(Adds statements from Navy, lawmakers and industry executives)
By Andrea Shalal-Esa
WASHINGTON, July 23 (Reuters) - A U.S. Navy decision to scrap the DDG-1000 destroyer program after just two ships could have “potentially devastating consequences” said Sen. Susan Collins, a Maine Republican whose state includes General Dynamics Corp’s (GD.N) Bath Iron Works shipyard.
U.S. Navy Secretary Donald Winter and Chief of Naval Operations Adm. Gary Roughead spent hours with lawmakers on Wednesday explaining their decision.
Collins said Deputy Defense Secretary Gordon England had promised to work with her to “mitigate the impact on Bath Iron Works’ work force of the termination of the DDG-1000 program.”
Bath Iron Works is building one of the new destroyers, Northrop Grumman Corp (NOC.N) is building the other at its Ingalls shipyard in Pascagoula, Mississippi.
Defense analyst Loren Thompson of the Lexington Institute said the net effect on Northrop and General Dynamics would be minimal since they would likely get more work building older model DDG-51 destroyers.
Lockheed Martin Corp (LMT.N), which builds the Aegis combat system used on the DDG-51 ships, but had lost the contract for the combat system on the DDG-1000 to Raytheon Co (RTN.N), would also benefit, Thompson said.
The Navy has spent almost $10 billion to develop the new stealthy warship over the past 15 years and was due to spend another $19 billion in coming years, according to the Pentagon’s latest acquisition report to Congress.
Government watchdog agencies and critics in Congress argue the cost of each DDG-1000 destroyer have already soared and could reach $5 billion apiece — a price so high the Navy would have trouble reaching its goal of a 313-ship fleet.
Thompson said the Navy was “flailing about trying to define its requirement for warships,” but had clearly decided it did not need as many of the new destroyers, which were designed to attack targets on land up to 100 miles away. “Without a major threat to organize our priorities, we’re not very good at defining what we’ll need in the future,” Thompson said.
Collins said Winter called her late on Tuesday to give her the news after a high-level meeting at the Pentagon.
Winter made the call after meeting with England and chief Pentagon arms buyer John Young, according to sources familiar with the decision.
Collins said the Navy’s decision was prompted by the House Armed Services Committee’s decision to eliminate funding for the DDG-1000 program in its latest defense spending bill. The Senate version of the defense authorization bill included $2.6 billion for the program for fiscal 2009, which begins Oct. 1.
House Armed Services Committee Chairman Ike Skelton, a Missouri Democrat, and Rep. Gene Taylor, a Mississippi Democrat and head of the sea power subcommittee, issued a statement welcoming the Navy’s decision as good for taxpayers.
Taylor said the DDG-51 could be used for many different missions, including missile defense, and the shipyards already “know how to build them on budget and on schedule.”
His subcommittee scheduled a hearing on the issue on July 31.
The Navy may face termination fees for the program, since it is being canceled “for convenience” rather than cost, said one source briefed on the issue. The scope was not yet clear.
Navy spokesman Lt. Clay Doss declined comment on internal budget briefings, but confirmed that Winter and Roughead met lawmakers on Wednesday.
Industry executives said the Navy was still working out plans to produce more Arleigh Burke-class DDG-51 destroyers, also built by General Dynamics and Northrop, instead.
That could help offset the lost revenue from the DDG-1000 ships, but much would depend on the rate at which the Navy decided to purchase the older model destroyers, they said.
In a statement, Collins said the Navy was considering buying nine more of the older style destroyers, but the DDG- 1000 program provided more work and about three times the amount of money for Bath Iron Works on each ship than than the older model DDG-51s.
“It’s a very dynamic situation,” said Randy Belote, spokesman for Northrop, adding the company would “support the Navy” whatever it decided.
General Dynamics spokesman Kendell Pease said it would be inappropriate to comment since his company had not been informed of any decision. (Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn and Andre Grenon)