F-35, For Sale to America’s Allies, May Fall Short of Revenue Goals
Policy + Politics

F-35, For Sale to America’s Allies, May Fall Short of Revenue Goals

Maybe the Pentagon should try eBay and Wal-Mart!

REUTERS/Yuri Gripas

U.S. allies are to thank and to blame for production costs associated with the F-35 Joint Strike Fighter Program, say Pentagon officials.

Potential orders from Israel, Singapore and South Korea will lead to a lower procurement price tag in coming years, according to Air Force Lt. Gen. Christopher Bogdan, head of the Defense Department’s most expensive weapons system. He also attributed part of last year’s higher acquisition costs to weaker demand from countries such as the Netherlands, Canada and Turkey.

That assessment came after the DOD last week published a congressionally mandated annual report detailing costs associated with some military hardware. The figures showed higher acquisition costs for the F-35 last year, increasing by almost 2 percent, to $398.6 billion, compared with the previous estimate of $391.2 billion.

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On the bright side, spending on long-term maintenance may now decline by about 9 percent, according to the Pentagon report. The total cost of development, procurement and operation also declined, from $1.5 trillion to $1.42 trillion.

In order to reverse the rise in production costs, the DOD is expecting U.S. allies to either start buying planes or increase existing orders.

“We are pretty sure that Israel is not going to stop at 19,” Bogdan told reporters last week, National Defense Magazine reported, adding that other countries could boost their purchases. “I can't influence that decision, other than keep driving the price of the airplane down.”

Part of those cost-reduction efforts include putting more pressure on defense contractors such as Lockheed Martin and Pratt & Whitney, where labor costs have increased recently.

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“For every dollar we save in production cost on this airplane, 80 percent of it can be attributed to economies of scale,” Bogdan said. “The two primary drivers that caused that procurement dollar amount to go up were labor rates for our prime contractors and for their major” subcontractors, as well as “the fact that some of the partners moved the buy of their airplanes out to the right. When you do that, the curve for the cost of the airplane doesn’t come down as fast as it would have and that’s reflected in the total procurement cost to go up.”

Eight countries besides the U.S. have contributed to the cost of developing the F-35: Australia, Britain, Canada, Denmark, Italy, the Netherlands, Norway and Turkey.

While economies of scale have been proven to drive down costs, the push for more overseas sales mirrors the U.S. approach during the 18-month recession that ended in June 2009 – export your way out of economic downturns. That approach didn’t work since the global economy was also in recession, and reliance on foreign demand for F-35s exposes cost-structures to austerity measures abroad similar to the automatic budget cuts in the U.S. known as sequestration, which is scheduled to resume in fiscal 2016.

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Another financial challenge facing production costs is the fact that about 30 percent of F-35 parts originate overseas, making the supply chain vulnerable to fluctuations in currency exchange rates. “Whatever acquisition program you're in, when you are in a sole-source environment, it is difficult to find the right levers and motivation to drive cost out of a program,” Bogdan said, according to National Defense Magazine. “One of the most effective ways to do that is through competition. In my experience, contractors are slow to shed costs when their business base changes.”

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