Lockheed’s Not Cutting F-35 Costs Enough, But We Know How: Assad, Bogdan
By Sydney J. Freedberg Jr.
on March 22, 2017 at 8:07 PM
F-35As at Nellis.
WASHINGTON: Two top Pentagon officials laid out a multi-pronged push to lower the price of the F-35 Joint Strike Fighter below $80 million apiece. The chief of the F-35 Joint Program Office, Lt. Gen. Chris Bogdan, and the director of defense pricing, Shay Assad, are underwhelmed by contractor Lockheed Martin‘s* cost reduction efforts so far. Instead, they said, contractors need to invest more of their own money in reducing cost — with suitable incentives from the government — and streamline the byzantine supply chain.
Meanwhile on the government side, under President Trump’s orders, Defense Secretary Jim Mattis is reviewing both how to reduce the cost of F-35 overall and whether to replace some of the Navy F-35C variants with cheaper but less stealthy Boeing F/A-18E/F Super Hornets.
“The F-35C model vs the F-18 (review), that’s drawing nearer to end but it’s not over yet,” Bogdan said. He’s submitted data on the F-35’s current and projected performance, cost to procure, and cost to operate, he said, which is now being reviewed against Super Hornet data provided by the Navy.
“I don’t think the answer is an either/or,” Bogdan said. “You can’t substitute a Super Hornet for an F-35C in the high-end fight (i.e. against Russian or Chinese radars and anti-aircraft missiles). You might be able to afford more Super Hornets, but they’re going to die in the high-end fight, and I don’t know how economical that is.” But, Bogdan continued, “we’re not only go to fight a high-end fight.” There are plenty of operations in lower-threat environments where the Super Hornet is perfectly suitable, he said, and with its current fighter shortfall, the Navy needs as many planes as it can get.
As for the F-35 program in general, Bogdan’s staff has prepared a compendium of ongoing, planned, and possible cost-cutting initiatives, he said, and “that compendium is up for review with the secretary as we speak.”
Speaking separately but largely in synch at the McAleese/Credit Suisse conference here, Bogdan and Assad laid out a multi-pronged approach to cut the stealth fighter’s cost. The previous price goal was to get the cost of the basic F-35A down from $95 million in the latest contract to $80 to $85 million by 2019. Today, said Bogdan, “the new goal we’ve set is that in 2020, an A-model airplane — with engine, in 2020 dollars — is going to be below $80 million.” (The Air Force F-35A is the simplest of the three variants). He also wants to reduce the cost to fuel and maintain the aircraft, its Cost Per Flight Hour, by about a third.
Throughout that period, production will be ramping up with unprecedented speed, to 170 aircraft a year, which should create economies of scale — both production efficiencies and block-buy contracts — but those savings by themselves are insufficient, said Assad. “It’s not the simple concept of, ‘well, we just increase the rate and that reduces the cost.’ That’s not what this is about,” Assad said. “This is actually reducing the cost of building the product.”
Lockheed Martin has its “Blueprint for Affordability” initiative to cut costs by $4 billion — with the government reimbursing the contractor for its investments in greater efficiency — but that effort left both Bogdan and Assad lukewarm.
“I think Blueprint For Affordability 1 was okay. Just okay. We took the low hanging fruit…. not quite as much as I thought we could,” Bogdan said. “On Blueprint For Affordability 2, I’m looking for a deeper savings, and the way I want to get the deeper savings is to get below the big top-tier suppliers.”
“Blueprint for Affordability has been modestly effective,” Assad said, damning with faint praise. “There are different ways and different approaches… that we can use to get cost reduction.”
First, Shay and Bogdan said, there are opportunities to cut out inefficiencies and unnecessary middlemen in the sprawling, complex network of roughly 1,300 subcontractors, which is less a supply chain than a supply spiderweb. “You’ve got to engage the entire supply chain, you can’t just engage up here,” Bogdan said. “We have to yet to explore that one bit (and) I think there’s a lot to be gained.”
“There’s opportunity for improvement (through) introducing more competition at the subcontractor level when we can,” Assad said. “We just don’t have enough.”
Second, contractors need to invest more of their own money in reducing cost. The Pentagon has ways to incentivize companies that do so, Assad said, authorities it’s not taking full advantage of today, he said. But that doesn’t mean defense contractors should just wait for the Pentagon to make an offer: They need to get to work on price on their own initiative, the way commercial companies do all the time. Compared to the commercial sector, Assad said, defense industry invests a lot less but buys back stock and pays out dividends a lot more.
Contractors have been cautious about investing because “we’ve been on annual procurement and the program has been topsy-turvy in the past, (but) we’re past that, we’re way past that now,” Bogdan said. “(With) a stable three-year production run, they ought to be able to take on some investment to drive some cost out of the program themselves. I don’t think that has happened fast enough.”
None of this hardball on price implies any lack of commitment to F-35, which former critic-in-chief took pains to praise in his State of the Union speech: “We’ve saved taxpayers hundreds of millions of dollars by bringing down the price of the fantastic new F-35 jet fighter.”
“JSF is an incredible game-changer from a warfighting point of view,” Assad said today, and he lauded both Bogdan and his predecessor, Vice Adm. David Venlet, for turning the troubled F-35 program around “technically and programmatically” — but, he said, price remains a problem.
“I believe that President Trump was right on the money when he said…F-35 is too expensive and we had to get the cost down. He’s absolutely right,” Assad said. “(F-35) is*unique in the sense that the president is focused on it, and I applaud that, I think it’s great.”
Isn’t the F-35 program pretty far along to start cutting the price significantly, one reporter asked. Assad’s reply: “We’re going to buy almost 3,000 aircraft and we’ve only bought 400. That’s not late in the game for me.”
Next Big F-35 Contract Expected Later This Year
The U.S. Marine Corps F-35B Lightning II demonstrates its refueling capabilities on Marine Corps Air Station Camp Pendleton, Calif., Jan 30, 2017. The Pentagon may award the next big F-35 contract before the end of the year, marking three such deals in roughly a 12-month span. (U.S. Marine Corps Photo/Ryan Kierkegaard)
Posted By: Oriana Pawlyk March 22, 2017
The U.S. Defense Department is expected to award the next big F-35 contract before the end of the year, marking three such deals in roughly a 12-month span, the head of Lockheed Martin Corp. said Tuesday.
Marillyn A. Hewson, chief executive officer of the plane’s manufacturer, said she’s optimistic her company and the Pentagon will strike a deal on the next low rate initial production, or LRIP, agreement as the number of Joint Strike Fighters coming off the line is “ramping up.”
“We will continue to see cost reductions just through volume,” she said on Tuesday during a daylong briefing with reporters at the company’s offices in Arlington, Virginia, outside Washington, D.C.
Hewson said President Donald Trump, who has publicly criticized the cost of the program — the Pentagon’s most expensive estimated at $396 billion for 2,457 jets — has thus far has not been involved in the negotiations.
Jeff Babione, the company’s general manager overseeing the F-35 program, said of the talks, “We’ve provided our LRIP offer to the [Joint Program Office] and we have begun negotiations on the LRIP 11 contract at what will be more than 130 airplanes.”
In November, the Pentagon abruptly ended negotiations and forced a “unilateral contact action” worth $6.1 billion for 57 of the stealthy fifth-generation fighters as part of LRIP 9, a deal that disappointed Lockheed officials and was initially supposed to include LRIP 10. (Before that, the last agreement was reached in 2014.)
Lockheed had a chance to appeal the decision by Jan. 31 but opted against doing so. On Tuesday, company officials told Defense News the company will not sue the government over the way the contract was handled.
In February, the Pentagon announced an $8.2 billion deal for 90 new jets in LRIP 10. That pact was noteworthy because it marked the first time the unit price of an Air Force F-35A variant declined below $100 million — to $95 million per aircraft, Babione said.
All the F-35s in need of insulation maintenance are back up and running, Babione said. “We just finished repairing all the planes in the factory,” he said. “It’s behind us and we’re moving forward.”
The service in September ordered a temporary stand-down of 13 out of 104 F-35s in the fleet “due to the discovery of peeling and crumbling insulation in avionics cooling lines inside the fuel tanks,” according to a statement at the time. Two additional aircraft, belonging to Norway and stationed at Luke Air Force Base, Arizona, were also affected.
Babione said the company is moving quickly to repair the F-35C after it experienced rough acceleration during catapult-assisted takeoffs from Navy carriers — a hit on the most-expensive variant in the program, which was estimated to take months to fix, according to an Inside Defense report.
Babione said Lockheed and partners recently finished some testing at Naval Air Engineering Station Lakehurst in New Jersey, “trying two different techniques. One was changing the way the pilot straps in — how they get into the seat, how do they pull their harnesses,” he said.
Additionally, he said, “we changed the hold-back fixture … a little less load holding the airplane back when it launches” which reduces the stored energy in the nose gear.
Engineers haven’t yet determined whether one of or both techniques will be implemented, Babione said. Testing crews “will want to go back out to the carrier … sometime this fall,” he said.
Hewson said the company will soon open a new facility in Pennsylvania to sustain F-35 production and boost job growth.
“We are finalizing our plans to expand production for components of the F-35 with a new leased facility in Johnstown,” Pennsylvania, a move expected to add 40 jobs by 2018, she said.
The F-35 program will eventually create 15,000 direct jobs and 41,000 indirect jobs across the U.S. over the next few years, Hewson said.
The price of the F-35A variant — the most popular export version — has fallen 62 percent since the first batch of aircraft rolled off the production line, she said. The target cost of the aircraft is $85 million or less per plane by 2019, according to the company.
Hewson’s comments come weeks after the F-35’s program executive officer, Air Force Lt. Gen. Chris Bogdan, told lawmakers the jet’s price tag has been steadily falling and could drop to as low as $80 million per plane.
Hewson said the F-35 program is the biggest driver of international growth for the company, with new partnerships and deliveries in 2016 with countries such as Denmark, Israel, Turkey and the Netherlands.
She said about 50 percent “of all F-35 orders over the next five years are expected to come from international buyers.”
Babione also said the company is working to contain the cost of sustaining the aircraft — an expense projected at more than $1 trillion over a 50-year lifetime. He said, “Our commitment, along with our JPO customers, is to try and drive out up to about $1 billion in operational costs by 2022.”
Last edited by buglerbilly; 23-03-17 at 03:04 AM.
F-35 program office concludes affordability review
By: Valerie Insinna, March 23, 2017 (Photo Credit: MC3 Utah Kledzik/US Navy)
WASHINGTON — A list of options to decrease costs on the F-35 is on the desk of Defense Secretary Jim Mattis and awaiting action, the Pentagon’s F-35 program chief said Wednesday.
“We’ve got a compendium of many kinds of initiatives that have already started or that we will start in the future. That compendium is up for review with the secretary of defense as we speak,” said Lt. Gen. Christopher Bogdan, the F-35 joint program office (JPO) head. “I can't comment on what he's going to do with that, whether he is going to pick from it like a menu or say, ‘Go do all of these.’”
Some items on the menu include contracting options that would allow the government a discount for buying in bulk, including block buys, economic order quantity and multiyear purchases. Other options involve changes to training and operations that would slash overall cost, such as relying more on simulator training instead of expensive live red air exercises, he said during a speech at the McAleese/Credit Suisse conference.
The JPO also wants to put increased pressure on F-35 prime contractor Lockheed Martin and its supply chain. Bogdan pointed out that his affordability goals have changed over the past several years: instead of wanting an $85 million F-35A unit cost by 2019, Lockheed will be expected to offer an $80 million dollar A-model by 2020.
To get there, Lockheed most likely will have to scrutinize its supply chain and cut out companies that bring little value — such as a middleman that issues a purchase offer to a supplier on Lockheed’s behalf.
“There are things that industry could be doing today to drive costs out of this airplane that they ought to be doing themselves, and if they don’t, then the government is going to help them do it. Like de-layering the supply chain, for one,” he said. Lockheed’s first cost initiative, called the Blueprint for Affordability, captured the “low-hanging fruit,” netting savings that were “just okay,” but Bogdan said more could be done to manage low-tier suppliers.
The JPO’s “affordability compendium” is just one half of two F-35 related studies ordered by Mattis in January. The second review, which is still in progress, will evaluate the Navy’s F-35C against the advanced Super Hornet, rebranded by Boeing as the F/A-18E/F Block 3.
“That is drawing nearer to end, but it's not over yet,” said Bogdan. For that assessment, the JPO will provide information on the current capability of the F-35C in a high-end fight both now and in the future, and the current and projected operating and unit costs for the carrier-launched variant. The Navy will provide similar data about the Super Hornet and potential upgrades.
The F-35 program head was confident the data will show that, although there may be a need for the Navy to buy more Super Hornets, the F/A-18 cannot replace the capabilities of the joint strike fighter.
“They need fifth-generation airplanes and they need some fourth-generation airplanes, and they need them soon. So what I think you're going to see the Navy do is buy as many F-35Cs as they can afford, and maybe supplement that with as many other things as they can afford. But they just need airplanes,” he said.
“You can't substitute a Super Hornet for an F-35C in the high-end fight. It doesn't work. You might be able to afford more Super Hornets, but they're going to die in a high-end fight, and I don't know how economical that is,” he added. “And everybody recognizes that. But that's not to say that there's not a right mix out there. Because we're not only going to fight the high-end fight, we're going to fight mid-fights and low-end fights too."
‘On to Lot 11’
With a contract for the F-35’s tenth lot of low-rate, initial production in the bag, Bogdan mimicked New England Patriots’ coach Bill Belichick in describing his focus on the next deal.
“We are on to lot 11. We need to get lot 11 on contract sometime between this summer and this fall simply because the next contract is a combination of lot 12, 13 and 14 put together, and that’s going to take some time to get through with industry,” he said.
Negotiations for lots 9 and 10 — which took more than a year to complete — helped the government understand the cost of the airplane so that a deal for lot 11 “should not be that controversial,” Bogdan said before knocking on a wooden podium behind them for good luck.*
“We'll see what happens, but we need to get done this summer, no later than the fall, so we can get onto the much bigger lot 12, 13 and 14, which encompasses over 430 airplanes. That will be a huge, huge contracting action,” he said.