[SAR] LM F-35 Cost Declines $4.5 Billion, Pentagon Says

"The development and production cost of Lockheed Martin Corp. (LMT)’s F-35 fighter, the Pentagon’s most expensive weapons program, has decreased by about $4.5 billion, primarily because of savings on labor, according to the Pentagon’s latest cost estimates.

The 1.1 percent decrease to $391.2 billion from $395.7 billion includes the aircraft and the engines produced by United Technologies Corp. (UTX)’s Pratt & Whitney unit for an eventual fleet of 2,443 planes.

The latest F-35 projection is included among reports on cost estimates for major weapons that the Pentagon sent to Congress today. The reports cover a portfolio of 78 weapons that the Pentagon now projects will cost a combined $1.66 trillion, an increase of $39.6 billion, or 2.4 percent, over a report published in March 2012.

Even with the improvement for the F-35 reported today, the projected cost has increased 68 percent since the Pentagon signed its initial contract for the fighter with Bethesda, Maryland-based Lockheed in 2001. The revised estimate bolsters findings by government analysts that the military and the contractor are making progress in managing the jet’s simultaneous development and production.

“My immediate reaction is that it reflects the improvements that we found in manufacturing last year,” said Michael Sullivan, who is in charge of producing an annual report on the F-35 for the independent Government Accountability Office....

...“Software risk remains the top development issue,” according to the F-35 report.

Pentagon analysts still estimate the potential 56-year cost of operations and support for the F-35 fleet at $1.1 trillion, according to the report today. Officials said that estimate could decline as improved data accumulate on aircraft reliability, maintenance and flying hours...."

"...The Pentagon’s authoritative Selected Acquisition Report says the program is projected to be $4.5 billion less expensive than its last estimate. That’s 1 percent of the program....

...“Lockheed Martin is pleased with the $4.5 billion reduction in acquisition, operating and support costs reflected in the 2012 Selected Acquisition Report (SAR 12). This is the first year a cost reduction was noted...."

"The Department of Defense (DoD) has released details on major defense acquisition program cost, schedule, and performance changes since the December 2011 reporting period. This information is based on the Selected Acquisition Reports (SARs) submitted to the Congress for the December 2012 reporting period.

SARs summarize the latest estimates of cost, schedule and performance status. These reports are prepared annually in conjunction with the submission of the President's Budget. Subsequent quarterly exception reports are required only for those programs experiencing unit cost increases of at least 15 percent or schedule delays of at least six months. Quarterly SARs are also submitted for initial reports, final reports, and for programs that are rebaselined at major-milestone decisions.

The total program cost estimates provided in the SARs include research and development, procurement, military construction, and acquisition-related operation and maintenance. Total program costs reflect actual costs to date as well as future anticipated costs. All estimates are shown in fully inflated then-year dollars....

....DoD:
F-35 Joint Strike Fighter– The F-35 program is comprised of two subprograms, Aircraft and Engine. Only the Aircraft subprogram had selected cost changes in the December 2012 SAR; however, the cost changes for the Engine subprogram are also provided.

F-35 Aircraft – Subprogram costs decreased -$4,942.4 million (-1.5 percent) from $331,855.2 million to $326,912.8 million, due primarily to decreases in the prime contractor and subcontractor labor rates (-$7,853.3 million) and revised airframe and subcontractor estimates that incorporate the latest actual costs from early Low Rate Initial Production (LRIP) lots (-$1,121.3 million). There were additional decreases to correct cost allocations between the aircraft and engine subprograms that were established in the December 2011 SAR (-$981.0 million), lower estimates of required risk for initial spares (-$698.3 million), other support reductions due to maturation of the technical baseline and further definition of customer requirements and Service beddown plans (-$1,032.9 million). These decreases were partially offset by the application of revised escalation indices (+$7,016.4 million).

F-35 Engine – Subprogram costs increased $442.1 million (+0.7 percent) from $63,856.6 million to $64,298.7 million, due primarily to revised escalation indices (+$1,301.3 million), correction of cost allocations between the aircraft and engine subprograms (+$981.0 million), and a lower near-term ramp that extended completion from FY 2029 to FY 2032 (+$230.7 million). These increases were partially offset by revised estimates to incorporate the latest actual costs from early LRIP lots (-$848.8 million), outyear offsets of new escalation indices (-$865.2 million), and lower estimates of required risk for initial spares (-$362.9 million).

* Note: Quantity changes are estimated based on the original SAR baseline cost-quantity relationship. Cost changes since the original baseline are separately categorized as schedule, engineering, or estimating "allocations." The total impact of a quantity change is the identified "quantity" change plus all associated "allocations."
_____________________

NAVY
Joint Precision Approach and Landing System (JPALS) Increment 1A – Program costs increased $106.8 million (+10.7 percent) from $996.0 million to $1,102.8 million, due primarily to additional engineering effort for algorithm refinement and development of an alternate configuration for the JPALS Inc 1A ship system variant, resulting in a smaller footprint for air capable ships (small combatants) (+$84.5 million). Additional increases were attributable to an extension of the procurement and installation profile from FY 2018 to FY 2020 (+$15.3 million) and a related increase in support costs (+$2.3 million), as well as a quantity increase of one system from 26 to 27 systems (+$7.5 million) and associated estimating allocation* (-$1.4 million). These increases were offset by a decrease in initial spares requirements (-$1.5 million)."..."

"WASHINGTON (Reuters) - Lockheed Martin Corp is developing and building the F-35 Joint Strike Fighter, the Pentagon's most expensive weapons program, for three U.S. military branches and eight international partners.

The Pentagon released new cost projections for 78 major weapons programs on Thursday, including the F-35 program which showed the first decline in cost after years of increases and restructurings.

The partners who are helping fund the F-35's development include Britain, Australia, Canada, Turkey, Italy, Norway, Denmark and the Netherlands.

Israel and Japan have also placed orders and Singapore may soon follow suit, according to U.S. government sources. Lockheed is also bidding for a 60-fighter order from South Korea.

Following are some key figures about the F-35 program:

COST OF THE OVERALL PROGRAM
* A new U.S. Defense Department estimate put the cost of developing, testing and building the F-35 multi-role fighter jet at $391.2 billion, down from last year's estimate of $395.7 billion. The forecast assumes U.S. purchases of 2,443 production jets, on top of 14 test planes.

* Retrofits of existing planes to address problems found in flight testing are expected to total $1.7 billion over the first 10 production batches, according to the most recent report by the congressional Government Accountability Office (GAO).

* The cost of operating and sustaining the new planes is estimated to reach $1.1 trillion, assuming that they will be used for 50 years, according to the most recent Pentagon data, although those estimates are likely to be updated this fall.

* Senior Pentagon officials have said they consider that price tag unaffordable. Program officials are taking steps to reduce the projected operating cost, including hiring engine maker Pratt & Whitney, a unit of United Technologies Corp, to cut the fuel burn of the engine by 5 percent.

COST PER JET
* New cost estimates prepared by the Pentagon showed a drop in the projected average cost of the Air Force and Marine Corps variants over the life of the program, but the projected cost of the U.S. Navy variant for aircraft carriers edged higher.

* The Pentagon now forecasts that the conventional takeoff A-model will average a cost of $76.8 million per plane, excluding R&D costs, down which is $1.9 million less than the estimate provided last year. The B-model, which can take off and land like a helicopter, is slated to cost $103.6 million per plane.

* The latest estimate put the cost of the carrier variant at $88.7 million per plane, up $1.7 million from last year.

* The fifth and most recent batch of jets ordered by the Pentagon cost 4 percent less than the previous order, and prices should come down steadily in the future, according to Air Force Lieutenant General Christopher Bogdan, who runs the F-35 program for the Pentagon.

* Lockheed submitted a bid for the next two batches of jets in January and both sides hope to reach agreement this summer.

* The 22 Air Force models included in the last contracts cost $119 million each, according to Bogdan, compared to a price of $127 million per plane a year earlier.

* The cost of the three Marine Corps' B-models in the fifth order, which have a more complex engine to allow it to land like a helicopter, is estimated at $153 million per plane, down from $164 million a year ago, when the Pentagon bought 17 B-models, according to defense officials familiar with the estimates.

* The seven Navy carrier variants or C-models in the fifth batch cost around $139 million, down from $148 million a year earlier, according to estimates by U.S. defense officials.

Over time, as production quantities increase, the jets are expected to start dropping in price. The per-plane forecasts factor in foreign orders, which are not included in the U.S. development, procurement and operating cost.

Bogdan recently said he expected to reach the target price at least for the A-model by 2020, when Australia is due to start buying the first of the 100 F-35s currently in its plans.

Lockheed executives say they believe the government's estimates are too conservative, and predict that the price of the new warplane will be even lower once the company starts full-rate production later this decade.

Critics of the program say Pentagon cost projections are probably too low, noting that further technical issues may well arise during flight testing of the new fighter jet.

The jet is built by Lockheed at its Fort Worth, Texas, plant, with Northrop Grumman Corp and BAE Systems Plc serving as key suppliers. Engines are built by Pratt & Whitney."

"Executive Summary
The total F-35 program Research, Development, Test, and Evaluation (RDT&E) estimate decreased by approximately $280 million (Base Year 2012). However, this SAR contains an RDT&E cost breach in the F-35 Engine subprogram. This breach is not the result of cost growth to the F-35 Engine subprogram. This administrative breach was driven by the correction of an error made in the allocation of program funding to the two subprograms. During the March 26, 2012 Acquisition Program Baseline (APB) build, the program office incorrectly allocated an additional 3.3 percent of the total RDT&E funding estimate to the F-35 Aircraft subprogram that should have been allocated to the F-35 Engine subprogram. This funding consisted of Other Government Costs, International contributions to engine development, and closeout costs for engine contracts. While this SAR corrects the allocation error for the RDT&E Current Estimate for both subprograms, it does not address the error in the March 26, 2012 APB. Therefore, the Department plans to revise the APB to correct the allocation error.

Additionally, the Department is reviewing the possibility of breaking out a third subprogram (F136 Engine) that would be added to the APB in order to accurately report the cost of the F135 Engine subprogram. The Department will provide the required congressional notification prior to taking this course of action. The next SAR submission will be based on the revised APB.

The F-35 remains the DoD's largest cooperative acquisition program, with eight International Partners (IPs) participating with the United States (U.S.) under Memorandums of Understanding for System Development and Demonstration (SDD) and Production, Sustainment and Follow-on Development. Additionally, the program has two Foreign Military Sales customers. The F-35 program has completed over eleven years of SDD and is currently executing Low-Rate Initial Production (LRIP).

The F-35 program continues to make slow, but steady progress and is moving forward in a disciplined manner. There were many successes as well as challenges in 2012. Successes include conducting the first in-flight weapons releases from both the Conventional Take-Off and Landing (CTOL) and Short Take-Off and Vertical Landing (STOVL) variants; stand up of the first operational STOVL squadron at Yuma Marine Corps Air Station (MCAS); executing edge of the flight envelope testing to the aircraft's maximum speed and altitude; and completing a U.S. Air Force operational evaluation clearing the way for the commencement of pilot and maintenance training at Eglin Air Force Base (AFB).

In addition, challenges remain. During Calendar Year (CY) 2012, software block development, Autonomic Logistics Information System (ALIS), and the Generation II (Gen II) Helmet Mounted Display System (HMDS) remained the major focus of program execution. All three are key capabilities that directly impact the F-35 program's ability to reach Initial Operational Capability (IOC). Therefore, these areas will remain the focus in the coming year and through the completion of SDD.

Software risk remains the top development issue for the program. Over the past year, the F-35 program has implemented a major shift in the oversight and management of software development. This effort has resulted in increased cooperation and understanding between the program office and Lockheed Martin (LM). Additionally, the program instituted a Software Block Review Board that provides a forum for joint management of the Software Capability Block Plan (the integrated roadmap that defines the incorporation of capabilities). Although the positive results of these new efforts have built additional confidence in the Block 2B fleet release (required for IOC), the release of Block 3 to the fleet remains a higher risk for delivery in 2017.

The Gen II HMDS is a major technological advance and design challenge. HMDS issues faced by the program over the past year were: (1) “green glow” or insufficient helmet display contrast, (2) latency of the displayed information, (3) “jitter” or lack of stability of the displayed symbology, (4) night vision acuity and (5) alignment of displayed symbology.

In CY 2012, significant work, including dedicated HMDS flight testing, was undertaken to address each issue and to better understand what constitutes acceptable HMDS performance. As a result of testing, the program has mitigated the effects of four of the five HDMS issues. Additional work still needs to be accomplished to ensure that the program has a night vision camera that is effective for operations. As risk reduction, the program continues to fund development of a night vision goggle-based alternative helmet solution. The goggle-based helmet development will continue until the HMDS demonstrates improvement in all of the risk areas.

ALIS provides the warfighter key information to support operations and maintenance. The program experienced a security issue with ALIS Version 1.0.3 (which is needed to operate and sustain aircraft in LRIP Lots 4 and beyond) in CY 2012. This issue was resolved in November 2012 and ALIS 1.0.3 is now fielded at Yuma MCAS), Edwards AFB, Nellis AFB, Ogden AFB, and Eglin AFB. There are some interim operational procedures necessary to mitigate security and data issues. Corrections for these interim procedures will be fielded in future ALIS releases.

During this SAR period, there were two issues that led to the grounding of the F-35 fleet. In both cases, after a system safety risk assessment was conducted and the issues were identified and understood, the fleet was cleared to resume flight operations. The first issue was a failed propulsion fueldraulic line on the F-35B STOVL variant. The fueldraulic line enables actuator movement for the STOVL vectoring exhaust system. Evidence revealed a quality discrepency and the investigation found that the line was improperly crimped at the manufacturer. Corrective actions to improve the quality control processes to ensure part integrity have been instituted and all fleet test engines have been inspected.

The second issue was an engine blade crack in a test CTOL aircraft at Edwards AFB. The crack was found on a 3rd stage turbine blade during a routine inspection. The engine in question is part of the F-35 test aircraft fleet and had been operated for extended time in the high-temperature environment in its mission to expand the F-35 flight envelope. Prolonged exposure to high levels of heat and other operational stressors on this specific engine were determined to be the cause of the crack. No additonal cracks were found during inspections of the remaining F135 engine inventory. Investigation into the casting anomaly along with development of an inspection method continues and should be complete in mid-summer. The engine prognostic and health management system continuously measures life of turbine blades to keep the fleet safe and will determine if or when parts will need to be replaced based on condition many years from now. Current production continues by inspecting during the manufacturing process.

The SDD flight test program has accumulated over 4,333 total flight test hours through February 28, 2013. In CY 2012, the flight test program exceeded test points and flight targets for both F-35B and F-35C testing. The SDD flight test program also conducted the first in-flight weapons releases from the F-35A and F-35B. Additionally, the program began high angle of the attack testing which has been successful to-date.

Following the International Association of Machinists and Aerospace Workers strike at LM from April 23 to June 28, 2012, LM re-balanced the production line and adjusted scheduled deliveries to execute an achievable post-strike plan. Total assembly operations continue to progress according to the revised plan, improving from eight days behind the post-strike plan to only two days behind.

In CY 2012, the program delivered 30 total aircraft, 29 LRIP and the last SDD aircraft. All LRIP Lot 3 aircraft have completed acceptance flight test, and only one, AN-1, remains to be DD 250’d, pending funding from the Netherlands.

Seven of 32 LRIP Lot 4 aircraft have been DD 250’d, with another twelve in flight and ground operations at LM, Fort Worth, Texas. The LRIP Lot 5 production contract for 32 aircraft was definitized in December 2012 showing a four percent decrease in unit cost from LRIP Lot 4. Nine LRIP Lot 5 aircraft have started the assembly process. 38 production aircraft have been delivered to the U.S. and IPs to-date.

The F135 propulsion contractor, Pratt and Whitney, delivered 24 CTOL and 24 STOVL propulsion systems in CY 2012. 87 engines and 35 lift fans (includes spares) have been delivered for the program to-date.

The Air Force Education and Training Command (AETC) conducted an Operational Utility Evaluation (OUE) in CY 2012. The OUE assessed the ability of the 33rd Fighter Wing to conduct pilot training. AETC determined the wing was ready for training and F-35 pilot training commenced in January 2013. Over the course of 2013, the training wing at Eglin AFB will prepare pilots for operational test, operational implementation and the stand-up of future training sites at Luke AFB and MCAS Beaufort in 2014.

The Integrated Training Center at Eglin AFB, Florida now has ten classes in session. These classes include the first Air Force certification courses on logistical support. Currently, there are students (both pilots and maintaince personnel) from the Air Force, Navy, Marine Corps, and United Kingdom. Continued success of these training activities is very important as aircraft logistical support is a critical factor in the Services decision to declare IOC dates.

From a business perspective, the Government and LM reached agreement on LRIP Lot 5 in late November 2012 with full contract definitization on December 14, 2012. This effort also includes manufacturing-support equipment, flight test instrumentation, ancillary mission equipment and Diminishing Manufacturing Sources Redesign. The program is now moving forward with a streamlined, combined LRIP Lot 6 and LRIP Lot 7 negotiation. An LRIP Lot 6 Undefinitized Contact Action was awarded on December 28, 2012 and will be modified at a later date to procure three aircraft on behalf of the Italian Government and two aircraft on behalf of the Australian Government. Definitization of both LRIP Lot 6 and LRIP Lot 7 is anticipated by June 2013.

In March 2012, in conjunction with the MS B decision, certification was made pursuant to section 2366b of title 10, United States Code (U.S.C.). However, the Defense Acquisition Executive waived provision (3)(c) of 2366b. This provision certifies that the Joint Requirements Oversight Council (JROC) has completed its duties pursuant to section 181(b) of title 10, U.S.C., including an analysis of the operational requirements for the program. The JROC accomplished the bulk of its duties under section 181(b). However, because the IOC dates remained "to be determined" by the Services, paragraph (5) of section 181 (b) cannot be satisfied. The Services plan to publish their respective IOC dates in June 2013. At that time, this waiver will no longer be necessary."

"...The overall price of the tri-service program has dropped a touch--about $4.5 billion overall from $395.7 billion to $391.2 billion. Unit cost for the aircraft has also dropped somewhat with the Program Acquisition Unit Cost (PAUC) falling to $108 million from $112 million while the Average Procurement Unit Cost (APUC) slips from $91.8 million to $88 million. The average Unit Recurring Flyaway (URF) which assumes "the quantity benefits of 61 Foreign Military Sales aircraft and 660 International Partner aircraft" is $65.9 million for the F-35A, $77.4 million for the F-35B and $77.9 million for the F-35C....

...But during his last press conference, outgoing Secretary of the Air Force Mike Donley said the USAF will notify the Congress next week when the F-35 will become operational with the service.

"We will make an IOC notification to Congress next week. We owe them a report by June 1st. That's on track," Donley said. "It's been coordinated between the Air Force and the Navy, both the Department of the Navy and the Marine Corps. So we're working on that, and a report will go to Congress next week."..."