LMT and the Pentagon announced a "handshake" deal for a "block buy" of 478 F-35s for US and international customers over three years.
F35 Orders
Specifically the deal is a firm order for 157 Lot 12 (FY 2018) aircraft with options for a further 321 aircraft in Lots 13 and 14 (FY 2019-20).
Quantities
- This is not technically a multiyear procurement since the US continues to order aircraft one year at a time until the completion of Operational Test and Evaluation in FY 2020 after which a full rate production decision will officially be made. Note that 400 F-35s have already been delivered worldwide.
- The international partner and FMS customer orders of 195 aircraft for the three year period are firm as they are buying as a block. The forecast is relatively conservative as it assumes 0 sales to Turkey and Canada.
- Turkey's order of 100 aircraft is encumbered by its procurement of the Russian S-400 air defense system. Acting SecDef Shanahan has set a deadline of July 31 for Turkey to cancel the S-400 procurement or be removed from the F-35 program.
- Canada's planned procurement of 65 F-35s was on, then off and now may be on again as they have restarted their competition to replace their F/A-18s.
- Note that the Congress has already appropriated the funds for the planned FY 2019 order of 93 jets for the US.
- The President's budget for FY 2020 requests only 78 aircraft for USAF, USMC and USN. However, the three of the four Congressional committees that have already marked the budget have each added 12 to 16 aircraft to the request for a likely order of 90 to 94 aircraft in FY 2020.
Cost
- The FY 2018 cost for the F-35A will be $81.3M, 8.8% less than the FY 2017 cost.
- LMT had promised that the unit recurring flyaway cost for the F-35A would be less than $80M by FY 2020. The announcement states that the $80M target would actually be achieved in the FY 2019 contract ($79.5M?).
- LMT says that the FY 2020 aircraft will average a 15% cost reduction ($76M?) compared to FY 2017.
Assessment
- The pace of contracting is improving. Ironically, a handshake for the contract for FY 2018 aircraft 21 months after the beginning of FY 2018 is four months faster than the FY 2017 deal. With appropriations for FY 2019 in place and the inclusion of FY 2019 orders as options, the lag will further decrease. This mitigates the cash impact on LMT having to float suppliers.
- This longer term production contract for Block 3 aircraft coupled with the recent award of a $1.8B contract for the development of the Block 4 upgrade begins to give LMT and its suppliers the stability needed to improve margins and performance.
- With F-35 production cost targets finally being achieved, Boeing's siren song of the F-15EX as an alternative means to increasing annual fighter procurement is losing resonance. The F-15EX program will survive this year's Congressional scrutiny but draft NDAA language will require that it go through the normal program hoops, all the while allowing the F-35 to gain further momentum.
- The handshake deal now shifts the battle over F-35 costs from production to sustainment which is where most of the costs of the $900B program actually lie.
