F-35 Problems Percolating For Lockheed Martin?

(MoneyWatch)  The Air Force Secretary, Mr. Michael Donley, addressed a forum held by Reuters in Washington D.C. and discussed the central program to the modernization of U.S. air power the F-35 Joint Strike Fighter (JSF). The Obama Administration has decided to accelerate production and testing of the advanced vertical and short take off fighter while canceling the F-22 Raptor. This means that thousands of F-35 will be the primary replacement for the aging F-15, F-16 and F-18 aircraft in the U.S. and its Allies air forces.

There have been concerns expressed that if the cost of the program increases due to schedule and test problems this will drive the cost of the aircraft up so that the current planned quantities cannot be purchased. Because one of the basic rules of defense acquisition is an item is cheaper the more of it you buy decreases in annual buy quantities will stretch out the program further increasing costs making it harder to buy the total amount. Mr. Donlan committed again to buying the large number of the F-35 planned but said that the schedule and annual buy quantities may be adjusted over time.

A more worrisome statement was made by Lockheed Martin (LMT) executives who said that the company is taking money out of the "award fee" part of the contract to cover schedule slips and cost growth rather then having the Government cover those. This means that first there are schedule issues that may be causing concern and second that Lockheed is willing to sacrifice some of the profit on development perhaps with a goal of making it up in production. This transfer of funding within the contract is good to a point but eventually if there are further schedule and cost issues Lockheed won't be able to cover them with the available pool.

Earlier this year an outside cost estimating team came in with a much higher development and production cost for the JSF as they expected delays in development and fielding. Not only will this delay if it occurs lead to higher costs for the JSF and the potential for fewer being built but it might also lead to a gap where the aging aircraft are being retired without new ones being built. The aging aircraft also will require more support dollars the longer they stay in service which will also affect the money available to procure replacements.

The JSF is the largest procurement program in the Pentagon's history due to the large number of aircraft planned. It will also be used by several different countries as diverse as England, Israel, Australia and Japan. A lengthy delay or severe cost growth will have a major impact on the plans of all of these countries plans and may lead to a major dislocation in the West's air power.