Foreign Service: F-35 tackles pricing issue for foreign buyers

Buying F-35 Joint Strike Fighters isno longer a purely academic question for potential foreign buyers. TheUK and the Netherlands signed orders earlier this year for flight testaircraft, and Italy is expected to follow soon.

As the foreign customers start lining up, a whole new clarity is being brought to the issue of the F-35′s price tag.

The US government established an international partnership with abusiness case partly based on the F-35′s supposed affordability,advertising a price tag of roughly $60 million per aircraft, dependingon the model.

Now, facing both industrial and competitive pressures, LockheedMartin is seeking a novel approach to fix the F-35 price forinternational customers that sign multi-year deals at a level below thecurrent market rate.

The $60 million figure is an average price calculated over the lifeof the programme’s estimated 3,000-aircraft production run. The cost tobuy a single aircraft this year could be significantly higher.

For example, the US Navy has asked for more than $1.7 billion toacquire eight low-rate initial production aircraft in fiscal year 2009.That figure equates to slightly more than $215 million per aircraft, apotentially unacceptable figure for most foreign partners to buy inquantity.

The price tag is expect to fall dramatically as annual productionrises from as many as 19 aircraft in FY2009 to more than 200 a year byFY2016. The pace of the price drop may still prove too slow forpotential customers, so Lockheed is seeking approval for a radicallydifferent pricing scheme.

Lockheed Martin chief executive Bob Stevens told the SanfordBernstein investor conference in May: “It is not too early in theprogramme to start talking about solidifying the production buysbecause as we do that, I think we all know that when you aggregatedemand and you phase that demand in an optimal way, you can get thebest opportunity to get the supply chain executing in a fashion that islow cost and high quality.

“And you will offer affordability in these jets that will be thevery best buy as a value-for-money spend, when we can get the demandphased properly, and that’s the phase of the programme we’re enteringnow.”

Multi-year deal

Lockheed’s proposal involves setting the aircraft unit cost at anaverage rate across a multi-year procurement deal, saving customersperhaps tens of millions of dollars on the higher-priced aircraftbought in the first years of the deal.

Lockheed is still trying to steer the deal pass two obstacles:securing legal authority to sign such a multi-year deal and financingthe upfront costs.

If the proposal fails in Congress or in the Pentagon, theLockheed-led programme faces the challenge of persuading customers tobuy early, even at higher prices. Failing to secure enoughinternational orders in the early phases of the programme could bedamaging.

The longer it takes to achieve full rate production, the slowerprices will decline, creating a circular effect with customers delayingpurchases to wait for better deals later.

The critical period for completing deals in the early years of production is from 2012 to 2016.

 Hundreds of aircraft could be sold to both the internationalpartners and non-affiliated governments, such as Japan, as long as thepricing meets expectations and the programme avoids critical problemsin flight test or production ramp-up.

Meanwhile, the JSF partners continue to refine their long-termplans, with the number of F-35s wanted rising in some countries andfalling in others. Canada, for example, wants to cut 15 aircraft fromits planned purchase, but Italy is likely to consider adding more.

The JSF international programme is quickly spreading beyond theoriginal eight-nation partnership. Israel, one of two securityco-operation participants, has issued a letter of request one year inadvance of posting a formal request for proposals for up to 75 F-35s.

 Japan is actively considering the F-35 for its F-X fighterprogramme, sending an assessment to Lockheed’s factory at Fort Worth,Texas.

JSF foreign sales have also become an urgent issue becausecompetitors have stepped up the pressure, suspecting that theaffordability issue or another production delay will force Lockheed’sfirst stealth fighter export out of some markets.

 F-35-JSF
 © Lockheed Martin
The F-35′s advertised $60 million price tag is an average pricecalculated over the life of the programme’s estimated 3,000-aircraftproduction run

Saab is on the attack with the JAS39 Gripen in Norway, forcing Lockheed to unveil an unusual price guarantee for the F-35 in 2016. Boeing continues to push the F/A-18E/F Super Hornet,not only as an alternative to the carrier-based F-35C for the US Navy,but also as an F-35 replacement in foreign markets that require animmediate replacement.

Australia

Australia’s future regarding the JSF became less than clear when anew Labor government was elected late last year. The new governmentinherited numerous defence purchases and plans, many of which it hassince re-examined and in some cases cancelled.

In February the government launched a review of Australia’s futureair combat capability requirements to 2045, which included an order for24 Boeing F/A-18F Super Hornets and plans to acquire up to 100 JSFs fordelivery from 2013. A decision on the latter is expected late thisyear.

The first part of the review focused on requirements through to 2015and included the feasibility of retaining Australia’s ageing General DynamicsF-111s rather than acquiring the Super Hornets that were ordered by theprevious government to replace the F-111s and as a stopgap before thefirst JSFs are delivered.

In March the government decided to retain the Super Hornet order.

The second part of the review, which focused on requirements throughto 2045, including a possible JSF purchase and assessing alternativessuch as the Lockheed Martin F-22 Raptor, was completed and presented to the government in late April, but it has yet to be made public.

Part two is “currently under consideration”, says the Australiangovernment. “The findings and recommendations of the Air CombatCapability Review will feed into and inform the wider-reaching ForceStructure Review being conducted as part of the defence white paperprocess.”

 The new defence white paper is not due for consideration by the government until December.

Although the new government is so far non-committal on the JSF,Royal Australian Air Force chiefs have long supported the type and manybelieve the Air Combat Capability Review recommends that the JSF is thebest next-generation fighter for the country.

Italy

Two major decisions are in store this year for Italy, the numberthree partner in the JSF programme, which invested $1 billion in thesystem development and demonstration (SDD) phase.

Italy’s first decision – to buy the country’s first two F-35s totake part in the flight-test phase – has been on hold for up to a year.

The political crisis that swept the previous government from powerhas delayed Italy’s decision until next year, but Lockheed confirms itis protecting production slots for Italy as the political situationstabilises.

Now, with the extreme left-wing faction marginalised in the Italianparliament, the country’s first F-35 order and participation in thetest phase is expected to be approved by July 2009.

Italy is to procure two early production models of the F-35A,starting with the first order in the lot 3 low-rate initial productioncontract. The second aircraft will be ordered from the LRIP lot 4batch.

Both aircraft are expected to be F-35As, even though Italy intendsto eventually have a mix of conventional and short take-off verticallanding (STOVL) aircraft.

\F-35-in-prod. 
 © Lockheed Martin
Early achievement of full-rate production is vital for keeping costs down for the F-35

Italy’s navy has a requirement for 22 F-35Bs, and the air forcewants a mix of F-35Bs and F-35As to replace Panavia Tornados and AMXstrike and attack aircraft. The programme’s overall restructuring in2004 prompted Italy to opt for two CTOL aircraft, however.

Italy must also confirm its decision to open the final assembly andcheckout line for the Italian and Dutch F-35. If approved, the linewould be at the former Cameri air force base.

Share-out of the financing package still has to be decided betweenItaly’s ministries of defence and economic development, and the initialinvestment by the Italian companies involved in the production andsupport programme is not frozen.

A dramatic change in previous decisions is unlikely, however.

The programme’s industrial and occupational benefits are clear tomost of Italy’s political forces, as well as the need to safeguard thecountry’s status as a reliable partner in major internationalprogrammes, perhaps seeking to offset the harm to Italy’s reputationcaused by its withdrawal from the Airbus A400M programme.

It also appears likely the number of F-35s ordered by Italy willrise from the current 131, including 109 F-35A/Bs for the air force and22 F-35Bs for the navy. The scale of such an increase and the finalquantities of the two versions are still to be decided.

 F-35-stovl
 © Lockheed Martin
Italy intends to eventually have a mix of conventional and STOVL F-35s

Meanwhile, Alenia Aeronautica is stepping up its efforts at the Foggia plants, where it is producing components for LRIP lot 2 aircraft.

In the LRIP lot 3 phase, Alenia’s role will expand to add thecentral wing box, then the external wing panel with LRIP lot 4 and thecomplete wing with LRIP lot 6. This later production batch will includethe first series-production Italian aircraft – up to six of the fullyoperational Block 3 configuration.

Israel

Although it has had only a minor role in the JSF programme to date,Israel is poised to become the first international partner to order theaircraft in significant quantities.

The Israeli air force issued a letter of request in May and isexpected to release a request for proposals in the second quarter of2009.

Israel’s official request seeks information on the purchase of atleast 25 basic F-35As. Lockheed sources confirmed the letter may alsoinclude an option to buy 50 STOVL F-35Bs.

This option would be exercised only after the performance of theF-35B can be compared to the unit price. Deliveries of the first F-35sto the Israeli air force are scheduled in 2013 to 2014.

A special liaison office in Washington is coordinating the effortsof the Israel’s air force and defence and aerospace industries to gainmore influence on the final configuration of the F-35s that Israel willpurchase.

Despite the fact that the Israeli defence industries are not fullyintegrated into the programme, some of them are already working ondedicated systems for the F-35.

Israel Military Industries isdeveloping internally carried, high-impact bombs for the F-35. TheIsraeli air force wants to increase the fighter’s operational radius byadding specially designed external fuel tanks, and Israel Aerospace Industries andCyclone Aviation are already designing the tanks. Cyclone offers tanksthat will be carried on the wing hardpoints, and IAI is offeringspecially designed conformal tanks.

According to Israeli sources, the request for proposals that will beissued in 2009 will include a formal request to instal Israelideveloped systems in the F-35. “We don’t expect any objections toinstalling Israeli weapon systems on the air force’s F-35s,” one of thesources said in June. “But we may encounter problems when we expressour wish to install electronic warfare systems on the aircraft.”

In February 2002, Israel joined the JSF program as a securityco-operation programme participant. This relatively low status gave thecountry’s air force limited access to some of the programme’s data, butallowed it no influence in the design process. Even Israel’s SCP rolewas suspended for several months in 2005 because of an unrelateddispute between the Israeli and US governments over export controlsecurity.

Additional reporting by Emma Kelly, Pino Modola and Arie Egozi contributed to this article

4 Responses to Foreign Service: F-35 tackles pricing issue for foreign buyers

  1. momento 10 July, 2008 at 3:38 pm #

    Israel don’t buy… they get “aid”.

  2. Stephen Trimble 10 July, 2008 at 3:41 pm #

    Well, we’re both correct.

  3. Jason Simonds 10 July, 2008 at 4:31 pm #

    Stephen Gumley, the chief executive officer of Australia’s Defence Materiel Organisation (agency responsible for buying military capability in Australia) let slip on 10 July 2008, in front of a Senate enquiry, that Australia WILL be buying the F-35A, barring some unlikely calamity in the project causing it’s entire cancellation. The 2nd phase of Australia’s Air Combat Review, won’t be released now until the White Paper in December 2008, but no serious observer of these issues, should doubt any longer that ANY other aircraft is a realistic chance of success in Australia. A calamity causing the entire cancellation of the F-35 project, notwithstanding…

  4. Michale Metenosky 20 July, 2010 at 12:34 pm #

    Did that correct the problem?? I’ve been searching for a solution for months Cheers

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