Pentagon vows 'demanding but fair' in F-35 talks with Lockheed

By Andrea Shalal

WASHINGTON, March 27 (Reuters) - The U.S. Defense Department on Friday said it will be "demanding but fair" in negotiations with Lockheed Martin Corp (LMT.N) for the next two batches of F-35 fighter jets, one of the Pentagon's largest-ever sole-source contracts.

"There's not going to be a lot of mystery in terms of what our expectations are. We intend to be a demanding but fair customer," Shay Assad, the Pentagon's director of defense pricing, told Reuters in an interview.

"It's a big deal. It's one of the largest sole-source negotiations in the history of the department," he said.

Analysts estimate the two orders, which are being negotiated at one time, could be worth over $15 billion.

Lockheed, the Pentagon's No. 1 supplier, and U.S. government officials have already begun early discussions about the ninth and 10th low-rate production contracts for a combined 150 jets, Orlando Carvalho, who heads Lockheed's aeronautics division, told Reuters on Friday.

He said the company hopes to conclude the contract negotiations by the end of the year.

Assad said the department would give its negotiating team all the support it needed to conduct the contract talks, and was focused on ensuring early and open communications with Lockheed to get the data it needs to assess its contract proposal.

The department in November awarded Lockheed a contract valued at $4.7 billion for an eighth batch of F-35 fighter jets, a 43-jet deal that lowered the average price per jet by 3.5 percent from the last contract.

The government signed a separate contract valued at $1.05 billion for an eighth batch of engines built by Pratt & Whitney, a unit of United Technologies Corp (UTX.N) , to power the jets.

Lockheed and its key subcontractors, Northrop Grumman Corp (NOC.N) and BAE Systems Plc (BAES.L) , as well as Pratt, are all investing in various measures aimed at simplifying production of the jets and reducing the cost to build and operate them.