Tuesday, March 23, 2010

No More Rose-Tinted Glasses

One of the great myths continuing to swirl around the F-35 engine debate is that continuation of the latest so-called competition (readers will remember that both F-35 airframer finalists chose the F135 over the F136 years ago) will ultimately save U.S. taxpayers through lower acquisition and sustainment costs.

Yet, independent analyses by multiple federal entities state the numbers just don’t add up. That was true in the 2007 Cost Analysis Improvement Group (CAIG) report from the Office of the Secretary of Defense and it’s even more striking in light of the 2010 Cost Assessment Program Evaluation (CAPE) update.

The original CAIG report presumed competitive pricing of two engines would occur in 2014, with immediate cost savings to be augmented by others in later production. Yet, even under these conditions, the DoD concluded that on a net present value basis, the F136 would cost an additional $1.2 billion and the potential life-cycle cost-savings were not compelling.

Now in 2010, CAPE Director Christine Fox maintains that even with the additional Congressional funding to date, another $2.9 billion will be needed to get the F136 to true competition in 2017, three years later than previously planned. Recognition of that multi-billion dollar figure is important, because lower ones quoted by supporters of the alternate engine underestimate the inevitable challenges lying ahead for the F136 team, and misleadingly omit tooling, logistical support and other inherent costs associated with bringing the alternate engine into production.

So, at this pivotal stage in the F-35’s funding stream, and in light of how billions could be better spent just about anywhere else, the CAPE update concludes the following: a two-engine program is at best at the breakeven point on a net present value basis and any lifecycle cost savings still do not make a compelling business case for the additional $2.9 billion expenditure. In fact, the net present value breakeven point would not occur until 2035 and would require average engine unit cost savings of 21%. This means the alternate engine would have to be priced $2 million lower. This scenario is improbable at best, and more than likely impossible. Classic competitive forces are not going to produce that type of savings.

Moreover, this breakeven proposition is highly optimistic as it presumes a seamless transition to production based on lessons learned from the F135, as well as an efficient mix of engines in the competitive buy. The latter point is especially troubling because very few customers will purchase from both F-35 engine teams. Thus, rather than true competition, the likely result from continuing the F136 funding stream is the cannibalization of engine orders between two supply chains mitigating any “pie in the sky” out-year savings.

The antidote to all this uncertainty is an F135 that leverages the proven F119 heritage, has now retired more than 90 percent of program risk, achieved more than 13,000 test hours, nearly completed SDD deliveries and already made its first production deliveries. A single engine program, the norm for military fixed- and rotary-wing programs during the past 30 years, will maximize dollars allocated for future safety and performance enhancements and achieve more supply chain efficiencies than an inefficient dual-track approach.

At the end of the day, it is fiscal responsibility, not politics that continues to drive unambiguous recommendations from President Obama and Defense Secretary Gates for Congress to discontinue funding the F136. The alternative: a $2.9 billion cost burden to be shouldered with no future benefit anticipated. Truly, this is a matter of dollars and sense.


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