Navy wants more cost-cutting from Huntington Ingalls

Reuters News
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Posted: Jan 12, 2012 7:14 PM
Navy wants more cost-cutting from Huntington Ingalls

By Andrea Shalal-Esa

WASHINGTON (Reuters) - The Navy on Thursday said it is working closely with Huntington Ingalls Industries Inc to continue to drive down costs on the CVN 78 aircraft carrier and LPD amphibious ships the company has under construction.

Navy acquisition chief Sean Stackley said the company was over the government's target price for a number of LPD ships under construction, and had hit the cost ceiling established in a fixed price contract for LPD-22, the second ship delivered at the Ingalls shipyard in Pascagoula, Mississippi.

Stackley said subsequent ships in the LPD class were also over target, but showing some improvement.

Stackely did not elaborate on how much the cost overruns were.

"Each ship is a little bit better. There's steady progress, but they're not where they need to be," he told reporters after a speech at the Surface Navy Association annual conference.

Pentagon acquisition officials have focused heavily on reining in cost overruns on major weapons programs as they brace for a downturn in spending after a decade of sharp growth.

Cost overruns are particularly large in the shipbuilding sector, given that it costs billions of dollars to build one warship, but the Navy has adopted new strategies, including block buys and multiyear procurements to stabilize costs.

Huntington Ingalls Chief Executive Mike Petters said the company had already taken charges for the cost overruns on the LPD ships 22 through 25, but said the company was doing better with LPD 26, which is in the early stages of production.

He said Huntington Ingalls, which was spun off from Northrop Grumman Corp last year, was focused heavily on improving its execution and driving additional cost out of its shipbuilding programs as it continued efforts to shut down its Avondale shipyard.

"We tell anybody who will listen that we still have risk on those programs," Petters told Reuters in an interview. "Until those ships are gone, and until we get Avondale wound down and closed, we sleep with one eye open on all those programs."

Petters said he remained confident that the company's margins would continue to improve and should reach 9 percent by 2015, with progress accelerating after work on the underperforming ship contracts was completed. The company posted an operating margin of 6.9 percent in the third quarter, compared with 4.6 percent a year ago.

Stackley acknowledged that building a new class of aircraft carrier was complex, and that task was made harder by the Navy's decision to transition to a new carrier in one ship, rather than over the course of three, as initially planned.

He said the Navy was working closely with Huntington Ingalls to drive cost out of the USS Gerald R. Ford (CVN 78) aircraft carrier, but was trying to "hammer home" the need for additional efforts.

He said the company had a good management team in place, but needed to make further changes to lower the cost of the carrier.

He said the Navy had added funds to the fiscal 2013 budget and five-year spending plan to cover expected cost increases on the CVN 78 carrier. He gave no details, since the budget will not be formally released until February, but said the Navy had not budgeted for the worst case, estimate by some to be a cost overrun of $1 billion cost on the $12 billion program.

He declined to comment directly on whether work on the next carrier would be delayed, something Huntington Ingalls says would drive up the cost of that ship.

Huntington Ingalls last week responded to reports that the carrier would likely be $884 million over budget by saying it was continuing to see improvements in its performance on the aircraft carrier.

Petters said both the company and the Navy knew at the outset that building a first-in-class ship as complex as an aircraft carrier involved risk, and they had agreed on a formula for sharing that risk.

If industry had to shoulder the risk of new development programs completely on its own, he said, the cost of new warships and other weapons would skyrocket because defense companies would raise prices to cover the added risk.

"There's an argument to be made that the method that we're using to build the Ford is saving the taxpayers hundreds of millions of dollars," he said, adding that company executives were "very aggressive in going out and continue to try to save money."

He said it was critical to maintain continuity on ship programs, and said Huntington Ingalls was urging the Navy to proceed with awarding a contract for the next Ford-class carrier in 2013, rather than delaying it as some have suggested.

"The more you push this thing out, the higher the price goes," Petters said. "The most efficient way to build it is to contract on time."

(Reporting By Andrea Shalal-Esa; Editing by Bernard Orr)