F-35 Absent, And Stuck In Second Gear

In the long run, the F-35's absence from the Royal International Air Tattoo and Farnborough air show will have minimal impact on the program's long-term fortunes. In the mid-term, however, the F-35's export hiatus may hobble the program's economics.

First, the good news. Even though the recent F-35 fire and subsequent fleet grounding came at a bad time, it likely will be brief. Since the aircraft has accumulated more than 3,000 flights and 5,000 flight hours, the problem is highly unlikely to be related to a serious design flaw. As of late last week, it appeared to be the result of "excessive rubbing" of engine blades on the powerplant cowling.

Also, there are unlikely to be any customers defecting as a result. The F-35 is the only fifth-generation plane on the market. Some air forces may be satisfied with a fourth-generation fighter for their future needs, but that decision would not be the result of the temporary F-35 grounding.

Meanwhile, most current and prospective F-35 customers still regard the aircraft as essential to their strategic needs. As the F-35 was grounded, the U.K. Royal Navy unveiled the first of its two new large aircraft carriers, which are designed for operations of the F-35B short-takeoff-and-vertical-landing variant. Britain's return to carrier operations after a decade depends on the F-35.

But the dark cloud around this silver lining is that this incident may result in delays in signing up export customers, and thus escaping from the F-35's high unit-cost problem. Export orders are essential to help lessen a spiral of high costs and low procurement numbers.

U.S. domestic procurement has been stuck in second gear for some time. Budget cuts and technology maturation concerns have delayed a procurement ramp-up. Between fiscal 2010 and fiscal 2015, combined U.S. procurement of all three F-35 variants has been limited to about 30 aircraft annually. As the graph indicates, there will be minimal change in annual output between 2012 and 2017.

The results have been dismally predictable: Low production numbers lead to high unit prices—well above $100 million in the most recent buy. For the next buy (Low-Rate Initial Production Lot 7), the target price of the least expensive variant, the F-35A, is still $98 million. These high prices keep procurement numbers low, creating a cycle. It's not a B-2-like death spiral, but it's a recipe for program stagnation.

The current Defense Department budget plan calls for a big leap to 52 aircraft in fiscal 2016, but earlier efforts to ramp up funding have been deferred. The F-35 funding plan from just five years ago called for fiscal 2015 procurement to be well above 100 planes. And the impact of budget sequestration is still uncertain.

Export orders are now essential to escaping this cycle. There have been some recent successes, most notably in Australia and South Korea, but contract signatures have been difficult, particularly with persistently high prices.

Thus the grounding is a problem only if it jeopardizes the timing of export orders. And there is a risk here. It isn't just contract delays. In target market countries, the F-35's enemies will use this incident as an argument in favor of holding a competition, rather than permitting a sole-source selection with a subsequent firm contract.

As a way forward, Lockheed Martin and its industry partners have chosen a wise path. Just after the grounding, Lockheed Martin, Northrop Grumman and BAE Systems announced they would invest up to $170 million from 2014-16 in a "Blueprint for Affordability," a plan to reduce the F-35's price tag. The current objective is a flyaway cost below $80 million in fiscal 2019.

Cost improvements like these are needed urgently and are far more important than air show appearances. Only seven countries have ever purchased export fighters in this price class. Of those seven, Australia, Israel, Japan and South Korea have provided the core of the F-35's export order book (Oman, Singapore and Saudi Arabia are the other three high-end customers; if India buys the Rafale, it will be the eighth). Expanding this order book is essential to achieve the production ramp-up expected in 2018.

Not only will the lower price boost demand it will also help the program escape the hobbling, toxic political dynamics of the past. An adversarial relationship between the industrial team and its U.S. customer has made it a target for politicians seeking to expose "waste, fraud and abuse."

In a market that is increasingly cost-sensitive at home and abroad, Lockheed Martin's new approach is long overdue. If this new initiative is a response to a public relations disaster, it's possible the grounding and missed air shows have created an opportunity for progress.