PARLIAMENT HILL --- A worst-case scenario of cost risks in a Department of National Defence report on a possible acquisition of 65 Lockheed Martin F-35 stealth fighter jets estimates the airplanes could cost Canada up to $71 billion through acquisition, sustainment and operations over 36 years.
The costs, $25-billion more than the current National Defence estimate, are contained in a section of the department’s latest report to Parliament on the F-35 that outlines “cost risk and uncertainty” and is intended to provide a range of effects on the cost of buying and operating a fleet of stealth attack planes if factors such as inflation, the exchange rate between the Canadian and U.S. dollar, the cost of fuel and the rate of aircraft to be produced by Lockheed Martin fluctuates either higher or lower than the estimates that are behind the current National Defence figures.
If Lockheed Martin expectations of more efficiency through continued production and economies of scale as it makes and sells an expected 3,100 jets are even just three per cent less than expected, the extra cost to Canada would be $6.1-billion over a current acquisition calendar which has the 65 aircraft being delivered over a seven-year period beginning in 2017.
Other risks the National Defence report outlines include a likelihood that Lockheed Martin will sell 250 aircraft less than the number previously expected during the period Canada would potentially buy, leading to lower economies of scale in production and an extra cost to Canada of $500 million.
The risk analysis shows if the Canadian dollar were valued at 78 cents per U.S. dollar, instead of the current forecast of 92 cents, it would add $1.6-billion more to the acquisition cost. If the inflation rate were one per cent more over the lifetime of the fleet than the inflation rate on which the current National Defence forecast is based, the extra cost for sustaining Canada’s fleet would be $3.1-billion over the aircraft lifecycle. A change of one cent in the exchange rate could mean an extra $2.1-billion in lifetime sustainment cost. On the other side of the coin, a one-cent change in the exchange rate to the benefit of the Canadian dollar would lower the lifecycle sustainment cost by $2.1-billion.
The National Defence forecast of $19.8-billion in operating costs over the F-35 fleet’s lifecycle would increase by $5.4-billion with just a one per cent increase in the inflation rate from the rate the National Defence estimates are based on. It would correspondingly drop with a reduction of one per cent in the inflation rate from the current forecast rate.
The National Defence report forecast of fuel costs over the fleet’s lifetime is based on a price of 87.9 cents per litre, and a 10-per-cent increase in that cost could raise the forecast of life cycle fuel costs by $1.5-billion, with a reduction of the same amount in the unlikely event fuel costs would drop by 10 per cent. (end of excerpt)
Click here for the full report, on The Hill website.
Lockheed Martin and the F-35 Joint Program Office have recently begun to claim they have significantly lowered F-35 costs when, in fact, they have simply lowered their estimates.
It is thus particularly appropriate to see how the picture can change when estimates are instead increased; in this instance, life-cycle costs jump from C$45 billion to C$71 billion if just a few assumptions change by a percentage point or two.
As the cost reductions claimed by Lockheed and the JPO are based on estimates of how various costs (labor rates, fuel, materials, exchange rates, inflation, etc. etc.) will evolve over the next 50 years, it is eye-opening to see how easily minor fluctuations can cause a totally unexpected cost blow-out.)