F-35 Program Manager: More Buyers Needed to Help Lower Production Costs

 The Pentagon released new cost estimates for 78 major weapon systems that has a mix of good and bad news for the F-35 Joint Strike Fighter. While the long-term costs of the program are slightly down, production expenses have increased by $7.4 billion over the past year.

The 2013 congressionally mandated "selected acquisition report,” which the Pentagon submitted April 17, measures the performance of weapon systems from year to year, and projects future costs.

The officer who oversees the F-35, Air Force Lt. Gen. Christopher C. Bogdan, downplayed the significance of the report as a bellwether for the program. Aircraft procurement cost is up, Bogdan said, not because program expenses are out of control but because Pentagon budgets are down and the military services are buying fewer airplanes.

“It's a fact of life that when you move airplanes to the right, they are going to cost more,” Bogdan told reporters April 17. Another contributor to the price hike are higher labor rates charged by aircraft manufacturer Lockheed Martin Corp., engine maker Pratt & Whitney, and subcontractors BAE Systems and Northrop Grumman.

Bogdan predicted that an expected surge in orders from foreign buyers will help bring production costs back down. He said he also is putting continuing pressure on the contractors to squeeze cost out of the program.

The only bright spot in the SAR report is thatF-35 operations and support costs — the cost of operating the entire fleet of 2,443 U.S. aircraft through 2065 — dropped $96.8 billion, or nearly 9 percent, from $1.1 trillion to $1 trillion. But acquisition costs from 2012 to 2013 increased $7.4 billion, or about 2 percent, from $391.2 billion to $398.6 billion. Aircraft production costs increased $3.1 billion (1 percent) from $326.9 billion to $330 billion. The F-35 engine costs climbed $4.3 billion (6.7 percent) from $64.3 billion to $68.6 billion.

The F-35 program includes 1,763 F-35A models for the Air Force, 340 F-35Bs for the Marine Corps and 340 F-35Cs for the Navy. Several hundred are being bought by foreign allies.

Bogdan said the SAR estimates do not tell the complete story of F-35 cost trends. “This is a very complicated program. It is where it is,” he said. He said the SAR does not show the true price of the airplane. “It is a projection out to 2065.” The per-unit price of the airplane last year was $112 million whereas the SAR said it was $123 million, Bogdan said. Higher procurement costs in the 2013 SAR is only a blip, he added. “I can explain it and understand it,” he said. The F-35 is “not a program out of control in terms of not knowing how and where costs are moving.” What the SAR says is that “this year, the rate at which I have to pay [contractors] in the future has gone up. Anytime anyone moves airplanes to the right, the price goes up.”

The surest way to lower cost, he said, is to bring in more foreign buyers into the program. The SAR estimates, he noted, do not include a possible order of 40 F-35s by South Korea, or anticipated future purchases by Singapore and Israel.

“We are pretty sure that Israel is not going to stop at 19,” Bogdan said. Another potential customer is Japan, which has a fleet of about 200 F-15s, half of which have been modernized. “At some point they will have to make a choice,” he said. “I can't influence that decision, other than keep driving the price of the airplane down. Then these FMS [foreign military sales] customers will make choices.”
Today, about 30 percent of F-35 components are made outside the United States, which exposes U.S. aircraft buys to fluctuations in foreign currency rates.

Bogdan insisted that the impact of budget cuts by the United States and other F-35 buying nations on aircraft cost projections should not be underestimated. In the Pentagon’s fiscal year 2015 budget proposal, the Navy delayed purchases of 33 aircraft and the Air Force postponed four. Turkey and Canada slipped their buys by one year, and the Netherlands slashed its order from 80 to 37. The cumulative effect of these changes, said Bogdan, is a cost increase of 2 to 4 percent to the price of each airplane. If sequester-level budgets are enforced by the Congress between 2016 and 2019, 17 fewer U.S. aircraft would be produced.

According to the SAR report, the average unit cost of F-35 aircraft is $131 million in 2012 dollars, and $162 million in “then-year” dollars, which projects what the aircraft will cost by the time the program is completed.

“This is always a tricky business,” Bogdan said of SAR estimates. Regardless, he said, “We have got to get the price of this airplane down, we have got to get the cost of sustaining the airplane down,” said Bogdan. “If it is not affordable, people will not buy it.”

He said he was encouraged that O&S costs are “trending in the right direction,” but disappointed that procurement costs are up. “It's not a surprise, and it's not a degradation of actual performance.”

The program still faces major hurdles, he said. “We are only 55 percent into flight testing.” During the next two to three years, the Air Force and Marine Corps variants are expected to be in full operation. The program overall has logged 15,000 flight hours so far.

High-rate production is scheduled to start in 2018, when 154 airplanes (90 for the United States) would be built. By 2019, production would rise to 168, of which 96 would be for the United States.

Bogdan set a goal of lowering the per-airplane price of F-35 to between $80 million to $85 million by 2019. That price would include the engine and contractor fees. Key to hitting that target is to ramp up production, he insisted. “For every dollar that we save in the production cost of this airplane, 80 percent can be attributed to economies of scale.” The other 20 percent comes from building airplanes and engines more efficiently. A case in point is the canopy that currently is manufactured with manual labor. “That produces scrap and rework and costs more than if you automated the manufacturing,” said Bogdan. The Defense Department and Lockheed are jointly funding a new system to automate the canopy assembly. “We have many projects on the books that are being implemented or about to be implemented,” he said.

Bogdan is asking Lockheed and Pratt to negotiate lower prices with their subcontractors. Both firms in the past have been reluctant to commit to long-term deals with suppliers, fearing that the F-35 was on fiscally shaky ground, he said. That “business risk” is not there anymore, said Bogdan, and he expects primes to “go to their supply base and make multiyear buys.” The Defense Department cannot by law sign a multiyear contract with Lockheed or Pratt, “but there's nothing to stop primes from going to their supply chain.”

The Pentagon has proved that it is committed to the program, he said. “We went through two years of sequestration and this program basically came out unscathed.”

Bogdan had harsh words for Pratt & Whitney and blamed the company for rising engine prices. The F-35 program office and the engine maker are still in negotiations for the next low-rate production lot. According to Bodgan, the company has not met cost targets that it had promised. “What they told me is, ‘when you buy more engines, the price comes down.’” That may be partly true, said Bogdan, although he suspects that the reason why engine prices are up is that Pratt has reduced engine production but not overhead costs. “I don't like that,” he said. “We'll be working with Pratt to continue the war on cost.”

Bogdan said he is frustrated by not having enough leverage with Pratt because the company is the sole manufacturer of the F-35 engine. A second engine manufacturer, General Electric, was eliminated from the program three years ago to cut costs. “There is only one engine, the F-135,” said Bodgan. “Whatever acquisition program you're in, when you are in a sole-source environment, it is difficult to find the right levers and motivation to drive cost out of a program,” he said. “One of the most effective ways to do that is through competition,” he said. “In my experience, contractors are slow to shed costs when their business base changes. … [Pratt] ought to rationalize their business base with their overhead.”

Topics: Aviation, Joint Strike Fighter, International, Procurement