Questions Raised About Cost Of The JSF And Its Effects On The Total Program

One of the fundamentals of defense acquisition is that the more you buy of a system the cheaper they are. That is why there are often attempts to broaden the market for a system or try to do joint programs. If the Air Force needs a hundred but can sell another hundred to the Navy or overseas customers then the cost of that first one hundred is much lower. It also helps with the Department of Defense’s cost management as the total development funding is spread across the number produced which means the more bought reduces the unit price even more.

Lockheed Martin’s F-35 Joint Strike Fighter (JSF) is the key modernization program for the United States’ aviation fleet. It will be purchased by the Air Force, Navy and Marine Corps as well as many allies and foreign customers to replace the F-16 and F-18 aircraft of the Eighties and Nineties. All of these purchasers are letting contracts based on estimated prices. The key drivers of these prices is the total number of aircraft being purchased and the yearly quantities. If a customer is planning on buying near the production peak they will be able to buy more aircraft for their available money then if they were buying the first units off of the line.

Due to some development delays the aircraft is behind its original schedule. There have also been some cost increases related to these delays and technical problems. This is not uncommon for any large development program. The Obama Administration is attempting to move the program forward in the 2010 budget by increasing quantities and buying back some of that slip.

If there is a reduction in total quantities for the aircraft or the annual buys this will have a ripple effect causing customers to have to pay more for their aircraft, wait longer to get them as they may buy less a year, or just not have enough money to carry out the program. This is what has happened to South Africa with their A400M transport buy. That program’s development delays have led to major price increases for the aircraft and the nation must either pay more or cancel the order.

In the Netherlands who are planning to buy the F-35 some members of the Parliament commissioned a report to look at the validity of the cost estimates based on the projected total buy for the program. There are some in that countries legislative branch who are concerned that the total price for the systems will be much higher then originally estimated. The report by Johan Boeder concludes that for a variety of reasons the total number of JSF purchased will be lower then estimated in 2002 when the Dutch joined by about two thousand or more total aircraft. This is due to the U.S. requirement dropping for unit cost, requirements and new systems reasons. If the number built drops the individual unit cost goes up further reducing the number built.

Prepared by JOBO

Mr. Boeder expects that U.S. budgetary pressure due to the economic downturn and other factors will make it harder to buy the planned quantities of aircraft as well. This will also cause the aircraft to be more expensive for foriegn customers further reducing the quantities purchased. Mr. Boeder describes this as a “downward spiral in the F-35 program.” This lower economy of scale achieved flows through the whole program and affects every customer. The report may be fund here.

There are worries being expressed by Lockheed Martin and JSF boosters that a special adviser to the Air Force Chief of Staff, Gen Schwartz, Mr. Tom Erhard might cause that service to re-look its planned buys as well. Mr. Erhard has recently written a paper for the Center for Strategic and Budgetary Assessments expressing concern that the Air Force’s budget will be JSF centered leaving little money for anything else. Obviously any cut to the quantity severely effects Lockheed and its sub-contractors. The report may be found here.

The key worry for the JSF is that further delays and increases in development costs will only cause higher prices down the road. Since funding is finite that means the total aircraft that may be purchased will be less then originally planned. As Mr. Boeder’s report indicates this could cause a spiral of cost increases and quantity reduction that may undermine the ability of a lot of planned purchasers to achieve their objectives of fleet and capability. Any decision by the U.S. Air Force or Navy to re-balance their aviation force be it buying more UAVs or using their limited defense funds to invest in other systems will also have the same effect. With the canceling of the F-22, the aging of the F-15/16/18 inventory and no other U.S. developed combat aircraft on the horizon the F-35 is what is available. This is good for Lockheed as it means that the system must be bought but may not be good for the world’s governments and defense departments.