Tuesday, December 20, 2016

Can the “art of the deal” rein in defense procurement?

President-elect Donald Trump is going to be an unconventional president as he was an unconventional presidential candidate.  Trump has now turned his Twitter account against two of the largest defense contractors – Boeing and Lockheed Martin.  Both are reeling and the defense industry in general must be nervous.

On December 6, 2016 President-elect Donald Trump Tweeted, "Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!" Boeing stock immediately dipped after Trump’s Tweet and Boeing’s Chief Executive Dennis Muilenburg arranged for a call with Trump.

On December 9, 2016 Trump Tweeted, “The F-35 program and cost is out of control.”  Since then Lockheed Martin and the U.S. Air Force have been jumping through hoops to mitigate any potential immediate damage and begun building their case to present to a newly empowered Trump Administration.

Boeing is currently under contract for $173 million to determine the capabilities needed for Air Force One  presidential aircraft and is due to deliver TWO aircraft to service in 2024 for a total program capital cost of $4 billion.  Of course this assumes the project will be on time and on budget – which is rare.

Lockheed’s J-35 fighter program is five years late and costs are double the original projection.  Volume and efficiencies are projected to reduce out year costs, but the many overruns early in the program result in a projected total program capital cost of $400 billion for 2400 aircraft - an average $166 million per aircraft.

The Air Force and Lockheed see the per unit price declining as production volumes rise for U.S. purchases and allies begin purchases.  The next order for the Air Force version is expected to cost about $110 million per aircraft and the Air Force says out year purchases will be about $85 million.  Navy and Marine Corps versions are more expensive due to requirements such as heavier landing gear and vertical takeoff and landing capabilities.

In 2009, President Barack Obama sought to tackle military procurement.  His poster child was the replacement of the presidential helicopter fleet.  Sen. John McCain and others were pressing President Obama to rein in recurring issues of cost overruns in a time of economic downturn.  President Obama said of the presidential helicopter fleet replacement, "It is an example of the procurement process gone amok and we are going to have to fix it."

At that time, the 28 Marine One helicopters to be built by Lockheed Martin were over budget at an estimated $13 billion for program capital costs – a per unit cost of over $450 million per helicopter.

As a former U.S. Navy helicopter crew chief with years of experience in the Sikorsky VH-3A helicopter that served Presidents Kennedy, Johnson, Nixon, and Carter, I was shocked by the price.  For comparison, the flyaway cost of a new UH-60M Army transport helicopter is less than $17 million.  Recognizing that upgrades to the basic airframe such as self-defense, communications, single point of failure avoidance, and executive furnishings are expensive, one can still not fathom why the new presidential helicopter would cost 25 times more than a standard helicopter.

In February, 2009 President Obama asked Secretary of Defense Gates to put the program on hold and by June the Navy cancelled the project.   Unfortunately, $4.4 billion had already been spent and a number of helicopters were in various stages of completion.

A complete reevaluation took place with the Congressional Budget Office providing four alternative pathways and a new contract competition took place.  Lockheed Martin subsidiary Sikorsky was awarded a contract to build 23 VH-92 presidential helicopters in 2014 with delivery in 2017 and 2020.  The total program capital cost is projected to be nearly $5 billion for the 23 aircraft or approximately $205 million per aircraft.  The halving of the total program cost results from reducing the number of aircraft by five, using an existing proven Sikorsky airframe, and reducing capabilities.

Though the per-unit cost appears to be half the original program, it does not include the $4.4 billion spent on the original program that was cancelled in 2009.   When that is added into the per-unit cost it once again rises above $400 million per helicopter.

President Obama and Congress may have had the best opportunity ever to transform military procurement when the economic collapse of 2009 provided cover, but as the three examples above demonstrate – nothing has changed.

Donald Trump is unconventional in many ways and this may or may not make him more successful in regard to Pentagon procurement.  On the one hand he may learn that the “art of the deal” does not apply to the antiquated procurement processes of the federal government and a defense industry entrenched in every congressional district.   On the other hand, his unwillingness to fall in line with conventional methods and systems may well prove his advantage in trying to tame defense procurement.  Let us hope so.

1 comment:

  1. See this article about Trump meeting at his FL home with Air Force generals and the CEOs of Lockheed Martin and Boeing. http://www.foxnews.com/politics/2016/12/22/trump-asks-boeing-to-price-out-comparable-f-18-super-hornet-to-lockheeds-f-35.html He probably doesn't want to move to the F-18 Hornet as frankly, the costs of the F-35 are sunk costs now and the per unit cost is going down, but maybe he can get LM to drop the out year cost on F-35 from $85 million per copy to $70 million or lower just by applying this pressure. That would be a real achievement of about $30 billion.


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