Introduction: What if the F-35 is the Right Plane, at the Right Time, for the Right Price?
Part One: Why Canada Needs An Air Force And Supersonic Fighters
Part Two: A New Generation Of Fighters
Part Three: The Joint Strike Fighter Program
Part Four: Replacing the Cf-18
Part Five: The Cost Controversy
Throughout the F-35 controversy in Canada, there has been numbingly ill-informed discussion on the issue of cost. With data extracted from the reports by the Parliamentary Budget Officer (PBO) and the Auditor General (AG) – not always accurately or in context — opponents of the F-35 purchase have skillfully manipulated an indolent media to transform debate about the right replacement for the CF-18 into an argument over whether Canada could “afford” the F-35.
The strategy has been to drive up “estimates” of the cost in an effort to pressure the government into delaying and perhaps never proceeding with the acquisition of the F-35. The delaying tactic was certainly successful, inducing the government to defer its decision while it developed a Seven Point Plan, established a National Fighter Procurement Secretariat, and set up an Independent Review Panel. Purchasing the F-35 has also been controversial in Australia, whose F-18 fleet (71) is not much smaller than Canada’s (77); but Australia long ago ordered a full complement of F-35s to replace them (72). The Royal Australian Air Force is due to take delivery of its first F-35A in 2018, will have its first squadron operational in 2021, and will have all aircraft operational by 2023.
One of the lowest points in what has been a generally superficial and dishonest debate was the “discovery” by opponents that the US Department of Defense had let a separate contract for Pratt and Whitney to build the engines for the F-35 — from which they drew the conclusion that cost estimates for the aircraft “didn’t even include the cost of the engine”. The most effective charges, however, have been that government (read National Defence) has been hiding the “true” costs from taxpayers and that costs are actually “out of control”.
Hiding the true costs?
The evidence offered for the first charge is that DND initially presented cost estimates for 20 years. This was a perfectly reasonable and, in Canada, traditional timeframe, but the PBO argued that costs should be calculated over 30 years while the AG based its calculations on what it declared to be the aircraft’s “complete life-cycle” of 36 years. The government-commissioned “independent” study by KPMG later calculated costs over 42 years.
There is little precedent for estimating costs over such an extended period – for the good reason that it is impossible to do. The PBO acknowledged it had had to rely on historical data and cost modelling methodology, declaring it had confidence in its forecasts but admitting there were risks. The AG report noted explicitly that “Estimating the future full life-cycle costs for military equipment, especially the F-35, is challenging”. (2.66) DND, it pointed out, had to establish budgets for the acquisition and sustainment of the F-35 program without the aid of complete cost and other information, some of which “will not be available until years from now”. (p. 3) Neither, though, was deterred from second-guessing DND’s cost estimates.
Selecting any particular timeframe as the “full life-cycle” of any piece of military equipment is a wholly arbitrary exercise. The AG reasoned that as the estimated life expectancy of the F-35 would be about 8,000 flying hours this translated into about 36 years “based on predicted usage”. Perhaps such calculations are feasible in peacetime for government limos, but war has a habit of being rough on military equipment.
The AG also predicted an attrition rate from “normal usage” (over 36 years) of 14 of the 65 aircraft planned — then charged DND with not including the costs of replacements, i.e. not planning for 79 aircraft instead of 65. And, it asked, what about the cost of munitions to replace those used in exercises or combat? And the costs of the mid-life (and presumably old-age) refits of the aircraft? And all the costs associated with operating any fleet of aircraft, such as fuel, pilots and maintenance staff, air bases and their equipment etc.? Once launched on a hunt to find “hidden” costs, it was not difficult for critics to make the F-35 bill appear to be not only much larger than “initially forecast” but so monumental as to be “unaffordable”.
In reality, the cost of acquiring/purchasing the F-35 or any other aircraft is actually a relatively small portion of the total cost of operating a fleet of fighters. In the case of the F-35:
- In 2008, National Defence estimated the cost of the aircraft to be US$6.0 billion out of a total of US$21.0 billion (over 20 years).
- In 2011, PBO had it at US$9.7 billion out of a total of US$36.85 billion (over 30 years).
- In 2012, the AG had it at US$5.58 billion out of US$42.87 billion (over 36 years).
- In 2013, the KPMG review cited an acquisition cost of US$5.98 billion out of a total of US$45.80 billion (over 42 years).
Note how similar are the various cost estimates for aircraft acquisition, in three cases almost identical ($6.0 billion, $5.58 billion, $5.98 billion).
Critics rarely bothered to explore any of this, ignored the fact that estimates had been prepared at different times to include different elements over different timeframes, and declared that costs were “soaring”. As a recent analysis prepared for the CDA Institute by George Petrolekas and David Perry notes, “There is little variance in the life-cycle cost estimates between studies if a standard life-cycle is used and the same cost elements are included”.
|F-35 LIFE-CYCLE COST ESTIMATES
|National Defence||PBO||Auditor General||KPMG|
|Additional acquisition costs||3.0||1.7||3.4||3.01|
|Total cost of ownership||21.0||36.85||42.87||45.80|
|Timeframe||20 years||30 years||36 years||42 years|
|Source: CDA Institute analysis|
Costs out of control?
The other major charge has been that US production costs of the F-35 have been higher than originally estimated. Indeed they have, as one would expect in a program to produce a new generation of high performance aircraft. But costs have hardly been “out of control” and have largely met the targets established following a 2010 baseline review.
In the United States, critics have keyed on a decision taken to begin production before testing had been completed, as a major explanation for why technical difficulties and hence cost overruns have afflicted the F-35 program. In 2010, DOD commissioned an independent baseline review of the JSF program to examine the complaints and take remedial action. In January 2011, Defense Secretary Robert Gates announced that “two of the JSF variants, the Air Force version and the Navy’s carrier-based version, are proceeding satisfactorily”, but that changes would be made in the testing and production of the Marine Corps version which was placed “on probation”. Canada, of course, is buying the Air Force version.
In March 2014, the Government Accountability Office in Washington reported that difficulties in development and testing were continuing to delay delivery of the some of the aircraft’s war-fighting capabilities and driving up costs. Once again, however, the largest increases in development costs had not occurred in the conventional take-off and landing version of the aircraft (F-35A) or the carrier-version (F-35C) but in the technologically challenging short-take-off and vertical landing version (F-35B).
Nonetheless, the GAO confirmed there had been success “on several fronts” to address technical issues and reduce costs. While the unit costs of all three versions of the aircraft procured in 2013 were still significantly over target, the GAO reported that “The F-35 program made progress this year in decreasing the unit costs of the conventional take-off and landing and carrier-suitable variants”.
While the GAO was skeptical how far costs could be reduced, both Lockheed Martin and Pratt and Whitney have reported successes in cutting costs. Combined with anticipated learning and productivity improvements, it is not unreasonable to expect costs to decline over the life of the program.
DOD, in fact, reports that the program is on track to reduce the unit price of the F-35A from around US$112 million in 2013 to the mid-US$80 million range by 2018-2019. In December 2013, DOD projected the Unit Recurring Flyaway Cost of the F-35A would average out at US$77.7 million over the life of the program, assuming 673 international sales.
Concurrently, the JSF Program Office reports that the two most recent aircraft production contracts show a marked downward trend in unit prices. Deliveries of 36 US and partner nation aircraft to begin by mid-2014 (Low-Rate Initial Production Lot 6) will be roughly four percent lower than the previous contract signed in December 2012; deliveries of 35 US and partner nation aircraft to begin by mid-2015 (LRIP-7) will be about eight percent lower than in 2012.
One need not, therefore, believe the most optimistic cost projections of those with a vested interest in the program to wonder how any reasonable person could conclude that F-35 costs are “out of control”.
Despite all the angst and misdirection, the bottom line is that Canada should be buying the F-35. It’s the right plane at the right time — and at the right price.