I’m paid to be a professional skeptic. When General Electric/Rolls-Royce announced a fixed-price deal for the F136 [pictured above], my radar starts looking for the loopholes.
As I wrote in my news article yesterday, the GE/Rolls Fighter Engine Team, to their credit, acknowledged their offer came with two strings attached. If the Department of Defense changes either the production rate or the performance specification for the engine, the team’s offer is null and void.
Sorry, I can’t let that go.
Click on the jump to read my email exchange on this issue this morning with GE/Rolls.
To: McLaren, George H
Subject: RE: new F136 photo
Thanks George. Beautiful pic.
I do want to raise a big question that’s been at the back of my mind since yesterday morning.
The question, and I’m going to be brutally candid, is: Is there any evidence that this offer is not just a meaningless PR stunt?
To be more specific, if the offer can be voided by a change in specification or a change in the ramp rate over the next five years, isn’t it basically a meaningless gesture?
The risks to the F-35 specification and schedule are fairly obvious. Only about 3% of flight tests are complete, so the spec remains a fairly open and unproven question. Further cost increases are already being mentioned as part of the Nunn-McCurdy recertification, which could change the ramp rate. Even if the F-35 sails through flight test and budget reviews perfectly over the next five years, there could be huge swings in defense spending itself during that period that could have a huge impact on F-35 production rates.
To: Trimble,Stephen (RBI-UK)
Subject: RE: new F136 photo
Steve – fair question. Our answer is adefinitive: NO.
Unlike some people who talk about fixedprices, “oh yeah, we asked about that too”, we have spent months preparing thisproposal. We’ve pushed and pushed our supply chain to keep costs down so itwould be valid, and crunched and re-crunched numbers to make it work. As youheard on the call, this had to be vetted through the highest levels of bothcompanies, in a brutal and honest review process by people who are dead seriousabout numbers. In the end, we submitted a formal, legally binding, writtenoffer from our contracts officer to the JPO contracts office. It has real,binding, solid numbers on price. They go DOWN, not UP, each year. We standbehind those numbers.
There are a couple of caveats: theGovernment owns the design, and has approved our design through the CDR processthat concluded in 2008. So we are diligently working and building engines tothe government-approved specs.
If the Government comes back two years fromnow and says, we changed our minds – we want a 48,000 lb thrust engine, well,that’s a pretty significant wrench in the works. It simply wouldn’t be prudentfor us to leave any potential future changes wide open at the government’sdiscretion, which would be extremely expensive to change at that point. Samething on ramp numbers – we’re on track to build 90 engines in LRIP8. We canmake these prices work at those numbers and that ramp rate.
If the government comes back and says,well, only build 10, it totally changes the economics of the process. Our offeris, we’ll sell this many engines you wanted in your plan, for this price, butif you alter the number, we need to talk about it.
Both of those changes – specs and numbers -would be entirely outside of our control. We can’t write blank checks. Thatwould not be prudent business decision making.
On the other hand, look at how thecompetitor has performed. Think they could have lived with this offer two orthree years ago? They have been having 40-50 percent price jumps, partially dueto test failures because their engine didn’t work right, partially due toproduction issues, both under their responsibility. Cost Plus – government eatsthe cost.
Remember, under our formal offer, our pricesgo DOWN, not up 50 percent.
Bottom line, we’re dead serious about this,it is real.