The US Air Force is taking back control of maintenance functions for the C-17 and F-22 previously outsourced to Boeing and Lockheed Martin.
The USAF confirmed to Flight International in early April that Lockheed's performance-based logistics contract for the F-22 will cease, ending months of speculation about the potential re-insourcing move.
That confirmation came only three months after the USAF announced that Boeing's performance-based logistics deal for the C-17 also would be stripped away.
In those two strokes, the USAF reversed more than a decade of policy momentum building in favour of such long-term outsourcing deals, and threw into doubt a pillar of projected profit growth across the defence industry.
© USAF/Master Sgt Kevin Gruenwald
An F-22 Raptor canopy being installed at Anderson AFB
"It is definitely a paradigm shift," says Gus Urzua, vice president for Boeing Globemaster Sustainment Partnership, the branded name for the C-17's PBL contract with the USAF and several foreign customers.
While the change means forcing a new business model on the C-17 and F-22 contractors, it also means the end of guaranteed aircraft availability at a fixed rate for operators.
"I can't provide guarantees if I'm not pulling the strings," Urzua says. "It will become more of a subsystem PBL for Boeing. Instead of being the whole weapon system and guaranteeing aircraft availability, Boeing will guarantee a supply system that is robust and responsive."
The policy shift also comes after a decade of near-universal accolades for the PBL concept, including specifically for the C-17 and F-22 deals. The latter was singled out for an award in 2008 by the USAF, or less than two years before the service terminated the deal.
"For the F-22, the USAF initiated the sustainment business case analysis [BCA] due to several factors," a USAF statement says. "First, a previous PBL 'Business Case' recommended a BCA at this point in the programme. Specifically, our program is in transition from development and production phases to an operations and support phase. Additionally, logistics support cost has grown so the USAF needed alternate options available to control and reduce F-22 operation and sustainment costs."
For its part, Lockheed issued a press statement reiterating the company's believe that a PBL contract gives "essential aircraft availability at the lowest possible cost".
In terms of acquisition history, the idea of performance-based logistics contract is a relatively new concept. It has its roots at the lowest point of the defence-spending downturn of the late-1990s, and flowered as the Pentagon embraced outsourcing at the peak of the last decade amidst a historic spending boom.
"The pendulum was on side in the late 1990s, and the pendulum has swung all the way to the other side right now," Urzua says.
The beginning came with the passage of the Fiscal 1998 national defence authorisation act, in which the US Congress authorised Pentagon officials to consider alternative ways to support the upkeep for weapon systems.
Until then, the DOD employed two traditional mechanisms to support products, which actually remain commonplace today despite the performance-based trend.
One traditional approach involves outsourcing, but is far more simple than the performance-based model. The military simply sends a component or system to a supplier for repair or service, along with a bill covering the vendor's cost plus a profit fee.
The same role is also performed by any of dozens of government-owned depots. Depots are a relic of the World War II mobilisation, but remain in place to ensure the DoD has the ability to support its own weapon systems during times of war.
The depots also create thousands of jobs, a fact not lost on Congressional-level politicians. Around the same time that lawmakers incentivised the Pentagon to seek out alternative support models, Congress also increased the amount of work required to be performed at government-owned depots to 50%.
Only the USAF has ever breached the 50% threshold since that time - in 2000 and 2001, although the Government Accountability Office has frequently complained about the difficulty of obtaining accurate estimates from the Pentagon.
© USAF/Sue Sapp
A C-17 Globemaster III undergoing maintenance at the Warner Robins Air logistics Center
Despite the pressure on the services to make sure depots received at least half of the sustainment budget, the usage of performance-based logistics deals after 1998 soared. With the results of a handful of pilot programmes available, the incoming Bush Administration in 2001 embraced the concept. The Quadrennial Defense Review that year established performance-based logistics programmes as the military's preferred approach to sustaining weapon systems.
The policy change produced results quickly, according to a 2009 study by the consulting firm Deloitte & Touche. Spending by DOD on performance-based logistics deals increased from $1.4 billion in 2001 to $5 billion in 2009, a 17.2% compounded annual growth rate, the study says.
Deloitte & Touche expected the rate of growth to decline after 2009, but still increase at a 10% compounded annual rate through 2013, even as other categories of defence spending, such as procurement and research and development, are expected to freeze or decline.
"This is due to the need for the US Military to bring costs down and to improve dispatch reliability," the study notes.
Simultaneously cutting costs and boosting performance is the elusive 'win-win' scenario of government contracting, but it was in fact the two selling points for performance-based logistics. A PBL contract allows the military to purchase support as an integrated package. Rather than simply repair components, the contractor would guarantee the availability of an entire fleet.
Structuring the PBL contract with the right incentives also should reduce the cost of sustaining the weapon system.
Such an arrangement "aligns the incentives of the entity doing the work to improve the performance of the platform", says Hal Chrisman, a principal consultant at Michigan-based AeroStrategy. "You can make more money under a PBL if you improve the reliability of that platform."
Embracing the performance-based approach seems easy, but there is a cost. The government shifts the risk of fleet availability to the contractor, but accepts a loss of control both in day-to-day parts management and long-term budget.
To guarantee fleet availability, the contractor must have absolute control over replacement schedules and inventories. Sometimes, upfront costs can actually increase under a PBL.
Chrisman says a good example occurred with the US Army's helicopter engines. The contractor maintained the engine to a higher specification than the government depot. Near-term maintenance costs increased, but the engine's time-on-wing metric also jumped, which lowered the overall sustainment cost for the engine.
At the same time, performance-based deals are usually structured over several years. This requires the government to commit to certain levels of usage and cost several years in advance.
"Part of [the Pentagon's doubts about PBLs] is being uneasy with not owning your own destiny and not controlling your own destiny," Chrisman says. "There's probably some truth to that."
The concerns about PBL deals extend beyond issues of control. The congressional mandate to devote at least 50% of sustainment work also could be a major factor in the USAF's decision.
Urzua notes that the policy changes were made a few years ahead of the introduction of the Lockheed F-35, which relies on a contractor-led PBL system, and the planned retirements of hundreds of fighters, tankers and airlifters from the USAF inventory over the next five years. Those trends could start upsetting the carefully managed balance between contractor and government.
Under the terms of the new arrangement, the USAF will set up a hybrid model that includes a combined programme office in 2012 based at Warner-Robins Air Logistics Center, Georgia. Although Boeing will no longer lead the programme, Urzua will move from Long Beach, California, to Georgia during the transition.
Both sides must be concerned that breaking up a contracting approach proven to work for an untested hybrid system could backfire, with aircraft availability declining despite strong operational demand.
"The last thing they want to do is have fleet degradation because of this," Urzua says. "They want to make sure this fleet isn't going downhill just because this is happening.