1 of 4. The U.S. Marine Corps version of Lockheed Martin's F35 Joint Strike Fighter, F-35B test aircraft BF-2 flies with external weapons for the first time over the Atlantic test range at Patuxent River Naval Air Systems Command in Maryland in a February 22, 2012 file photo.

WASHINGTON (Reuters) - It's called the "death spiral," and America's newest warplane, the F-35 Joint Strike Fighter, is in danger of falling into it before the plane has even gone into service.

The term - recently invoked by top brass involved in the F-35 program - refers to a budgeting Catch-22 that plagues the defense industry. To keep the cost per airplane low, you need to build and sell a lot of planes. But in tough economic times, governments cut orders to save money. That pushes up the cost per plane, leading to more cancellations, pushing up the cost, leading to more cancellations. And so on.

The U.S. military is in the process of making tough decisions due to mandatory budget cuts from sequestration which went into effect March 1 and could lop off $46 billion of Pentagon spending this fiscal year.

Earlier this year, Pentagon budgeteers crunched the numbers on Lockheed Martin Corp's F-35 in an exercise that spoke volumes about the troubles facing the world's most expensive weapons system and the Navy's uncertain commitment to it.

Postponing orders for about 40 of the 260 Navy models of the plane, which will take off from and land on aircraft carriers, would save money in the short-term, according to several defense officials familiar with the analysis, which has not been made public.

But it would also add from $1 billion to $4 billion to the eventual price of the F-35 program, already at a record-setting $396 billion.

Seven years behind schedule and 70 percent over early cost estimates, the stealthy F-35 "Lightning II" appears to have overcome myriad early technical problems only to face a daunting new question: is it affordable in an era of shrinking defense budgets?

According to a congressional watchdog agency, the average price per plane has already almost doubled from $69 million to as much as $137 million since the F-35 program began in 2001. Any further price rise could scare off potential buyers -including vital foreign customers.

"It's a house of cards," said one senior defense official who is familiar with the F-35 program, but was not authorized to speak publicly. "We have finally started improving performance on the program and efficiency in testing, and bang, we get this budget challenge."

Steve O'Bryan, one of Lockheed's top F-35 executives, says the company has already cut F-35 production costs by 50 percent, and is making progress on flight tests and software development.

"While there are still challenges and room for improvement, the program is heading in the right direction and we see no insurmountable obstacles to delivering the F-35 and its unprecedented 5th generation capability to our three U.S. service and international customers," he said.

BULLET PROOF?

Built by Lockheed and designed to be the next-generation fighter jet for decades to come for the U.S. Air Force, Navy and Marines, as well as key U.S. allies in Asia and Europe, the F-35 appears bullet-proofed against cancellation.

There are no other new fighter jets in the pipeline; the U.S. military's fleet of warplanes is aging; and 10 allies including Britain, Japan and Israel are deeply invested.

Manufacturing - and jobs - spread across 46 states ensure a vital layer of political protection as well.

With 10 million lines of software code onboard, and another 10 million lines in its logistics and ground systems, the F-35 is a flying computer with radars and other sensors that can see enemy threats 200 miles away in any direction.

In what was meant to be a money-saving move, U.S. officials designed the F-35 as one basic fighter (with three variants) to replace a dozen warplanes flown by the U.S. Air Force, Navy and Marine Corps, as well as U.S. allies worldwide.

The U.S. armed forces currently plan to buy 2,443 F-35s in total, comprising 1,763 A-models for the Air Force, 420 B- and C-models for the Marines, and 260 C-models for the Navy. Foreign orders are now slated to total 721.

The Marine Corps, under pressure to replace its aging fleet of Harrier AV-8B "jump jets", Boeing Co F/A-18 Hornets, and EA-6B Prowlers, is scheduled to be the first U.S. military service to use the jet, by late 2015.

Given the tight schedule and huge cost of keeping its aging current fleet flying, top Marine Corps officials are vigilant about the program and the budgetary risks it faces.

"Any delay in fielding the F-35 brings added risk to the Marine Corps' ability to execute our mission as the nation's crisis response force and it affects our ability to augment U.S. Navy carrier air wings," Lieutenant General Robert Schmidle, Deputy Commandant of Aviation, said in a statement to Reuters.

Schmidle and other planners at the Pentagon are desperate to avert the "death spiral" that gutted the Air Force's plan to buy 750 F-22 Raptor stealth fighters down to just 187 jets.

Behind closed doors, some U.S. officials fret that sequestration budget cuts could trigger a similar dynamic on the F-35, which has already seen 410 orders pushed back beyond 2017.

Depending on how the cuts are implemented, the purchase of up to nine F-35s could be deferred in fiscal 2013 alone, Navy and Air Force officials have said. That might not seem like much out of more than 3,100 destined for U.S. and foreign clients.

But initial calculations show that while cutting nine jets would save about $1.3 billion, it would also raise the cost of the remaining aircraft by nearly $800 million, said one defense official, who was not authorized to speak publicly.

The Pentagon budget analysis, which Reuters is reporting for the first time, found that postponing the 40 Navy C-model jets would raise the cost of the Navy version by about $4.5 million per plane, and add between $1.5 million to $2.6 million to the per-plane cost of the Air Force and Marine Corps versions, according to several defense officials familiar with the study.

"Cutting tails to pay bills is inefficient. Whether it's nine planes in one year, or 40 across the (future years defense plan), you're going to pay later," said one of the officials. This official and others cautioned that the studies were hypothetical for now.

Air Force Lieutenant General Christopher Bogdan, the often blunt F-35 program chief, invoked the dreaded "death spiral" this week as he pounded on the need to cut costs and keep foreign orders - which will account for half of all F-35s produced through 2017 - on track.

"The one thing that our partners care most about is how much this airplane is going to cost," he said. "If ... we want to sell the 600-plus airplanes to our partners and a couple hundred more projected to our (foreign military) customers, we better be darned sure we keep reducing the price on this airplane."

Even a two-year delay in Turkey's initial order of two jets had added $1 million to the cost of each of the remaining planes in the original order year, Bogdan told a defense conference.

No one knows exactly how much of a price tag will be too much to bear for countries like Australia and Canada, whose F-35 orders are already on shaky ground. "The tipping point will be different for each country," said one U.S. official.

In Australia, defense contractors involved in building the new jets are worried that $5.5 billion in expected orders will be in jeopardy if Canberra cuts its plans to buy 100 jets by 30 to 50 jets, as many experts expect.

Lockheed remains optimistic that international orders will hold up and even grow. South Korea is expected to choose the F-35 as the winner of a 60-jet competition to be decided this summer, and U.S. officials this week said Singapore may order more than a dozen F-35s in coming weeks.

Other allies, like Japan, see no going back on the fighter.

A senior official at Japan's Defense Ministry said it was keeping a close eye on cost and schedule risks, but there were no plans to change Tokyo's order for 42 planes: "If we don't buy until all the glitches are eliminated, it would be too late."

NAVY IS WARY

The Air Force is considering a slightly less capable version of the plane for its initial use, but the Navy is reconsidering the size of its order.

Chief of Naval Operations Admiral Jonathan Greenert this week ruled out scrapping the Navy's entire F-35C order, but said the Navy was thinking about how many jets it really needs.

Greenert last year ordered a study on equipping each aircraft carrier air wing with just one squadron of F-35s instead of two, according to defense analyst Loren Thompson. The Navy is also developing several unmanned planes, although military officials insist they will never completely replace manned fighters on carriers.

Bogdan said cutting the Navy's order too far would have serious consequences. "There is actually a 'do not go below' type of calculation, which says, if you get below the minimum production quantity on one of these variants, the price starts shooting up tremendously," he told the conference.

The Pentagon's Cost Analysis and Program Evaluation office recently forecast that the F-35's cost would rise by 9 percent if Washington only bought 1,500 jets and foreign partners stuck to their orders, according to a Government Accountability Office study, first reported by Reuters. The cost would surge 19 percent if Washington bought 1,500 jets and the partners none.

"If you cut any of these aircraft, the cost of each remaining one goes up," consultant Thompson said. "At some point soon, you're at risk of undermining the whole business case for the F-35 as an affordable new fighter."

The F-35's worsening fiscal challenges come just as advocates, and some independent analysts, say the often-troubled fighter development project is getting back on track after years of setbacks - which included two engine-related groundings this year - and expensive retrofits.

The F-35 "is now moving in the right direction after a long, expensive and arduous learning process," the GAO study concluded, although it said long-term affordability remained a big concern.

Top Pentagon officials are vowing to shelter the F-35 from the latest budget crisis, if they can.

"We'll try to protect the F-35," the Pentagon's chief weapons buyer, Frank Kendall, said this week. "There's no question about its priority.

(Additional reporting by Kiyoshi Takenaka in Tokyo and John O'Callaghan in Singapore; Editing By Warren Strobel, Claudia Parsons and Leslie Gevirtz)

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Israel's Prime Minister Benjamin Netanyahu points to a red line he has drawn on the graphic of a bomb as he addresses the 67th United Nations General Assembly at the U.N. Headquarters in New York, September 27, 2012.

JERUSALEM | Fri Mar 15, 2013 6:20pm EDT

JERUSALEM (Reuters) - U.S. President Barack Obama visits Israel next week at the onset of spring - the "red line" previously drawn by his host, Prime Minister Benjamin Netanyahu, to trigger an attack on Iran's nuclear sites.

But an Israeli-Iranian war, Washington's nightmare as it tries to scale back defense commitments abroad and avoid a draining Gulf oil crisis, does not appear trip-wire imminent.

Officials and analysts say Iran warded off Israel's threat by calibrating mid-level uranium enrichment so it does not accrue enough fuel for a potential first bomb - the threshold Netanyahu warned about in a United Nations speech in September.

He was presenting a worst-case extrapolation from U.N. nuclear inspector reports. The most recent of those, however, found a slowdown in the stockpiling of the 20 percent fissile uranium that Iran, in the face of mounting Western suspicions, says is part of an entirely peaceful program. [ID:nL6N0BLD2Y]

Netanyahu has not publicly revised the spring-to-summer 2013 dating for his "red line". But several Israeli officials privately acknowledged it had been deferred, maybe indefinitely.

"The red line was never a deadline," one told Reuters.

The chief U.S. military officer, General Martin Dempsey, has questioned Israel's ability to deliver lasting damage to Iran's distant, defended facilities. Netanyahu, meanwhile, makes little secret of preferring that Washington take the lead in any war.

Yet while mobilizing Gulf forces and saying it was open to military force as a last resort, the Obama administration has resisted Israeli calls to present Tehran with a clear ultimatum.

CLOCKS AND KILOS

Interviewed by Israel's top-rated television news program on Thursday, Obama voiced cautious hope that negotiations, re-launched last month between the United States, five other world powers and Iran, could still curb its disputed nuclear drive.

"There's a window - not an infinite period of time - but a window of time where we can resolve this diplomatically, and that it is in all of our interests," he told Channel Two TV.

The U.S. "red line" was Iran reaching the verge of acquiring a nuclear bomb, Obama said, adding: "That would take over a year or so ... But obviously we don't want to cut it too close."

Confidence in Obama is not unanimous among Netanyahu's circle. While one Israeli official, speaking to Reuters on condition of anonymity, said "American presidents don't bluff" and that therefore Obama should be trusted, others worried Iran might elude scrutiny and dash to nuclear arms capability.

"The key question is not when Iran will have a bomb, but only when we can no longer prevent Iran from having a bomb," Michael Oren, Israel's ambassador to Washington, told reporters.

He accused Iran of planning to run an accelerated, "shorter track" toward nuclear weaponry "that is invisible because it is underground".

A February 21 U.N. report said Iran had 167 kg (367 lb) of mid-level enriched uranium, in gas form, after converting some of the stockpile to solid reactor fuel. Experts say it would need 240-250 kg (530-550 lb) of the gaseous material for a bomb, though the fuel would have to be further enriched to 90 percent purity.

Yet Iran has also been expanding centrifuges so it could rapidly ramp up mid-level enrichment if it chose, diplomats say.

Netanyahu alluded to those developments on March 4 when he reiterated his "red line" in a speech to a pro-Israel lobby in Washington, saying Iran was "putting itself in a position to cross that line very quickly once it decides to do so".

An Israeli official posited Iran could gather 230 kg to 240 kg of mid-level uranium - just short of a bomb's worth - and then, between inspectors' weekly visits to the enrichment plants, churn out the few kilograms required to close the gap.

Next, it could move all the material to a secret location for prospective later processing into weapons fuel, making the Islamic Republic a "latent nuclear power", the official argued.

"For now, we know what sites would have to be targeted in a military strike," the official said. "Can any of us, even the Americans, be sure of having such full knowledge in the future?"

The United States sounds more secure about nuclear inspections and intelligence monitoring of the Iranians, as well as in its ability to intervene militarily at short notice.

"We assess Iran could not divert safeguarded material and produce a weapon-worth of WGU (weapons-grade uranium) before this activity is discovered," U.S. National Intelligence Director James Clapper said on Tuesday.

STRATEGIC AMBIGUITY

Gary Samore, Obama's former nuclear non-proliferation adviser, disputed the idea that Iran would break out of the U.N. inspections regime with just one bomb's worth of fuel, or that it would be capable of making a quick switch to the highest level of uranium enrichment, given its technical lags.

"Nobody knows, including the Iranians, how much 20 percent (enriched uranium) they need to have a bomb's worth. They have never done it. They have never converted," Samore, who is now executive director at Harvard Kennedy School's Belfer Center for Science and International Affairs, said in a phone interview.

That made threshold questions "inherently ambiguous", said Samore, who referred to Netanyahu's "red line" alternatively as a "red zone".

Mark Fitzpatrick, a former U.S. State Department official who heads the non-proliferation and disarmament program at London's International Institute for Strategic Studies, had similar doubts about whether Iran would try to sneak past Netanyahu's "red line" and, if so, whether Israel would respond with strikes.

"Nobody's going to make a war-or-peace decision based on a few kilograms of 20 percent enriched uranium," he said. "Nobody knows what Israel's real 'red line' is. I don't think Israel knows either."

Fitzpatrick faulted Netanyahu for fixating on Iran's 20 percent enrichment, arguing that this risked distracting from ongoing progress in other risky aspects of its nuclear program like centrifuge improvements and tonnes of low-purity uranium.

"That may not have been a clever way of putting it, because Iran is able to make tactical adjustments and can push back the so-called 'red line' as long as it wants," he said.

But Fitzpatrick also saw a tactical gain for Netanyahu "in reminding the world that there was a concrete threat here, after the world has heard so much saber-rattling from Israel".

Israel, which is reputed to have the region's sole atomic arsenal, has spoken about being ready to attack Iran for close to a decade - rhetoric some Israeli officials say was designed, at least in part, to stiffen the determination of war-wary world powers to find a diplomatic alternative through sanctions.

Samore said the international coalition had been "deeply energized for years" in confronting Tehran. "I think we still have a reasonable prospect of stopping them, and that if the Iranians misstep, the U.S. will act," he said.

(Writing by Dan Williams; Additional reporting by Matt Spetalnick in Washington; Editing by Jeffrey Heller, Will Waterman and Roger Atwood)

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A technician looks at collision at the CMS experiment in the control room of the Large Hadron Collider (LHC) at the European Organisation for Nuclear Research (CERN) near Geneva April 5, 2012.

GENEVA | Wed Mar 13, 2013 5:33pm EDT

GENEVA (Reuters) - Physicists who found a new elementary particle last year said on Wednesday it looked like a basic Higgs boson rather than any "super-Higgs" that some cosmologists had hoped might open up more exotic secrets of the universe.

"It does look like the SM (Standard Model) Higgs boson," said physicist Brian Petersen of Atlas, one of two research teams working in parallel on the Higgs project at CERN in Switzerland.

His assertion, on a slide presentation to a conference at CERN and posted on the Internet, was echoed by the other group. "So far, it is looking like an SM Higgs boson," said slides from Colin Bernet of CMS.

The two groups work separately and without comparing findings to ensure their conclusions are reached independently.

It has been assumed since the triumphant announcement last June that a new particle spotted at CERNS's Large Hadron Collider (LHC) was the Higgs, named after British theoretical physicist Peter Higgs, that, theories say, gave mass to matter after the Big Bang 13.7 billion years ago.

But CERN has yet to confirm that. CMS may issue more information on Thursday at an expert gathering in the Italian Alps. A confirmed discovery of the Higgs boson, which could happen this year, would likely win a Nobel prize.

Meeting at CERN, near Geneva, the scientists said on Wednesday that the particle looked very much like it fit into the 30-year-old Standard Model of the makeup of the universe.

If confirmed on Thursday, it would mean LHC scientists will have to wait until late in this decade for any sign of "new worlds of physics".

Until the last few days there had been some faint signs that the discovery might prove to be something more than the particle that would fill the last gap in the Standard Model, a comprehensive explanation of the basic composition of the universe.

Rumors flew of a "super-Higgs" that might - as recently predicted by U.S. physicist Sean Carroll in a book on the particle - "be the link between our world and most of the matter in the universe."

Many scientists and cosmologists will be disappointed that the LHC's preliminary 3-year run from March 2010 to last month has not produced evidence of the two grails of "new physics" - dark matter and supersymmetry.

Dark matter is the mysterious substance that makes up some 25 percent of the stuff of the universe, against the tiny 4 percent - galaxies, stars and planets - which is visible. The remainder is a still unexplained "dark energy."

The theory of supersymmetry predicts that all elementary particles have heavier counterparts, also yet to be seen. It links in with more exotica like string theory, extra dimensions, and even parallel universes.

"I think everyone had hoped for something that would take us beyond the Standard Model, but that was probably not realistic at this stage," said one researcher, who asked not to be named.

The LHC closed down last month for two years of work that will double its power, and, it is hoped, the reach of its detectors.

(Editing by Robin Pomeroy)

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ALMATY | Sat Mar 16, 2013 12:48am EDT

ALMATY (Reuters) - A Russian Soyuz capsule made a "bull's eye" landing in the steppes of Kazakhstan on Saturday, delivering a Russian-American trio from the International Space Station, a day after its originally scheduled touchdown was delayed by foul weather.

NASA's Kevin Ford and Russian cosmonauts Oleg Novitskiy and Evgeny Tarelkin, who had manned the $100 billion orbital outpost since October as Expedition 34, landed in cloudy weather at 7:06 a.m. Moscow time (0306 GMT) northeast of the town of Arkalyk.

They had spent 144 days aboard the multinational ISS on their space journey of almost 61 million miles (98 million km).

"The landing was energetic and exciting," Russian TV showed Novitskiy as saying.

NASA television said the deorbit burn and other events during the descent had gone flawlessly. It said the capsule had landed upright, almost hitting its bull's eye target in thick fog.

"Oleg Novitskiy reported to search and recovery teams that the crew is feeling good," NASA television said. "Everything seems to be in order."

Due to hampered visibility, it took a few minutes before helicopters with Russian search and recovery teams could locate the Soyuz capsule after its landing.

The first images shown by Russia's Vesti-24 television featured rescue workers standing in a snow-covered steppe opening the hatch of the capsule.

The three smiling astronauts were seated on semi-reclined chairs and covered with blue thermal blankets. They were then carried to a nearby inflatable medical tent.

On Friday, fog and freezing rain at the landing site in Kazakhstan prevented helicopters from setting up for the crew's return to Earth.

In preparation for their departure, Canadian astronaut Chris Hadfield took the helm of the space station on Wednesday, becoming the first Canadian to take command of the outpost.

It is only the second time in the 12-year history of the station, a project of 15 nations that has been permanently staffed since November 2000, that command has been turned over to someone who is not American or Russian.

Hadfield will be part of a three-man skeleton crew until NASA astronaut Chris Cassidy and cosmonauts Pavel Vinogradov and Alexander Misurkin arrive later this month.

(Reporting by Dmitry Solovyov; Editing by Lisa Shumaker)

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Fri Mar 15, 2013 3:49pm EDT

n">(Reuters) - U.S. options exchanges on Monday will introduce new mini-options on five popular higher-priced securities, including Apple and Google, a development expected to boost interest among retail investors.

The minis, which are 1/10th the size of a standard option, will be available on Apple Inc, Amazon.com Inc, Google Inc, the SPDR Gold Trust exchange-traded fund and the SPDR S&P 500 ETF Trust. If interest in the products is strong, more offerings are expected.

The new breed of option offers the opportunity for a small investor who holds less than 100 shares of high-profile securities to implement the same options strategies that exist for the traditional contract with much less capital.

Google and Apple, with prices north of $800 and $400 per share, respectively, also carry high option premiums. Previously, a retail trader may have found these options too costly because they would be committed to buy 100 shares of the security.

"Anytime you can expand investment products to retail investors who are qualified and excited to trade them, it is a win to all parties involved," said TD Ameritrade's chief derivatives strategist, J.J. Kinahan.

The mini-option has similar terms and contract features as the traditional product, but with certain key differences. Each contract represents only 10 shares of the underlying stock, versus the regular-sized options that represent 100 shares of a security.

"The product was designed with the retail trader in mind who may not have the capital to purchase 100 shares of those underlying securities and therefore could not hedge with a standard options contract," said Kinahan. "They now can do so with the minis."

The entry cost for trading these options is lower. A mini contract trading at $11.50 would cost $115 versus the cost of that standard "big" 100-share contract of $1,150 with the same quote, said Brian Overby, senior options analyst at online brokerage TradeKing in Charlotte, North Carolina.

The options industry has already seen explosive growth with the addition of weekly single-stock options since their introduction in June 2010. More than 4 million options contracts were traded in 2011 and 2012, the industry's two biggest years.

The new mini-option opens the door for retail investors to utilize option strategies like the "covered call," which helps protect against losses. Investors have the flexibility to sell a call on as little as a 10 share position on these expensive stocks, Overby said.

Investors previously had to own at least 100 shares of a stock to sell a call option against their stock position for it to be considered covered, Overby said. That carries a big cost for a stock like Google.

"Many investors often hold a relatively small number of shares in these stocks, and minis provide them with the ability to both hedge and write options on their holdings," said Andy Nybo, head of derivatives at research firm TABB Group.

The options will carry the symbols AAPL7, AMZN7, GOOG7, GLD7 and SPY7.

(Reporting by Doris Frankel; Editing by Leslie Adler)

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  A company logo of Dell is seen on the cover of its laptop at a Dell outlet in Hong Kong October October 21, 2009.

NEW YORK | Fri Mar 15, 2013 9:34pm EDT

NEW YORK (Reuters) - Private equity firm Silver Lake Partners bid as low as $11.22 per share for Dell Inc in mid 2012, when it first discussed a buyout with founder and CEO Michael Dell, according to a person familiar with the situation.

Since then, on February 5 this year, Silver Lake and Michael Dell raised their bid to take the world's No. 3 personal computer maker private to $13.65 a share. At $24.4 billion, it would be the largest private equity-led buyout since the 2008 financial crisis.

When the bid was first announced, the price represented a 25 per cent premium over the stock price before news of the bid, but Dell's share price closed at $14.31 on Friday.

The computer maker has said repeatedly that the bid comes only after extensive review and negotiations, and has deemed it fair to shareholders and that view will likely be emphasized again in an upcoming proxy filing with the SEC.

But some analysts say Michael Dell and Silver Lake may eventually raise their bid to try to appease investors in Dell like Southeastern who complain it undervalues the company.

Michael Dell is trying to complete his company's transition from a low-margin PC maker into a provider of computing services. The makeover has become more urgent as the PC market shrinks. Analysts say it might best be carried out if the company were taken private, away from public shareholder pressure and scrutiny.

BID DISCUSSIONS GO BACK TO MID-2012

CNBC first reported the opening bid and, according to the business television network, private equity house KKR & Co LP had also discussed a bid for Dell at $12 to $13 a share but dropped that offer in December last year.

Several major shareholders voiced opposition to the bid including Southeastern Asset Management and T. Rowe Price.

A second person familiar with the matter told Reuters that Southeastern, Dell's largest independent shareholder, had itself broached the possibility of a leveraged buyout to Michael Dell in the summer of 2012, when it expressed interest in contributing its equity in Dell toward any deal.

But two other sources familiar with Southeastern's thinking told Reuters the firm had not touched on any sort of private equity-led buyout deal during talks with Michael Dell last summer.

These sources said Southeastern proposed a transaction similar to one it outlined on February 8 in a letter to the board, when it outlined a so-called "Dutch auction" or tender offer to all shareholders, the two sources added.

Southeastern's objection to the current bid, like that of many other investors, is that the buyout as it stands severely undervalues the corporation.

All sources asked not to be named because the matter is not public. Dell did not respond to requests for comment and Southeastern declined to comment.

A clearer picture of the negotiations leading up to the deal is expected to emerge in the last week of March in a company proxy filing.

(Reporting By Greg Roumeliotis, Soyoung Kim and Nadia Damouni in New York; editing by Clive McKeef)

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