We are coming up on a year since KPMG delivered its report to Treasury Board Secretariat on the total lifecycle cost (LCC) of the F-35 Lightning II. The report was the final installment in a long series of deliberations to determine the total ownership cost for a fleet of F-35A fighter jets. The report’s findings caused the Conservative government to hit the “rest button” on the fifth generation fighter program and establish a secretariat within Public Works and Government Services Canada to reconsider all options, including the possible acquisition of a fourth generation alternative.
In analyzing the information provided by KPMG, it appears that the assignment was an abstract exercise prepared without detailed technical information and without the cooperation of the F-35 Joint Project Office (JPO) in the United States, the Canadian presumptive in-service support (ISS) provider or the Operational branch of the Royal Canadian Air Force. In short, it reflects a slew of questionable guesses about the future and, as a result, is yet another in a lengthy series of misinterpretations that have created a cross-purpose dialogue in Canada since 2010.
Pricing differences
In 2011, the debate over the F-35A acquisition heated up when the Canadian Parliamentary Budget Office announced that the price of each F-35A would be $129 million (this price was also used in the KPMG study). When Canada signed its Memorandum of Understanding with the aircraft’s manufacturer, Lockheed Martin, in 2002, the rough order of magnitude (ROM) estimate was $70 million per aircraft, a cost that raised few objections at the time.
The recent 2013 U.S. government cost for delivery of the F-35A starting in 2020 is pegged at $85 million per aircraft (1.5 percent annually compounded escalation between 2013 and 2020), indicating a 2013 Low Rate of Initial Production 7 (LRIP 7) price of $75 million per aircraft. The KPMG report price for 65 aircraft was $8.388 billion; the 2013 LRIP 7 fleet price would be $4.875 billion (a savings of $3.5 billion).
Comparing the KPMG study’s unit price of $129 million per aircraft with the latest LRIP 7 export price of $75 million per aircraft shows a savings of $54 million per aircraft, reflecting a 42 percent price reduction. Lockheed Martin has reported that the export prices for F-35A between LRIP 1 and LRIP 5 has decreased by 50 percent. In addition, the price between LRIP 5 and LRIP 7 has seen a further eight percent reduction, leaving the new 2013 LRIP 7 price only $5 million above Canada’s 2002 ROM estimate.
As production ramps up, the experience curve commonly produces substantial cost reductions. However, changes to the numbers of aircraft produced within each LRIP may cause fluctuation in prices; as well, later LRIPs could be affected by changes in the total quantities of the program, particularly if the overall U.S. government order decreases.
Sustainment costs also vary significantly. In its report, KPMG showed an odd 42-year lifecycle sustainment cost of $13.29 billion. The JPO Program Executive Officer’s (PEO) prepared sustainment cost forecast for 65 aircraft, however, works out to $7.48 billion, a 43.7 percent difference. The largest part of sustainment is the aircraft maintenance, repair and overhaul (MRO) and support, which should be less expensive for the F-35A due to the advanced reliability of the engine, electronics, avionics, and the use of electric sub systems and onboard diagnostics. In addition, Lockheed Martin’s new aftermarket fleet management system, the Autonomic Logistics Information System, reflects fifth generation support improvements that are projected to generate substantial reductions in the overall support cost.
It’s not entirely clear what KPMG has included in their $45.8 billion total LCC. But even if they include all costs for procurement, development, test and evaluation, operational (pilot salaries, training and facilities), support, inventory personnel and logistics salaries, MRO infrastructure, supplier repair and overhaul (R&O), upgrades, obsolescence, military facilities, airfields and infrastructure cost, military support personnel, hangar facilities and utilities, as well as mission equipment, stores, fuel and even decommissioning cost, it is unlikely to add up to $45.8 billion.
Without a realistic baseline with manageable variables one cannot determine what the KPMG analysis really means. The study’s operator, sustainment, risk, attrition and disposal costs represent $23.6 billion of its findings, but these costs will exist for the military regardless of which fighter aircraft Canada finally decides to procure.
Determining total program cost
My findings (see table in digital edition) are based on the F-35 JPO’s data provided by the Program Executive Officer on the total LCC by flying hours (CPFH), using average annual flight hours, optional fleet sizes and a lifecycle for 50 and 42 years of ownership, which indicates the ratio between acquisition and total LCC of various national F-35 fleets.
KPMG’s relationship between acquisition and total LCC reveals a 2013 ratio of between 1:5.7 or 1:10, depending on whether the auditor is using the F-35A acquisition unit cost of $129 million or the LRIP 7 unit cost of $75 million. Whatever the figure, these ratios are excessive.
The table also displays prices of the F-35 partners’ initial quantities and the 2013 reduced quantities: the Netherlands (NL) went from 85 to 55 units (down 35%), the United Kingdom from 138 to 51 units (down 63%, though F-35B quantities will be reinstated), Denmark from 48 to 30 units (down 38%), Italy from 131 to 90 units (down 31%), and Australia from 100 to 72 units (down 28%). Whether the Royal Canadian Air Force also scales down, to 42 as some have stated, remains to be seen.
In many ways, Holland and Canada have experienced similar issues over the cost of the F-35A program. The comparisons in the table are possible because Dutch lawmakers in March 2013 challenged the F-35 JPO to come up with a total LCC per flight hour (CPFH) that can be guaranteed. The program executive officer, LGen Christopher Bogdan, presented the RNLAF with a tailored CPFH of $24 million as the total ownership cost over a 50-year program. Incidentally, Bogdan performed his study by comparing the F-35A with the F-16C/D – based on the latter’s actual sustainment costs – and found that the USAF F-35A had an average CPFH of $31.923 million and F-16C/D had a CPFH of $24.899 million. The final figure of $24 million was based on his interpretation of the RNLAF philosophy of Operations and Sustainment and, interestingly, it shows a lower ownership cost than that of the F-16C/D.
In discussion with L-3 MAS of Canada, the presumptive ISS contractor for a Canadian F-35A fleet, they concurred with the lower Dutch CPFH as appropriate also for the RCAF. This observation is based on the sustainment cost experience between Canada’s CF-18s and the USAF F-18s. A number of sources peg the USAF yearly flying hours at an average of 300, compared with Canada’s average of 200 hours annually. The table shows that DND was not far off in its cost estimates for LCC and that KPMG’s CPFH acquisition to total LCC of 1:5.8 to 1:10 is two to three times higher than the USAF F-35A CPFH of 1:2.8.
To complete the picture, we know that the Pentagon in Q1 2013 announced that the initial cost of the Research,
Development, Test, and Evaluation (RDT&E) phase of the F-35 program had grown over the last decade from $50 billion to $70 billion, much of it related to B and C variants. Overlooked in the Canadian debate was the fact that the government has invested only $150 million in RDT&E, a very low contribution toward the total RDT&E budget. Had Canada contributed a share in line with its potential order of 65 aircraft, the figure should have been closer to $1.3 billion.
Finally, little has been said about the industrial benefits that Canadian companies have already accrued from just the development phase of the program – $440 million to date – and the potential billions in export opportunities over the life of the program.
Given the discrepancies in total ownership costs, one can certainly speculate about why the government commissioned the KPMG study – to step back from an unpopular program, perhaps, or lessen a protracted debate that could affect the next general election? However, stopping and restarting programs has rarely proven successful for the government. Witness the Joint Support Ship program, which may result in little savings and less capability than what was originally offered in 2007 when the ships finally enter service. Ultimately, buying a fourth generation fighter that will be dated the day it enters Canadian inventory will prove to be an unacceptable outcome. A fourth generation fleet will limit Canadian options in coalition and NATO operations, making the RCAF mostly irrelevant to international campaigns.
After reviewing LRIP 7, it would appear that Lockheed Martin has moved a long way toward making its F-35A offer more acceptable to Canada – both conceptually and financially – and it would be wrong, may even irresponsible, to change direction now.
Henning Jacobsen is the owner of HJA Solutions, a consultancy that has advised numerous defence companies, including ThyssenKrupp Marine Systems and DCN International. He is a former executive with Bombardier, Spar Aerospace and Oerlikon Contraves.