General Electric Co.
(GE) and Rolls-Royce Group are gathering support for the second F-35 engine program, which Defense Secretary Robert Gates and President Barack Obama have singled out as unnecessary in the tightening credit environment. Representatives of the two companies met top Pentagon officials recently to offer a fixed-price package on about 100 low-rate production engines for the F-35 fighter.

The deal would cover low-rate production engines to be built from 2012 to 2015. Without F-35, GE would be out of the large fighter-aircraft engine business. Gates recently reiterated his opposition in Fort Worth, Texas, where Lockheed Martin Corp. (LMT) builds the F-35. Lawmakers backing the program are of the view that continuing work on a second engine will stimulate competition and lower costs on the massive $300 billion fighter program in the long run.

United Technologies Corp.’s (UTX) Pratt & Whitney unit has seen the cost of developing its F135 engine soar by nearly $1.9 billion since 2002. The engine for the short-takeoff, vertical-landing version of the fighter needed redesigning after problems arose during testing several years ago.

Without a competing engine, Pratt & Whitney would essentially get a $100 billion monopoly on engines for over 3,000 airplanes expected to be sold over time. If the second engine program remains in place, current plans call for the two engine makers to compete for new engine orders every year, beginning in 2015 or 2016.

General Electric is a global infrastructure, finance and media company. With products and services ranging from aircraft engines, power generation, water processing and security technology to medical imaging, business and consumer financing, media content and industrial products, it serves customers in more than 100 countries and employs more than 300,000 people worldwide. We currently have a Neutral recommendation on GE.

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