In a mammoth deal announced Wednesday, the Pentagon awarded Lockheed a contract to sell 255 new F-35 fighter jets for $22.7 billion — $89 million per plane averaged across all three models. These will include:
- 64 F-35A conventional takeoff and landing fighters for the U.S. Air Force.
- 26 short takeoff/vertical landing F-35Bs for the U.S. Marine Corps.
- 16 carrier-variant F-35Cs for the U.S. Navy.
- 131 F-35As and 18 F-35 Bs to be delivered to U.S. allies abroad…
Why buy so many F-35s, and why buy so many at once? The answer to the first question is that, over the next five or so decades, the U.S. military and its allies abroad plan to buy more than 3,000 F-35 fighter jets from Lockheed Martin. This week’s contract doesn’t cover even one-tenth of total global demand for the stealth fighter jet…
As for why the Pentagon decided to commission production of more than 250 planes all in one go, that’s because — as any Costco shopper can tell you — items are often cheaper when bought in bulk.
That was from a nice article by Motley Fool.
One might think that for such a big order to be placed, the F-35 worked out all the development kinks. But it looks like a ploy to get a big contract, claim economy of scale savings, and fix the planes later. Initial Operational Test & Evaluation (IOT&E) hadn’t even started before the deal was signed. So it’s not clear whether the production models are combat effective.
The plan to upgrade the F-35 is called “continuous capability development and delivery,” or C2D2. There seems to be some skepticism over the plan. Here is what POGO wrote about C2D2:
It doesn’t require inside information to understand that the proposed plan is just a way to hide major development delays and cost overruns while facilitating increased annual production buys of incompletely developed F-35s.
There were 263 Priority 1 and 2 deficiencies outstanding. Given this, I find it strange that foreign buyers lined up to buy 131 aircraft in one order. Perhaps the US will foot the bill on the C2D2 upgrades and push it to our allies for free. Like an iPhone app update, they say. In any case, here’s what Mark Mandeles has to say about such strategies:
“Pre-planned product improvement” and other administrative processes have been proposed to control the tendency of ambitious technological goals to lead to budget overruns, schedule delays, and performance shortfalls. Such processes, grafted onto the formal acquisition process, have had little success.
The story highlights two things:
First, the DOD laid out a plan to buy more than 3,000 F-35s back in 2002. It basically remained committed to that plan for accountability reasons. It dupes you into thinking that the DOD had to buy these planes, regardless of testing. Lockheed had already delivered 300 F-35s before testing was complete, and it has on order hundreds more.
This level of concurrency is difficult to wrap your head around. What’s the point of operational testing when you’ve already bought hundreds over a decade? What’s the point of the full-rate production decision scheduled for Oct. 2019?
Second, the bulk-buy discount story is nice, but not necessarily true. Weapon systems procurement is not like Costco. If you’ve been working a couple dozen planes ordered per year, and need to ramp up to hundreds, you have to hire a whole lot of new labor, and so does your supply chain for all but commercial items.
This is specialized stuff, not boxes of cereal. I’ve seen this before in real program learning curve data. Each unit is taking less and less labor hours (e.g., touch labor on the assembly line) to produce, but then you might have a “bump” in the middle where unit hours increases when you on-board new people before coming back down. This is particularly true as you work more complex systems and need more specific skill sets.
Lockheed added 3,000 new employees to their Fort Worth plant and has been hiring aggressively.
So that might help answer the question of why unit costs for the contract did not come down all that much. Other cited reasons are more foreign sales (at higher average unit prices than US copies) and relatively more buys of the Marines and Navy variants (higher average unit prices than the Air Force variant). I’m also sure escalation had been built into labor and material rates, as these aircraft ordered in 2018 will be produced and delivered over several years.
In any case, Lockheed made out well:
Whatever the reason for the apparent rise in average cost, the upshot is this: Lockheed Martin just scored a contract worth more than 40% of all the revenue it ordinarily books in a year.
The contract was 40% of Lockheed’s total ordinary revenue, and the US’s end of the bill looks to be nearly one-third of the entire aircraft procurement budget for Navy and Air Force, which came in at about $36 billion in the FY 2019 request. Holy guacamole.
Lockheed’s stock had a nice steady growth until 2018 when it stalled. Some think that Lockheed is well under-priced. Maybe that’s true.
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