Forum: General F-35 Forum

McCain Backs Hard-Line Pentagon F-35 Stance

http://www.aviationweek.com/aw/generic/ ... el=defense

Nov 18, 2011
By Jen DiMascio

Lockheed Martin may not be happy with the Pentagon’s negotiating stance on the next lot of F-35 Joint Strike Fighter aircraft, but a key lawmaker is.

The Defense Department is refusing to sign a contract for the fifth lot of F-35s until Lockheed agrees to pay for a “reasonable share” of concurrency costs, which result from the overlap between development and production.......

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That's what LM gets for low-balling estimates.

Darn right

The issue that is holding things up has nothing to do with the base cost of the F-35, but the cost of implementing changes found while testing. IMHO this falls on the DoD due to their insistence on the level of concurrency that the program has. They insisted on a high level of concurrency in order to get the jet to IOC faster, knowing that there would be higher costs along the way.

I'm going to back Spud and LM up on this one.

Low balling is really not the issue and there was apparently no original Program liability written into the contract as it pertains to this eventuality.

What Spud outlines though, is central to the issue.

Bottom line, the JSF Program represents a very unfortunate and catastrophic failure dating back to the mid-1990s in both DoD's planning of JSF's core requirements and underestimating the inherent flaws in it's acquisition process up to the current day.

Given all of the Program development and production realities involved with the most complex and risky fighter Program ever conceived, one cannot simply legislate or mandate a solution for this fundamental miscalculation. It doesn't work that way... what is unsustainable at it's core is unsustainable. It will now likely require massive subsidies and support to survive - especially as austere budget environments around the globe force substantial reductions in originally expected orders. It's unfortunately a liability of the DoD now.

Personally, and I know Spud has kicked the concept around too, but I feel the only conceivable way to prevent a disorderly implosion and to in fact sustain an 'affordable' F-35 Program track over the next 8 yrs, is to develop a 'sustainable-LRIP' acquisition financing scheme to include what I would call a 'Strategic Lease' option and even supported by an 'F-35 Bond' sale Program supported in part by QE3.

My support for F-35 leasing was very limited in scope. Specifically, it dealt with FMS leases where the F-35s could be picked up by the DoD if the customer did not eventually buy the F-35 (used as a way to mitigate risk in a FMS sale). However, leasing would not work for DoD sales because there would not be a post-lease customer.

My main problem with the way that the budgets are drawn up is that they are cutting Defense spending for finite programs. In other words, they are treating programs that have no end and are ever expanding (social) with programs that are limited in scope and have a finite end (fighter acquisition). I have no problem with deficit spending when there is a set goal (# of fighters) as opposed to social programs that never end.

Spud -

Yes on support for an FMS-based Lease concept, which would only help make US orders that much more affordable in return, given the added economies of scale during the next 8 years of crucial make or break Production. It could absolutely assist easing certain political obstacles and hesitancy too, in the near-term, knowing that there's at least an 'out' at the end of the term, if not absolutely convinced it's the best platform to operate.

On the DoD end however, I think it's possible to contemplate some sort of split Lease term coupled with a financed purchase agreement on the back-end (post-lease term). Alternatively, as said 'Lease' concept might only include a maximum of 6-8 yrs as front-end production stimulus, at least some units of the 'hypothetically Leased' USAF batch (those not bought back) could be refurb'd to a block IV standard and sold second hand. There should be a 2nd hand market for F-35 in 15-23 yr's out, just as there is a vibrant 2nd hand F-16 market still today. No reason why DoD could sell some of the earlier block III (post-Lease) to upgrade with new build block V themselves?

My argument is that in the 'next-generation', DoD and Congress could get a little more flexible and creative in ways of meeting (and maximizing) certain equipment acquisition requirements. There could be some opportunity to be unconventional and innovative in acquisition schemes, along w/ the technological advances.

One of the key factors of the JSF, dating back to the 90's, is low cost. No one wants to buy them because they cost ~120 mil right now with a promise of ~60 mil later. They were supposed to be the same cost as an F-16. Now I understand that even if LM managed to make cheap effective RAM the electronics alone in the F-35 cost more than an F-16. But if LM had to sell F-35s the way Boeing sells, say 777's, then the process would go like this

LM: "Rep, we need at least 60M to overcome the cost of production."
Rep: "Customer, I can sell you 24 of these planes for 120M each."
Customer: "No. At that price I could only afford 12."
Rep: "okay, 90M?"
Customer: "I dunno, I think the XXX fits my needs better for less money"
Rep: "Okay, 85 M and we will throw in free support and overhaul for the first three years until you can get your up and running"
Customer: "Wow, okay you have a deal."

And for reference, Boeing's production line for 777's cranks out a plane every 3 days, at 220M apiece without the cost of engines (add another 20M to the price), and has a backlog of orders measured in years. Their system for selling airliners works. If they have to take a loss on the first few shipped to secure full price orders later, they will. Boeing is the largest source of income for the US as far as exports go. LM could take a business lesson from that, dont you think?

LM should have a fixed price for the F-35, under the caveat that Congress stops interrupting the funds for development. Unlike the example above, LM doesn't just have to eat the R&D costs and hope the plane sells enough to make up for it.

Why does leasing seem to always solve your issues Geo? New fighter acft do not pop up every few years. Why would the US lease an acft that is not fully developed? Would it make any sense outside of short term wishful thinking to actually do it? What actually makes it affordable to lease when the intent is to procure? Who would buy said acft and who would the US even allow them buy after said lease expired? Fighter acft are not cars. To treat the subject as such is foolish.

The problem with L-M is that they haven't had a commercial product since the L1011 and have become less cost efficient. When you bid only cost plus contracts there is little incentive to constrain your costs thru engineering and efficient production techniques because it lowers your profits. I have always thought that the defense contractors know that any program has a high likelyhood of being terminated early so they structure their efforts to make the most profit in the engineering and devevelopment phases of the project. Remember the mangement team of any corporation is there to maximise stockholder return on investment.

DOD should just mandate fixed price contracts on the F-35 from this point on and require L-M to meet efficiency targets not only in the program but throughtout their organization. In other words require L-M to lower their overhead costs. What you will see around the country right now are businesses that have found a way to get buy with less people facilities and equipment. Don't think that has set it with the defense contractors. Additionally L-M would need to start a stock buyback program to reduce the shares on the market increasing the profit to share ratio to keep the investors happy. The big question is how much can the government demand in a free market economy?

One way that could reasonably done to calculate a cost reduction curve and make your contract offers from that. We'll pay 100 million each for the next five, then 95 million, and so on down to 65 million.

Another method contractors respond to is bonus incentives for meeting cost and schedule milestones. That's money right in the directors pockets. That always gets their attention.

Unfortunately, even Super Hornet prices have been climbing gradually, consistently too. There's truly no way to force or rather, 'legislate' an affordable fighter. Govt can only twist so much price discount out of the Program during F-35 concurrency. And then even then, regardless of whenever and whatever FRP actually looks like when it starts, the final procurement cost once produced in mature block III and later block IV lots will hardly be an F-16 priced jet. This pre-conceived 'estimate' was likely more marketing ploy by JPO to perpetuate the Program, than sound estimate based on more realistic production rates.

IMHO, LM should just apologize, but flat out inform DoD that they need to be serious about future F-35s Procurement cost expectations. A 30k lb aircraft manufactured with nex-gen materials and processes, internal bombay, powered by a $10-12m engine 35% more powerful than the F-16s and equipped with triple the electronics of the F-16 plus next-gen displays, will be significantly more expensive than a current day F-16.

One simply cannot put lipstick on this jet's price tag, now or at any time.

geogen wrote:

I'm going to back Spud and LM up on this one.

Low balling is really not the issue and there was apparently no original Program liability written into the contract as it pertains to this eventuality.

What Spud outlines though, is central to the issue.

Bottom line, the JSF Program represents a very unfortunate and catastrophic failure dating back to the mid-1990s in both DoD's planning of JSF's core requirements and underestimating the inherent flaws in it's acquisition process up to the current day.

Given all of the Program development and production realities involved with the most complex and risky fighter Program ever conceived, one cannot simply legislate or mandate a solution for this fundamental miscalculation. It doesn't work that way... what is unsustainable at it's core is unsustainable. It will now likely require massive subsidies and support to survive - especially as austere budget environments around the globe force substantial reductions in originally expected orders. It's unfortunately a liability of the DoD now.

Personally, and I know Spud has kicked the concept around too, but I feel the only conceivable way to prevent a disorderly implosion and to in fact sustain an 'affordable' F-35 Program track over the next 8 yrs, is to develop a 'sustainable-LRIP' acquisition financing scheme to include what I would call a 'Strategic Lease' option and even supported by an 'F-35 Bond' sale Program supported in part by QE3.

Who is going to buy the aircraft before some agency can lease them out to customers though Geo? THAT is the problem. A bond might work, but the USG is still going to have to buy the fighters off LM.

That is what they are seemingly objecting to.

Of the 3 fighter leases I am somewhat familiar with in recent times, the fighters (Gripen - Hungary Czech Republic and F-16's - Italy) still had to be purchased by a Government first (Sweden for the Gripens and USA for the F-16's).

Until the problem of WHO is going to pony up the funds to buy these aircraft, no other finance options can be considered.

In simpler terms, someone has to actually own the fighters before they can be leased anywhere, and I doubt LM has the capital on hand to buy its own fleet of F-35s. Still, one might ask whether LM might be willing to take a hit in order to keep the program alive through the lean times ahead even though they've probably already made a tidy profit on development (as they had with the F-22). This also brings up a question: Seeing as cost overruns have destroyed so many big ticket items since 1992, would it not make more sense to force contractors to take on more of the risks associated with failure of a program in the future?

Here's how it might go down.

1. Do away with flyoffs unless two or more companies are willing to fund their own demonstrators.

2. Having picked a winning design, fund its development by way of a 10-12 year interest-free loan, a large percentage of which will have to be re-payed if the system isn't ready in the allotted amount of time.

This would insure that:

1. Companies will have to give a more realistic estimate of cost (no more motivation to low-ball).

2. The Pentagon will have to resist its instinct to change requirements during the development process.

3. There would be serious consequences for failure and untold rewards for success, a great motivator for any contractor.

Conan -

Good points there. I'm not a financial guru in any means on the subject of bond issuance technicalities or various aviation financing/leasing schemes, but have in the past have attempted to elaborate more on this F-35 Strategic Lease concept being conjured.

In short, I've proposed and advocated that the DoD as an institution could (and should) be given a 'Strategic National Security and Economic security' managing authority in the form of a calculated stimulus strategy. As acting manager for a Leased LRIP F-35 Program and at a time when the Program is most vulnerable and when in need of continuity and stability the most, one could contemplate the DoD given special stimulus procurement budgets with which they can manage a limited Leasing program and eventual post-lease resale (ultimately making a slight profit on, or at least breaking even with initial front-end tax payer stimulus).

The objective however should be obvious. The stay the course F-35 Program is unfortunately unsustainable and as such will not be considered affordable in the near-term, nor procured under previously expected annual rates (in both foreign and US buys).

In times of crisis, there are drastic measures which must be implemented in order to overcome the impossibilities. WWII and the Lend-Lease program with Europe and Soviet Union for one example. WWII war bonds for another. WWII would have been a whole different outcome if not for both of said crisis-easing and monetization interventions.

To a lesser scale, it can be argued that a similar approach could be both justified and workable with respect to making or breaking the F-35 Program's relative outcome in the end.

Separately, LM could additionally issue some form of special F-35 Bond, supported by likely QE3, with the purpose of both stimulating production capacity during concurrency and backstopping/mitigating short-term losses during LRIP cost overruns. Again, basically a subsidized 'loan' to be paid off on the back-end once Program and production has completed it's run. Note: this would be similar to how current state corporations, eg in China would also ensure their industrial and Program viability in the modern day. It's not ideal, nor preferred, but it's arguably the more feasible solution at this point in the game.

Forum: General F-35 Forum

Pressuring Lockheed for Fixed Price