Budget Crunch Could Jeopardize New Carrier Procurement
With uncertain economic waters ahead, there may be a growing reticence within the Defense Department to commit to buying future aircraft carriers, its single largest procurement item.
With its newest carrier nearing structural completion and materials piling up for the second in the new Gerald R. Ford class of ships, analysts following the Navy’s budgeting requests have observed a hesitance to begin paying for CVN-80, scheduled for procurement in fiscal year 2018.
Going into the fiscal year 2013 budget that is currently being mulled in Congress, there were discussions within the Pentagon and on Capitol Hill that CVN-79, the USS John F. Kennedy, might be delayed to save money. But the shipbuilding industry breathed a sigh of relief when the Obama administration’s defense budget called for full funding to begin next fiscal year.
Now all eyes in the shipbuilding world are on CVN-80, which has not yet been named. As the only shipyard in the country that builds nuclear-powered carriers, Newport News Shipbuilding is dependent on future business from the Navy.
“The laws of economics are unforgiving,” shipyard President Mathew Mulherin testified to the House Armed Services Committee subcommittee on seapower in March. “Construction of aircraft carriers on four-year construction start centers will align the supplier base to plan production … and [purchase] equipment and materials every four years. Changing to five or six-year centers interrupts the entire supply chain … and may result in significant inefficiencies.”
Each 1,000-foot-long behemoth takes at least five years to build. With a service life of 50 years, a meticulous schedule of materials purchasing, procurement and construction is necessary to maintain a functional fleet of 11 carriers, which is called for by law and in the Navy’s 30-year shipbuilding plan.
Mulherin has said that in the current budget environment a full slate of Ford-class carriers, each procured on time and fully funded, could be a pipedream.
“I’m not confident of that,” Mulherin said when asked last year if he expects the shipyard will build a full class of Ford carriers. “I’m not convinced we’ll build them all. That’s what keeps us up at night.”
There currently is no plan to adjust carrier procurement schedules, though both construction time and multi-year funding periods for the Kennedy and CVN-80 have been lengthened. At the same time, advanced procurement periods for the two ships have been scaled back.
Traditionally, the Navy has used advanced procurement funding as an under-the-radar method of committing to buying a carrier. Once time for full funding rolls around, the Navy can point to several years of advanced funding — perhaps in the billions of dollars — as evidence that the ship should be bought.
For that reason, carrier acquisition has not been a major source of controversy since around 1988 when the Navy bought two Nimitz-class carriers, analysts said.
It has been suggested that the Navy could shave costs from the second and third Ford-class ships if it bought materials for both at the same time. It is a plan the Navy has used for carriers in the past and is currently using for destroyers, submarines and the Littoral Combat Ship. A dual- or block-buy procurement plan also gives industry peace of mind as they plan for the future.
Mulherin told HASC members that “absolutely I think there’s huge opportunity to go and do that,” when asked his opinion of a block buy strategy for CVN-79 and CVN-80. “You talk to the vendor base … they would love to see it. It gives them the ability to go look at what investments they need, what work is out in front of them and be able to invest in training and tools to be able to support [a block buy].”
But Navy officials refused to consider a block buy with CVN-79 and CVN-80, saying that lessons from construction of CVN-78, the USS Gerald R. Ford, need to be internalized before any such plan could be put in place.
“It would be premature to investigate block buys before the Navy has fully absorbed those lessons and completed testing and delivery of the ship,” said Capt. Cate Mueller, a Navy spokeswoman. “The Navy will seize opportunities that present themselves during construction of CVN-79 and planning for CVN-80 for budget savings and construction efficiency.”
The Ford received seven years of advanced funding between 2001 and 2007 before being fully funded for four years between fiscal 2008 and the current fiscal year. The funding schedule is not unusual, given that the Ford is first in its class.
The Ford had the lower section of its bulbous bow lifted into place earlier this year. It is now 85-percent structurally complete, said Christie Miller, a shipyard spokeswoman. Overall, the ship is nearing the halfway point to a 2015 delivery.
Of 500 prefabricated components that will eventually make up the ship, 420 have been put in place, she said.
But as a first-in-class vessel, it has experienced rampant cost overruns to the tune of nearly $1 billion. The Navy’s fiscal 2013 budget estimates the ship will cost $12.3 billion — $3.3 billion for non-recurring engineering expenses for the class as a whole, and $9 billion for construction.
The service plans to come back to Congress in fiscal 2014 and 2015 to request $811 million to cover cost overruns associated with the Ford.
The Navy is also deeply committed to procurement of the Kennedy, with nearly half the material for that ship purchased.
As the second ship in the Ford class, shipyard and Navy officials have promised significant savings over CVN-78. Scheduled for full funding next fiscal year under a six-year incremental payment plan, the Kennedy is estimated to cost $11.4 billion. Five years of advanced procurement funding have already been sunk in the ship, accounting for about 43 percent of necessary materials. But HASC was not privy to that figure prior to its defense budget markup, according to a Congressional Research Service report published in June.
At a March briefing for CRS and the Congressional Budget Office on carrier acquisition, CRS naval specialist Ronald O’Rourke asked Navy bean counters to look into a block-buy strategy for CVN-79 and CVN-80 as a potential cost saver.
The Navy’s response, dated April 22 but sent to CRS May 10, was that little or no savings could be achieved from those two ships. The response came mere hours after the House Armed Services Committee completed its markup of the fiscal year 2013 National Defense Authorization Act.
“Given hard budget constraints in FY13 and FY14, CVN-79 and CVN-80 cannot benefit from a multiyear construct,” the Navy’s response reads. “By the end of fiscal year 14, 75 percent of CVN-79 material will be under contract with suppliers, leaving limited opportunities to implement material savings with multiyear incremental funding. Seventy-five percent of CVN-80 material would also be incapable of achieving savings, as the material purchases would be placed after CVN-79.”
CRS asked the Navy May 10 what percentage of material for CVN-79 would be under contract by the end of fiscal year 2012. The Navy responded May 22, but waited three days to share the findings with CRS, the same day that the House Appropriations Committee reported the fiscal year 2013 Defense Department Appropriations Act.
The Navy’s initial reasoning discounted savings that could have been achieved if a dual-buy strategy began with the current fiscal year. With only 47 percent of the materials for CVN-79 purchased, more than half the materials for CVN-80 could have been bought concurrently with the Kennedy.
The first chance at realizing savings from a materials dual-buy strategy would be during advance procurement of CVN-80 and CVN-81, Navy officials said. Funding for CVN-80 is scheduled to begin in fiscal year 2016. Mueller would not comment on when a block-buy scenario would take effect with CVN-81, but said funding for that ship is scheduled to being in fiscal 2021.
The Navy is still “committed to ordering CVN-80 in FY18,” Mueller said, which is good news for the shipyard and its vendors.
Knowledge that the Navy was committed to building CVN-80 would allow the shipyard and its vendors to plan ahead, making investments for future production and optimizing their specialized workforces, Mulherin said.
“Stability is a big issue,” he said, adding that industry and the Navy realized savings the last time two ships were bought concurrently. Block-buy contracts “provide the shipbuilder and industrial base with a stable, relatively long-term business base over which investments in process and infrastructure improvements can be justified.”
With CVN-72 and 73, “there were huge savings that flowed to the second ship, both in the ability to go buy materials … also that you did the engineering upfront the first time for both hulls,” Mulherin said.
The wider the gap between carrier acquisitions, shipyard engineers lose more efficiencies between the two. Lengthening the interval between ships almost always ensures that the downstream ship will be more expensive.
Mulherin used that argument when asked if a block-buy strategy would benefit the Navy and the shipbuilding industry.
“If we were able to do a two-ship buy for 79 and 80, it would ensure that CVN-80 was a copy of CVN-79 … no change into the contract or very minimal. On the materials side you get economic-order savings, you don’t have to deal with obsolescence.”
While carrier procurement remains at five-year intervals, the construction and funding schedules for each ship have been lengthened for the Kennedy and its follow-on ships. Both it and CVN-80 will be built over a seven-year period rather than five. There is little indication that payment schedules will be lengthened to match construction, something that Mulherin said could cause the shipyard to take drastic measures.
One immediate course of action would be to downsize, or “reconstitute the workforce,” Mulherin said.
At stake is a huge swath of the defense industrial base — Newport News Shipbuilding, a division of Huntington Ingalls Industries, employs more than 20,000 people. It also supports more than 4,000 vendors in all 50 states that make everything from light bulbs and metal pipes to structural steel and nuclear reactor components.
“Just as we do, our suppliers rely on the Navy and Coast Guard projections in order to invest in people and infrastructure,” Mulherin said.
The shipyard will still have work if new carrier construction is delayed. It is also the only shipyard in the country that can refuel and decommission the nuclear-powered ships. The USS Theodore Roosevelt has been undergoing its two-year midlife refueling overhaul and upgrade and is scheduled to re-launch in early 2013. Before it leaves the Newport News pier, the USS Abraham Lincoln — having reached 25 years of service — will come into port to begin its refueling. For a time, the shipyard will have three carriers at its facility at once.
Newport News will also be the final stop for the USS Enterprise, which is scheduled to be decommissioned next year.
Photo Credit: Navy