BY ANDREA SHALAL
(Reuters) – Sikorsky Aircraft said on Wednesday the U.S. Navy’s plan to skip orders for 29 MH-60 helicopters in the final year of a five-year contract could undermine the industry’s willingness to sign such cost-saving agreements in the future.
Any move by the Navy to “break” the agreement in fiscal 2016 could also raise the cost of 60 U.S. Army Black Hawk helicopters included in the deal, Tim Healy, director of maritime programs for Sikorsky, a unit of United Technologies Corp, said at the annual Navy League conference.
“This is not a legal issue. This is a confidence issue,” Healy said. “If multiyear contracts are negotiated and then not followed through … industry is back to making year-to-year calculations and investments because you never know when the next year’s contract is going to be canceled.”
Sikorsky signed an $8.5 billion contract with the Army and Navy in July 2012 to buy 653 Black Hawk and Seahawk helicopters through December 2017, a deal that generated significant discounts given the large size of the order.
Navy Captain Jim Glass, program manager for the H-60 helicopters, told reporters he believed this would be the first time the Pentagon has reneged on a multiyear pact with industry.
The Pentagon promotes such agreements since they provide stability for industry, and generate savings of 10 percent or more on key weapons programs by providing economies of scale. Companies often used the long-term agreements to fund investments in reducing production cuts.
Glass said the proposed cuts in Sikorsky helicopter orders were pegged to the Navy’s inability to fund the refueling of an aircraft carrier, and the associated aircraft reductions would likely be revisited if funding for the carrier was restored.
The Navy’s fiscal 2015 budget and five-year spending plan omitted funding for 29 Sikorsky helicopters and other key weapons programs in fiscal 2016, when automatic budget cuts required under sequestration are due to resume.
Navy officials have said they will have to cancel the refueling of the nuclear-powered USS George Washington aircraft carrier, and eliminate the associated fleet of aircraft, unless Congress reverses the mandatory budget cuts.
Senate Armed Services Committee Chairman Carl Levin last month said the Navy’s decision to breach the Sikorsky agreement would trigger termination fees of at least $250 million.
Both Healy and Glass said it was difficult to determine the financial effect, or any termination fees, since it remained unclear how the cuts would be implemented.
But Healy said breaking the multiyear agreement would have other far-reaching consequences for the U.S. Department of Defense’s ability to reach such deals in the future.
The fiscal 2015 budget preserved the multiyear contract for now, Glass said, and included $107 million in advanced procurement funding to ensure production could begin as planned.
Pentagon documents from fiscal 2014 showed that the multiyear contract resulted in savings of over 17 percent when compared to buying the aircraft one year at a time. (Reporting by Andrea Shalal, editing by G Crosse)