Lockheed's JSF is Overdue, Over Budget - and Too Big to Fail

(MoneyWatch)  Confirming weeks of rumors, the Department of Defense said the F-35 Joint Strike Fighter had doubled in price since 2001. Originally estimated to cost around $50 million a year, the new forecast is that some versions will cost up to $113 million an aircraft, due to test problems and delays.

The aircraft program is headed up by Lockheed Martin (LMT) who saw itself stripped of $614 million in performance fees from the development contract. There is no danger Lockheed will lose the contract, though, as the Defense Department and Air Force continued to say that the new aircraft is "critical to modern warfare and are desperately needed to replace tactical fighter fleets in each of the services". In short, if not the F-35, then what?

The only other options are to start over or buy an existing aircraft that may only meet a few of the F-35 requirements. The more advanced and much more expensive F-22 Raptor program has been completed. That production line is shutting down. To restart it would cause a major cost increase in the individual F-22 aircraft cost estimated by RAND at over $50 million. The F/A-18 still in production for the U.S. Navy and the F-16 for overseas customers do not have the short and vertical take off ability the F-35 will.

What all this means is that Lockheed may get the chance to recoup all of its money when production starts. It also will mean that more money is required to build the same number of aircraft. Already U.S. allies like The Netherlands and Australia are complaining about this increase.

The Pentagon will try to negotiate a fixed-price contract with Lockheed Martin for the initial production. This may be difficult as it will force Lockheed and its sub-contractors to absorb more of the cost overruns and problems. It also means that it will be difficult to add money if the work falls further behind schedule. The Pentagon recognizes this but went on to say that "these decisions are crucial to moving the program forward in a way that is acceptable to the military and the American public."

Under the law the admission of this dramatic price and schedule change requires the Department of Defense to reaffirm that the F-35 meets the stated needs; otherwise, Congress can shut the program down. It looks like the Department will support going on with the JSF. In effect, the program has become "too big to fail."

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