As sales increase, prices fall. That is the first rule of economics – but when neither prices nor volume can move, it is also a frustrating paradox for any salesman, who may wonder: how do I improve sales if I can’t reduce the price until I improve the sales?
Commercial aviation can employ useful accounting policies, such as amortising capital spending over a block of production. Governments do not have the luxury of commercial accounting policies, so prices are set the old-fashioned way: work out the cost and add a small fee for the supplier’s profit, or force the supplier to make a profit at a specified price.
This is Lockheed Martin’s F-35 Lightning II dilemma. Sales must rise to reduce the price of the stealth fighter, but some customers – particularly in cash-strapped Europe, but also in the USA – don’t want to buy until the flyaway price is more reasonable.
The joint programme office’s solution is a multi-year “block buy”, to lock in higher and more consistent volume and thus help suppliers cut prices. But the US military is prohibited from seeking such deals until full-rate production begins – so the joint programme office wants Congress to authorise an exception, for three years and up to 477 aircraft.
That will do nothing to solve the F-35’s technical and scheduling woes, but it could help address its affordability problem.