Pentagon Looks to Lower Costs of F-35 Joint Strike Fighter Program -- Update

By Dow Jones Business News, 
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By Doug Cameron

The Pentagon said it is pushing builders of the F-35 Joint Strike Fighter to invest their own funds to reduce the cost of the $399 billion weapons program, and that it is eyeing financial incentives and penalties to get overseas buyers to stick to their order commitments for the jet.

The twin moves announced Thursday by senior Pentagon officials mark a major upgrade of its effort to shift more of the burden of the delayed and over-budget F-35 program to other stakeholders at a time when the department's own procurement funds are shrinking.

Lockheed Martin Corp., Northrop Grumman Corp., BAE Systems PLC and the Pratt & Whitney unit of United Technologies Corp. are the largest contractors for the F-35, which Pentagon officials said is on track to be declared combat ready by the U.S. Marine Corps in July 2015. The program also involves hundreds of other companies, and around 30% of the jet by value is built outside the U.S.

Pentagon officials in the past have expressed frustration that the Defense Department has been left to pay for upgrades and modifications to the F-35. On Thursday, Frank Kendall, the Pentagon's acquisition chief, told reporters he was looking to contractors to invest "tens of millions" of dollars of their own funds to help lower the jet's cost. While its purchase prices have fallen with successive batches acquired by the U.S., defense officials said in April the overall cost of the program had climbed for the first time in two years because of rising overhead expenses and exchange-rate effects.

Some 80% of targeted cost improvements have been tied to boosting F-35 annual production rates from 40 to more than 100, but the latest push includes possible changes to manufacturing facilities and processes or even part of the jet's design to improve affordability, said Sean Stackley, the Navy's acquisition chief, following a two-day meeting with contractors at Eglin Air Force Base in Florida.

Such changes would be paid for by contractors, though Mr. Kendall said incentives for contractors to invest in lowering the F-35's cost would aim to ensure a "win-win" for both sides. These could include accelerating or withholding progress payments, depending on performance and meeting cost goals.

A Pratt & Whitney spokesman said it had already self-funded more than $65 million of cost reduction initiatives, and continued to push for more cuts. A Lockheed spokesman said the company continued to work with the Pentagon on " affordability measures in an ongoing effort to further reduce costs."

Mr. Kendall also said for the first time that the Pentagon is looking for ways to bind overseas governments to their commitments to buy the plane, though it has yet to introduce any penalties or incentives.

Years of delays and cost overruns have made the F-35 notorious as one of the most expensive weapons projects ever, fueling concerns that its escalating price would scare off overseas buyers--which account for half of the expected orders over the next five years. Those buyers are critical to achieving production volumes that will bring down the cost of the jet and make it affordable to the Pentagon, which plans to buy 2,443 of the aircraft.

The aircraft has this year secured fresh orders from South Korea, Australia and Turkey. But some countries such as Italy and the Netherlands have reduced the number they intend to acquire. Denmark has launched a competition for new fighters, having originally picked the F-35, while Canada has also yet to confirm whether it will stick to its original plan of buying the plane.

Mr. Kendall said there is increasing emphasis on reducing the operating costs of the radar-evading, single-seat jet, which official estimates have pegged at just over $1 trillion for the entire U.S. fleet through 2065.

Lt. Gen. Chris Bogdan, the military official in charge of the program, said the life-cycle costs had already been cut by 9%, but the target was for a 30% reduction.

Critics of the program have disputed the underlying assumptions for these long-term forecasts, as well as official Pentagon data for the purchase price of the jet.

Gen. Bogdan said increased test flying of the jet was helping to refine cost estimates, and expressed optimism that Lockheed and Pratt & Whitney are fixing lingering reliability problems.

For example, mechanics no longer have to check the oil after every flight, and software problems that have dogged the jet's development are no longer a barrier to its entry into service, he said, though work is behind schedule on more advanced versions.

Pentagon officials also said they were mindful of efforts by the main contractors to push cost-cutting efforts off on smaller suppliers that account for 80% of the F-35's value. The wider aerospace and defense industry is engaged in multiple programs to squeeze more from suppliers.

"We have to keep an eye on that," said Mr. Kendall, though he said there was still room for smaller players to contribute more to the affordability push.

Write to Doug Cameron at doug.cameron@wsj.com

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