US$ Currency Fluctuations Are A Time Bomb for F-35 Financing
(Source: nytkampfly.dk; posted Feb 24, 2017)
(Posted in Danish; unofficial translation by JoBo)
Large fluctuations in the dollar may well mean that the Danish fighter is far more expensive than the politicians have budgeted for and will absorb much of the extra money that especially the conservative parties have earmarked in the future Defence Budget.

As the parties behind the Defence Agreement on 9-June-2016 agreed to purchase 27 F-35 fighter aircraft, the financing proposal of the purchase of American fighter was based on an exchange rate of 6.25 Danish kroner.

The problem however is that the dollar has been down 12% in price against the Danish krone since January 2015. At present, the rate of about 7.0 Danish kroner to the dollar. This means that when Denmark later this year probably joins into a block buy of F-35 aircraft, at a price claimed to be of around 85 million dollars per unit, then the planes will not cost 531 million. Danish kroner, but around 596 million Danish kroner, if the current price holds -- a price increase of 12 percent. (In fact, while the “public” price will probably be over $100 million per aircraft, once incidentals, spares and enabling equipment are added it will no doubt work out to over $120 million per aircraft—Ed.)

As one source told nytkampfly.dk: “"This is a much bigger problem for Denmark than Trump's tweets on F-35". When all exceedances of the budget to purchasing combat aircraft have to be financed within the current defense budget, then the price increase due to exchange rate change will absorb much of the extra money for defense, which particularly the conservatives parties have requested for a new future defense plan.

The upcoming F-35 block buy will include aircraft for delivery in 2020, 2021 and 2022. As Denmark must have four aircraft in 2021 and six aircraft in 2022, the block buy purchases include 10 Danish aircraft. The first document which will be presented to the Parliamentary Finance Committee's board in December 2017 or January 2018 will only include these 10 aircraft.

The (budget) document will have to be based on the unit price Lockheed Martin and the Joint Program Office on behalf of the participants in the F-35 block buy may have negotiated and the current dollar exchange rate at the time the proposal is presented to the Finance Committee. The remaining 17 aircraft will be purchased in at least one later block buy, where the dollar can be increased or decreased again easily.

Essential is a passage in the agreement (of 2016): "Parties to the Agreement have agreed that prior to contracting for the last six aircraft, dependent on price a decision can be taken to purchase fewer aircraft, also when the first aircraft is delivered on time and at the expected price level". This means that there might be two future batches after the first batch of 10 aircraft: a second batch of 11 for delivery in 2023-2024 and a last batch of 6 aircraft for delivery in 2025-2026. So, there are two future batches with two times a risk (or chance) of changing price levels.

Ultimately this year we will become wiser about what the exact unit price is over the 10 Danish F-35 aircraft, we will learn more about what the dollar is expected to be at the crucial moment and we will learn more about the other expenses associated with the acquisition, whether these will be higher or lower than we had budgeted.

As a F-35 partnership country Lockheed Martin only makes public the "fly-away cost". This net price only includes aircraft airframe and engine. However, add to this weapon simulators, support equipment, spare parts, etc. to be acquired also. This all together will be the total contract price. Since many of the weapons and simulators and support equipment also must be purchased in the United States, then the high dollar will influence the total contract price negatively. In addition, the payment is likely to fall in several installments, when the additional 17 aircraft will be purchased.

Therefore, it cannot be ruled out that the politicians more than once have to find extra money within the defence budget to finalise the total F-35 combat aircraft purchase, simply because of price increases. Thus, there is a risk that a large part of the increase of the defense budget will be eaten up by currency fluctuations, and that during the conciliation period 2018-2022 other major investments will be blocked until the exact price is known for the purchases of combat aircraft in batch two and three - the aircraft to be delivered in 2023-2024 and 2025-2026. Most likely this will become clear in the future defense papers in about 2020-2022, and not before.


(EDITOR’S NOTE: See our Jan. 23, 2017 story “While Trump Fumes, F-35 Subcontractors Reap Bumper Profits and Buyer Countries Quake” for our analysis of how exchange rate fluctuations are affecting the F-35 program)

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