The defence industry
http://www.economist.com/node/18958487
The last manned fighter
It is the most expensive military project ever. It is plagued by delays and menaced by budget cuts. Will the F-35 survive?
Jul 14th 2011 | from the print edition
LEON PANETTA is under no illusions about what Barack Obama moved him from the CIA to the Pentagon to do. The wily Mr Panetta, who took over from Robert Gates as defence secretary at the beginning of the month, is everyone’s idea of a safe pair of hands. But his greatest claim to fame (other than presiding over the plan to kill Osama bin Laden) is as the director of the Office of Management and Budget who paved the way to the balanced budget of 1998. Mr Panetta has inherited from his predecessor the outlines of a plan to reduce military spending by $400 billion by 2023. But America’s fiscal crisis (and the lack of any political consensus about how tackle it) makes it almost certain that Mr Panetta will have to cut further and faster than Mr Gates would have wished.
That could be bad news for the F-35 Joint Strike Fighter, the most expensive military-industrial programme in history, and its lead contractor, Lockheed Martin. The plane is expected to come into service six years late (in 2016) and wildly over-budget. The Pentagon still plans to buy 2,443 F-35s over the next 25 years, at a cost of $382 billion. But in a parting shot, Mr Gates gave warning that although he did not think the F-35 faced cancellation, “the size of the buy” might have to be cut.
After beating a Boeing design that was deemed technically riskier, Lockheed Martin signed the contract with the Department of Defence to develop the F-35 in 2001. It was an ambitious undertaking. The aim was to reap huge efficiency gains by replacing nearly all of America’s ageing tactical aircraft (the air force’s F-16s and A-10s; the navy’s A/F-18s and the marines’ AV8B jump jets) with three variants of one basic design. There would be a conventional take-off and landing (CTOL) version for the air force, a short take-off and vertical landing (STOVL) version for the marines and a beefier carrier version for the navy.
With radar-beating stealth capability and a suite of advanced software and sensors, the F-35 would be a “fifth generation” fighter, far more effective in both its primary ground-attack role and air defence than “legacy” aircraft. (Respectively eight times and four times better, say Lockheed Martin executives, though by what measure is anyone’s guess.)
Burning banknotes
Above all, the F-35 was meant to be affordable. Development costs would be shared across the three versions and with eight foreign partners who were also buying and helping to build the F-35. Manufacturing scale economies were assured because more than 3,000 planes were to be sold—2,443 to Uncle Sam and the rest to his NATO allies. And because 80% of the parts were common to all three versions, maintenance and logistics would be simpler and cheaper. Deliveries of operational aircraft were to begin in 2010.
That was the idea, anyway. The F-35’s critics have long argued that its performance is compromised by having to fulfil too many roles and that an over-complicated design lashed to an over-optimistic schedule was asking for trouble. In the past 18 months, as delays have mounted and costs escalated, even some of the plane’s ardent fans have become alarmed. In 2009 the Pentagon realised that a breach of the Nunn-McCurdy rules on over-budget defence-procurement programmes was inevitable, because costs would exceed the original baseline by more than 50%. An internal report declared: “Affordability is no longer embraced as a core pillar.”
Anticipating the breach, in March 2010 Mr Gates restated his support for the F-35, but hit out at “unacceptable delays and cost overruns”. He said he was “fundamentally restructuring” the programme, adding more money and time for development. He also withheld $614m in performance payments to Lockheed Martin, tying its future earnings to specific criteria rather than the subjective ones that he believed had stiffed the taxpayer.
In January this year Mr Gates made a series of further announcements which included spending another $4.6 billion on development, slowing down initial production to avoid building aircraft that would later have to be expensively upgraded and putting the marines’ STOVL version on two-year “probation” because of problems with the aircraft’s structure and propulsion system. Condemning the failure to get costs under control, which he blamed partly on the lack of financial discipline in the defence department during George Bush’s presidency and partly on execution failures by Lockheed Martin and its partners, Mr Gates said that “the culture of endless money that has taken hold must be replaced by a culture of restraint”.
The latest cost estimates from the Government Accountability Office (GAO), published in May to coincide with a Senate Armed Services Committee hearing on the F-35 programme, were shocking. The average price of each plane in “then-year” dollars had risen from $69m in 2001 to $133m today. Adding in $56.4 billion of development costs, the price rises from $81m to $156m. The GAO report concluded that since 2007 development costs had risen by 26% and the timetable had slipped by five years. Mr Gates’s 2010 restructuring helped. But still, “after more than nine years in development and four in production, the JSF programme has not fully demonstrated that the aircraft design is stable, manufacturing processes are mature and the system is reliable”. Apart from the STOVL version’s problems, the biggest issue was integrating and testing the software that runs the aircraft’s electronics and sensors. At the hearing, Senator John McCain described it as “a train wreck” and accused Lockheed Martin of doing “an abysmal job”.
What horrified the senators most was not the cost of buying F-35s but the cost of operating and supporting them: $1 trillion over the plane’s lifetime. Mr McCain described that estimate as “jaw-dropping”. The Pentagon guesses that it will cost a third more to run the F-35 than the aircraft it is replacing. Ashton Carter, the defence-acquisition chief, calls this “unacceptable and unaffordable”, and vows to trim it. A sceptical Mr McCain says he wants the Pentagon to examine alternatives to the F-35, should Mr Carter not succeed.
How worried should Lockheed Martin be? The F-35 is the biggest biscuit in its barrel, by far. And it is not only Mr McCain who is seeking to knock a few chocolate chips out of it. The bipartisan fiscal responsibility and reform commission appointed by Mr Obama last year said that not all military aircraft need to be stealthy. It suggested cancelling the STOVL version of the F-35 and cutting the rest of its order by half, while buying cheaper F-16s and F-18s to keep numbers up. If America decided it could live with such a “high-low” mix, foreign customers might follow suit.
The danger for Lockheed Martin is that if orders start to tumble, the F-35 could go into a death spiral. The fewer planes governments order, the more each one will cost and the less attractive the F-35 will be. This happened to the even more sophisticated and expensive F-22. By cutting its order from 750 to 183, the Pentagon helped to drive the programme cost per aircraft of the F-22 up from $149m to $342m.
Lockheed Martin’s investors doubt this will happen to the F-35: the share price has been remarkably stable over the past two years. Tom Burbage, the executive who helped run the F-22 programme and who has also been in charge of the F-35’s development from the start, is still in charge—evidence that the company thinks he is doing a decent job. Mr Burbage says that a programme as big as the F-35 is bound to attract barbs. The main cause of the delays and cost over-runs, he says, is a problem with the weight of the STOVL version that came to light in 2004. It was impossible to continue work on the other two variants while this was being dealt with, he says. The plane was slimmed by 2,700lb (1,225kg), but this severely disrupted the supply chain that Lockheed Martin had put together with its main partners (BAE Systems and Northrop Grumman). That set the project back by nearly two years. On the bright side, Mr Burbage says that applying a similar diet to the other two variants yielded better planes.
Mr Burbage is also confident that once production at the firm’s mile-long factory in Fort Worth ramps up to 17 aircraft a month, as planned, the more pessimistic unit-cost projections will start to fall. That, however, remains a distant prospect while the design of the aircraft keeps changing.
Even so, Mr Burbage points out that the fixed-price contract agreed with the Pentagon for 32 aircraft in the fourth production lot (including a 13% margin for Lockheed Martin) is half the price of the first lot of aircraft. Mr Burbage predicts that the average cost of the air force version will eventually be around $65m—about the same as the F-16 sells for today. One reason for the much higher Pentagon forecasts is that the cost is built up to include every contingency, including projecting inflation over the whole production cycle.
In other words, the Pentagon and its contractor calculate future costs in completely different ways. That vertigo-inducing $1 trillion figure is so high because it covers such a long period—the government changed its initial cost projections to cover 50 rather than 30 years. It also increased the number of bases the aircraft would be stationed at from 33 to 49.
Mr Burbage rejects the assumption that the F-35 will cost a third more to sustain than the F-16s and F-18s it is replacing. He says that if you applied the same measures to legacy fighters the cost would be up to $3 trillion. He also remains convinced that the cost-saving ideas that first gave birth to the F-35 remain valid—commonality of spares, quick and easy replacement of components, advanced diagnostics and so on. Together they add up to a plane that will be twice as reliable as its predecessors and require fewer hands to maintain. Yet none of these benefits has been factored in because none has yet been proven.
Even if Mr Burbage is too sanguine, the F-35 is in no imminent danger. Its position is strengthened by two inarguable propositions. The first is that many of the current generation of fighters are approaching 30 years in service and must soon be replaced. The second is that because the F-35 was designed to replace so many types of aircraft, it has, in effect, a monopolist’s grip on the future fighter market.
Even if America and some of its NATO allies cut their orders, Lockheed Martin is confident that the numbers will be more than made up by countries such as Japan, South Korea, Singapore and Taiwan. All these nations are rich and nervous of Beijing. Mr Burbage draws comparison with the F-16, of which more than 4,500 will be built over its long life.
The future belongs to the drones
But the longer-term outlook for the F-35 is uncertain. Its costly capabilities are intended to make it effective against the air defences of a sophisticated enemy, such as China. But the growing vulnerability of American aircraft carriers to Chinese missiles will mean operating from well beyond the F-35’s 600-mile (1,000km) range.
Some military strategists already think that the job the F-35 is meant to do can be better handled by cruise missiles and remotely piloted drones. In many roles, unmanned planes are more efficient: they carry neither a bulky pilot nor the kit that keeps him alive, which means they can both turn faster and be stealthier. And if they are shot down, no one dies. Even the F-35’s champions concede that it will probably be the last manned strike fighter aircraft the West will build.