F-35 output jumps. Northrop Grumman (NOC) builds the center fuselage and mission planning software, United Technologies (UTX) makes the engines, and Raytheon (RTN) is modifying its missiles and other weapons for the jet.
Lockheed and Raytheon rose 0.5% in the stock market today while Northrop sank 0.55% and United Tech climbed 1.55%.
As Lockheed gears up for full-rate production and smooths out lingering development problems, separate contract issues remain.
The Pentagon has stopped taking F-35 deliveries due to a dispute on payments for correcting production errors. But during Lockheed's first-quarter earnings call last month, CEO Marillyn Hewson said she expects "resolution on this soon" and said that the company will still meet its delivery goal of over 90 F-35s this year.
In addition, contract talks for the 11th batch of low-rate production, which includes more than 130 planes, are dragging on. Lockheed and the Pentagon missed their target to have its done by the end of 2017.
Lockheed "could be much more cooperative and more collaborative, and we could seal this deal faster. We could. They choose not to, and that's a negotiating tactic," Vice Adm. Mat Winter, F-35 Program Executive Officer, said in February.
Meanwhile, defense officials are pressuring Lockheed to find ways to lower the expected life-cycle expenses of the F-35 fleet, which will cost about $1.1 trillion to operate and maintain through 2077, Bloomberg reported in April.
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