Last week the GAO recommended that Congress delay DoD's formal full rate production decision on the F-35 Joint Strike Fighter program and not fund follow-on (Block 4) development. At the same time, the House Appropriations Committee moved assertively towards funding full rate production quantities in FY 2019 just as Congress already did in FY 2018. We sort out these contradictions and check the status of the largest acquisition program in DoD.
BLUF: The GAO's third annual report on the F-35 catalogs well documented problems and essentially recommends that the program "take a knee" while the endless test, repair, test cycle catches up and all fixes are applied to all aircraft. This bureaucratic approach is not acceptable to DoD which is already deploying the aircraft in combat situations and must continually upgrade the aircraft in the face of evolving threats. We believe that the program of record will not materially change over the next five years. Currently the US is planning to spend $10.4B in procurement per year between now and 2044.
- Development. After 17 years and $56B in R&D spending, System Design and Development testing for the baseline Block 3 F-35 program is complete as of April of this year. Follow on modernization, known as Continual Capability Development and Delivery (C2D2) or Block 4, has begun. GAO wants to stop Block 4 funding until a better business case is developed. DoD users are pushing back hard on the high price tag but given long span times and the evolving threat, want to get started.
- Testing. An exhaustive, one year-long Initial Operational Test and Evaluation (IOT&E) program involving 27 production representative aircraft is off to a rolling start this summer. The results of this largest-ever testing regime are intended to drive the required formal decision to move into full rate production by the end of FY 2019. While the results and subsequent recommendations regarding operational suitability and effectiveness will be much ballyhooed, in truth, there can be few surprises given over 250 aircraft already in the hands of operators. Massive sunk costs and recap requirements mean that any recommendations resulting in major program disruptions in the near term will be dismissed as infeasible.
- Production. The F-35 program has already delivered over 290 aircraft in 12 lots to the US Marine Corps, Air Force and Navy and eight foreign countries. Despite earlier contractual disputes, 26 of 91 planned CY 2018 deliveries are complete and LMT should meet its target by December. Current F35 orders already match planned full rate production levels but have yet to enjoy the benefits of multiyear contracting that will come with a formal full rate production decision.
- Manufacturing. Even the curmudgeonly GAO admits that manufacturing efficiency has improved.
- Unit Costs. Manufacturing efficiencies have led to a dramatic reduction in per unit production costs with targets below $80M in the next two years. Unit costs are now actually lower than fully equipped, apples to apples, fourth generation aircraft. Note that the Lot 11 (FY17) contract for 126 aircraft which are now actually nearing completion, has still not been finalized.
- Concurrency. According to GAO, over 500 aircraft will have been procured by the time all operational tests and evaluations are complete. While a source of intense controversy and poor estimates in the past, the bill to retrofit older lot aircraft to the latest standard, known as concurrency, currently stands at $1.4B, the lowest level since 2012.
- Sustainment.
- With Block 3 development now essentially complete and production costs clearly in hand, the primary focus of program attention is on sustainment costs. Halfway to the 200K flight hour maturity milestone, fleet reliability and maintainability improvement is running behind rates necessary to meet required goals. There are numerous initiatives underway to improve long term sustainment projections.
- Note that the F-35 program is the first time DoD has treated O&S costs as part of overall program costs in a serious way up front and the learning curve for requirements, resources and acquisition communities continues to be steep. LMT manages 47% of O&S costs, propulsion (Pratt and Whitney: UTX) comprises 13% and 40% is attributable to the users of the aircraft (fuel, personnel, etc).
- The greatest risk to the F-35 program in terms of production rates and quantities are business cases for various alternatives that are based on false comparisons of O&S costs.
- Congress. While the F-35 is the Hill's favorite punching bag when DoD budgets are bewailed, the F-35 continues to have very strong support on the Hill when it counts: when it is time to distribute the cash. The FY19 budget will be no exception. While Senate authorizers want to move two aircraft worth of money from production into sustainment, there is no question that the policy-focused John S. McCain NDAA for 2019 will endorse the President's plan for the F-35. In the end, what counts are appropriations and the House is now set to add 16 aircraft to the President's budget for a total of 93 aircraft. Senate appropriations remarks will appear at the end of June.
