PARIS --- The Pentagon’s “Blueprint for Affordability” initiative, intended to reduce F-35 acquisition costs and unveiled just before the Farnborough air show, has drawn renewed attention to the program’s economic aspects.
While most observers discussed the aircraft’s latest grounding, and whether or not it would show up at various UK air shows, less attention has been given to its continuing financial troubles, which this new initiative aims to fix at contractors’ expense.
The new blueprint calls for the three main airframe contractors – Lockheed Martin, Northrop Grumman and BAE Systems – to invest up to $170 million of their own money in unspecified “affordability measures, directly resulting in a lower-priced aircraft.” The JPO’s July 10 statement adds that “only after a reduction of cost, will industry recoup the investment plus profit with the accrued savings from the cost reduction initiatives.”
This clearly implies that serious financial issues have recently come to light, because the contractors would not otherwise have agreed to “invest” $170 million.
The initiative comes in parallel with an unofficial proposal broached to reporters by Lt Gen Christopher Bogdan, the JPO director, who said prospective export customers could secure better prices by pooling their F-35 purchases and using multi-year contracts.
The overall goal is that, by 2019, “…the F-35 ….will be nearly equal in cost to any other fighter on the market,” the JPO statement adds. In other words, the objective is an F-35 at F-16 prices.
Having contractors invest their own money to reduce customer prices, and offering bulk discounts to foreign buyers, are innovative, if not revolutionary, initiatives in an industry already reeling from the scrapping of its traditional “cost-plus” contracts, and are an indication that, even to its makers, the F-35’s economics look increasingly unsustainable.
Prices are climbing, not dropping
First of all, it is now clear that F-35 prices have not been decreasing year-on-year, as claimed by both the JPO and Lockheed Martin; they have, in fact, risen substantially.
As confirmed by US Air Force budget documents (see page 37) the F-35A variant – the one also being bought by most foreign buyers – had a unit cost of $145 million in FY2013, which increased to $167.5 million in FY2014.
Even today, the FY 2015 unit cost is $149.5 million – still higher than it was in FY2013.
The same table shows F-35A unit costs dropping to $104.8 million by FY2019, but this assumes that 212 aircraft will be ordered between FY2016 and FY 2019 -- almost double the current annual rate.
The idea of F-35 prices dropping to F-16 levels is not new, and in fact was first broached in December 2012 by a Lockheed consultant who wrote in a blog post that “When you add up all the expenses, though, the cost of manufacturing each F-35A (the Air Force variant) five years from now looks likely to be identical to what manufacturing the latest version of a single-engine F-16 costs today.”
Clearly, F-35 prices haven’t conformed to his expectations, and it is unlikely they will even if the JPO has now moved the goalpost further back, from 2017 to 2019.
Production costs rising
In 2013, Gen Bogdan was quite optimistic that production prices were dropping steadily, “a trend he said he believes will continue until per-unit costs approach the original 2001 estimate of $69 million,” according to a Pentagon news story which also stated that:
“F-35 production is “the shining star” of the program, the general said. About 30 aircraft are being built each year, he said, and the cost per unit has come down with each successive low-rate initial production, or LRIP, lot. Between LRIP 4 and LRIP 5, there was a 4-percent decrease in build costs, Bogdan said.
Bogdan’s optimism has not been confirmed in real life, and he has clearly realized that the only way for costs to drop – aside from this new “Blueprint for Affordability” – is to increase production numbers.
This is where the idea of bulk buys by foreign partners, who have been leery of placing firm orders, given not only the price but also the lackluster performance of the aircraft, and its increasingly well-documented problems.
If fact, the British Ministry of Defence was widely expected to announce it was buying an initial batch of 24 F-35B STOVL variants on July 4, during ceremonies in Scotland marking the christening of the Royal Navy’s new carrier, HMS Queen Elisabeth. Understandably, given that the entire F-35 fleet had been officially grounded the previous day, and that the aircraft could not make its planned appearance at the event, this announcement was postponed. And, given that a new defense secretary was appointed during the mid-July British government reshuffle, it is unlikely that any official statement will be forthcoming before the new man has had time to take stock.
The great danger to the program is now that other prospective buyers will, like most others, defer their orders, even as they continue to make strong statements of support. A case in point is Australia, whose prime minister recently announced with great pomp that he had ordered an additional 58 aircraft, to follow a previous order for 14, while in fact Australia, to date, has contracted for only two.
To encourage fence-sitters to bring forward their orders, Bogdan is thus offering bulk discounts. “My incentive to them is if you commit to buying X number of airplanes over five years, I'm going to give you a discount,” he told NPR radio on July 15, and repeated the offer during media briefings during the Farnborough air show.
Bogdan specifically mentioned Norway, Australia and the Netherlands as partners who have gone through "tough decisions" to meet these criteria, according to Aviation Week. "They know how many airplanes they are going to buy now [and] they don’t have to go back and ask their parliaments" for additional resources to get them, Bogdan said.
The obvious question of how big a discount remains unanswered. Given the F-35’s current price levels it would have to be a pretty big one to lure foreign governments to make a big purchase in the hope that Lockheed will finally do what it has been unable to do for the past decade: deliver a working aircraft, on cost.