PARIS --- Norway may be forced to reduce its F-35 order by as many as ten aircraft to remain within its allocated budget, public service broadcaster NRK reported Sept 23, showing how the US dollar’s strong appreciation can damage the acquisition plans of countries tied into the F-35 program.
Foreign buyers have no escape, as all F-35 contracts are labeled in US dollars and, as usual, they include no compensation or escape clauses for currency variations. F-35 buyers are especially vulnerable because the program’s long timeline – over 20 years from signing on to final deliveries -- makes them far more vulnerable to currency fluctuations.
The actual amount of the cost escalation varies from country to country, and will only be known when each aircraft is delivered – and paid for. It also is conceivable that the variation could be reversed, and a huge drop in the dollar’s value would make the F-35 more affordable, but given the weakness of the economies of most F-35 buyer countries this looks improbable.
Until recently, the dollar’s influence on F-35 prices had been overlooked despite its strong appreciation over the past year, but the consequences are now becoming clear to buyer countries: either boost budgets by the same amount as the dollar’s appreciation, or reduce the number of aircraft.
This dilemma was illustrated by recent warning to the Dutch Parliament by the minister of defense that the cost of the planned F-35 acquisition had increased by €550 million in less than two years because of the rising US dollar (see below).
Even worse, from the program’s point of view, is that the rising dollar will wipe out whatever savings Lockheed Martin and the Pentagon may achieve by bulking up annual orders and other cost-cutting measures.
While the F-35’s Joint Program Office says it reduced unit costs by 3-4% in the last annual order, the value of the US dollar – and thus the cost of each F-35 to Eurozone buyers - has increased by 22% in one year -- rising from €0.73 in mid-2014 to €0.89 now.
In Norway, it will not be possible to buy the 52 aircraft currently planned if future defense budgets continue at current levels, with just the usual cost escalation. This is the official military advice that the Norwegian Chief of Defence, Adm. Haakon Bruun-Hanssen, will publish on Oct. 1, according to public broadcaster NRK.
Bruun-Hanssen believes that politicians must allocate an additional 180 billion kroner ($21.7 billion) over twenty years to get the defense capabilities they want – including all 52 planned F-35 fighters.
Incidentally, the looming necessity to further cut F-35 numbers contradicts statements made by both Norwegian Defense Minister Ine Eriksen Søreide and Bruun-Hansen during the Sept 23 official roll-out of the first production F-35A for Norway.
Norway has already reduced its planned acquisition of the F-35, from the 85 it originally wanted to today’s 52, because of their high cost.
According to the Defense Ministry, the entire F-35 procurement is expected to cost 67.9 billion in real 2015 terms for the 52 planes. Cutting the purchase by ten aircraft will thus entail savings of many billions.
How much the defense chief expects to save is not specified in detail in the main document "Chief of Defence professional military advice." Nor is it clear whether, and by how much, the price for each aircraft will go up if their number is reduced.
“The military will not comment on details of the ongoing work with the Chief of Defence’s professional military advice, but will come back to it as a whole when it is finalized on 1 October 2015,” Major Vegard Finberg, a spokesperson for the Chief of Defence, told NRK.
Problem Holds for All Export Customers
The fast appreciation of the US dollar over the past two years compared to many foreign currencies is having a similar impact on all foreign buyers of the F-35, as it increases the cost in their national currencies to buy a given amount of dollars.
Dutch Defense Minister Jeanine Hennis-Plasschaert informed Parliament Sept 15 that according to new estimates, the cost of buying 37 F-35 fighters has increased to over 5.2 billion euros -- 550 million euros more than the previous estimate. Higher sales tax adds another 75 million euros. The cause of the price increase is the “substantially higher” dollar exchange rate.
In Italy, no official statement has been made on the issue, but the 90 F-35s now planned (down from the original 131) are likely to cost more than 30% more than planned because of dollar’s 30% appreciation since the order was awarded in 2011 -- increasing from 0.65 euros to the current 0.90 euros.
Similar increases tied to the strong dollar are also due in other countries, such as Australia -- where the US dollar’s value has increased from A$1.08 to A$1.41 -- and Turkey, where the dollar’s value has increased from 5.9 to 8.15 Turkish lira.
Asian customers face much lower currency-related cost increases as the dollar’s appreciation relative to the South Korean won (1,060 won to 1,170 won) and Japanese yen (from 101 to 120 for one US dollar) has been lower than elsewhere.
For the time being, only the United Kingdom has escaped a currency-driven price escalation, as the US dollar’s value relative to the pound sterling is back at its July 2012 levels (steady at around £0.65), after especially strong variations in the interim.
A Very Thin Silver Lining
While the appreciating dollar is boosting F-35 unit prices, it also will boost profits of the companies involved in the program’s supply chain. Again, contracts awarded by prime contractor Lockheed Martin to overseas suppliers are labeled is US dollars, so any increase in the dollar’s value goes right to the contractor’s bottom line.
In the same way, of course, a drop in the dollar’s value would instead generate operating losses for foreign subcontractors that had not bought currency hedges.
-- Sept 25 at 16:30 CET: Made editing changes and corrected typos.