March 15, 2013 / 9:00 PM / 5 years ago

INSIGHT-Expensive F-35 fighter at risk of budget "death spiral"

By Andrea Shalal-Esa
    WASHINGTON, March 15 (Reuters) - It's called the "death
spiral," and America's newest warplane, the F-35 Joint Strike
Fighter, is in danger of falling into it before the plane has
even gone into service.
    The term - recently invoked by top brass involved in the
F-35 program - refers to a budgeting Catch-22 that plagues the
defense industry. To keep the cost per airplane low, you need to
build and sell a lot of planes. But in tough economic times,
governments cut orders to save money. That pushes up the cost
per plane, leading to more cancellations, pushing up the cost,
leading to more cancellations. And so on.
    The U.S. military is in the process of making tough
decisions due to mandatory budget cuts from sequestration which
went into effect March 1 and could lop off $46 billion of
Pentagon spending this fiscal year.
    Earlier this year, Pentagon budgeteers crunched the numbers
on Lockheed Martin Corp's F-35 in an exercise that spoke
volumes about the troubles facing the world's most expensive
weapons system and the Navy's uncertain commitment to it.
    Postponing orders for about 40 of the 260 Navy models of the
plane, which will take off from and land on aircraft carriers,
would save money in the short-term, according to several defense
officials familiar with the analysis, which has not been made
    But it would also add from $1 billion to $4 billion to the
eventual price of the F-35 program, already at a record-setting
$396 billion. 
    Seven years behind schedule and 70 percent over early cost
estimates, the stealthy F-35 "Lightning II" appears to have
overcome myriad early technical problems only to face a daunting
new question: is it affordable in an era of shrinking defense
    According to a congressional watchdog agency, the average
price per plane has already almost doubled from $69 million to
as much as $137 million since the F-35 program began in 2001.
Any further price rise could scare off potential buyers
-including vital foreign customers. 
    "It's a house of cards," said one senior defense official
who is familiar with the F-35 program, but was not authorized to
speak publicly. "We have finally started improving performance
on the program and efficiency in testing, and bang, we get this
budget challenge."
    Steve O'Bryan, one of Lockheed's top F-35 executives, says
the company has already cut F-35 production costs by 50 percent,
and is making progress on flight tests and software development.
    "While there are still challenges and room for improvement,
the program is heading in the right direction and we see no
insurmountable obstacles to delivering the F-35 and its
unprecedented 5th generation capability to our three U.S.
service and international customers," he said.
    Built by Lockheed and designed to be the next-generation
fighter jet for decades to come for the U.S. Air Force, Navy and
Marines, as well as key U.S. allies in Asia and Europe, the F-35
appears bullet-proofed against cancellation.
    There are no other new fighter jets in the pipeline; the
U.S. military's fleet of warplanes is aging; and 10 allies
including Britain, Japan and Israel are deeply invested.
    Manufacturing - and jobs - spread across 46 states ensure a
vital layer of political protection as well.
    With 10 million lines of software code onboard, and another
10 million lines in its logistics and ground systems, the F-35
is a flying computer with radars and other sensors that can see
enemy threats 200 miles away in any direction.
    In what was meant to be a money-saving move, U.S. officials
designed the F-35 as one basic fighter (with three variants) to
replace a dozen warplanes flown by the U.S. Air Force, Navy and
Marine Corps, as well as U.S. allies worldwide.
    The U.S. armed forces currently plan to buy 2,443 F-35s in
total, comprising 1,763 A-models for the Air Force, 420 B- and
C-models for the Marines, and 260 C-models for the Navy. Foreign
orders are now slated to total 721. 
    The Marine Corps, under pressure to replace its aging fleet
of Harrier AV-8B "jump jets", Boeing Co F/A-18 Hornets,
and EA-6B Prowlers, is scheduled to be the first U.S. military
service to use the jet, by late 2015.
    Given the tight schedule and huge cost of keeping its aging
current fleet flying, top Marine Corps officials are vigilant
about the program and the budgetary risks it faces. 
    "Any delay in fielding the F-35 brings added risk to the
Marine Corps' ability to execute our mission as the nation's
crisis response force and it affects our ability to augment U.S.
Navy carrier air wings," Lieutenant General Robert Schmidle,
Deputy Commandant of Aviation, said in a statement to Reuters.
    Schmidle and other planners at the Pentagon are desperate to
avert the "death spiral" that gutted the Air Force's plan to buy
750 F-22 Raptor stealth fighters down to just 187 jets.
    Behind closed doors, some U.S. officials fret that
sequestration budget cuts could trigger a similar dynamic on the
F-35, which has already seen 410 orders pushed back beyond 2017.
    Depending on how the cuts are implemented, the purchase of
up to nine F-35s could be deferred in fiscal 2013 alone, Navy
and Air Force officials have said. That might not seem like much
out of more than 3,100 destined for U.S. and foreign clients. 
    But initial calculations show that while cutting nine jets
would save about $1.3 billion, it would also raise the cost of
the remaining aircraft by nearly $800 million, said one defense
official, who was not authorized to speak publicly.
    The Pentagon budget analysis, which Reuters is reporting for
the first time, found that postponing the 40 Navy C-model jets
would raise the cost of the Navy version by about $4.5 million
per plane, and add between $1.5 million to $2.6 million to the
per-plane cost of the Air Force and Marine Corps versions,
according to several defense officials familiar with the study.
    "Cutting tails to pay bills is inefficient. Whether it's
nine planes in one year, or 40 across the (future years defense
plan), you're going to pay later," said one of the officials.
This official and others cautioned that the studies were
hypothetical for now.
    Air Force Lieutenant General Christopher Bogdan, the often
blunt F-35 program chief, invoked the dreaded "death spiral"
this week as he pounded on the need to cut costs and keep
foreign orders - which will account for half of all F-35s
produced through 2017 - on track.
    "The one thing that our partners care most about is how much
this airplane is going to cost," he said. "If ... we want to
sell the 600-plus airplanes to our partners and a couple hundred
more projected to our (foreign military) customers, we better be
darned sure we keep reducing the price on this airplane."
    Even a two-year delay in Turkey's initial order of two jets
had added $1 million to the cost of each of the remaining planes
in the original order year, Bogdan told a defense conference.
    No one knows exactly how much of a price tag will be too
much to bear for countries like Australia and Canada, whose F-35
orders are already on shaky ground. "The tipping point will be
different for each country," said one U.S. official.
    In Australia, defense contractors involved in building the
new jets are worried that $5.5 billion in expected orders will
be in jeopardy if Canberra cuts its plans to buy 100 jets by 30
to 50 jets, as many experts expect. [ID:nL4N0BV14D}
    Lockheed remains optimistic that international orders will
hold up and even grow. South Korea is expected to choose the
F-35 as the winner of a 60-jet competition to be decided this
summer, and U.S. officials this week said Singapore may order
more than a dozen F-35s in coming weeks. 
    Other allies, like Japan, see no going back on the fighter.
    A senior official at Japan's Defense Ministry said it was
keeping a close eye on cost and schedule risks, but there were
no plans to change Tokyo's order for 42 planes: "If we don't buy
until all the glitches are eliminated, it would be too late." 
    The Air Force is considering a slightly less capable version
of the plane for its initial use, but the Navy is reconsidering
the size of its order.
    Chief of Naval Operations Admiral Jonathan Greenert this
week ruled out scrapping the Navy's entire F-35C order, but said
the Navy was thinking about how many jets it really needs.
    Greenert last year ordered a study on equipping each
aircraft carrier air wing with just one squadron of F-35s
instead of two, according to defense analyst Loren Thompson. The
Navy is also developing several unmanned planes, although
military officials insist they will never completely replace
manned fighters on carriers.
    Bogdan said cutting the Navy's order too far would have
serious consequences. "There is actually a 'do not go below'
type of calculation, which says, if you get below the minimum
production quantity on one of these variants, the price starts
shooting up tremendously," he told the conference.
    The Pentagon's Cost Analysis and Program Evaluation office
recently forecast that the F-35's cost would rise by 9 percent
if Washington only bought 1,500 jets and foreign partners stuck
to their orders, according to a Government Accountability Office
study, first reported by Reuters. The cost would surge 19
percent if Washington bought 1,500 jets and the partners none.
    "If you cut any of these aircraft, the cost of each
remaining one goes up," consultant Thompson said. "At some point
soon, you're at risk of undermining the whole business case for
the F-35 as an affordable new fighter."
    The F-35's worsening fiscal challenges come just as
advocates, and some independent analysts, say the often-troubled
fighter development project is getting back on track after years
of setbacks - which included two engine-related groundings this
year - and expensive retrofits.
    The F-35 "is now moving in the right direction after a long,
expensive and arduous learning process," the GAO study
concluded, although it said long-term affordability remained a
big concern. 
    Top Pentagon officials are vowing to shelter the F-35 from
the latest budget crisis, if they can.
    "We'll try to protect the F-35," the Pentagon's chief
weapons buyer, Frank Kendall, said this week. "There's no
question about its priority."

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