Home » Aviation » Winter: New Contract Incentives Encourage Efficient F-35 Production


Winter: New Contract Incentives Encourage Efficient F-35 Production

Test pilot Billie Flynn pilots an F-35C Lightning II test aircraft at Naval Air Station Patuxent River, Md., April 4, 2018. (U.S. Navy photo courtesy of Lockheed Martin/Released)

Seeking to install long-term cost savings into what is routinely derided by critics as an overly expensive aircraft, the F-35 Lightning II Joint Strike Fighter program director worked a new incentive regime into the recently inked contract with Lockheed Martin.

The $11.5-billion contract to build Lot 11 — the 141 aircraft included in next batch of F-35 manufacturing — was signed Friday and shaves millions of dollars of the cost of each fighter. The difference with this contract is Lockheed Martin is incentivized to improve its production process, Vice Adm. Mat Winter, the F-35 program director, said during a reporters roundtable Monday.

Past contracts only included cost incentives and fees paid to the manufacturers, rewarding them with boosts to profit margins as long as their costs remained below the contract price tag.

However, inefficient production lines meant prime contractor Lockheed Martin routinely missed monthly manufacturing targets, Winter said. Costs remained high – between $94 million and $122 million per aircraft, depending on the variant – because of the need to frequently rework, repair, or scrap parts with manufacturing mistakes.

“We deliver predominantly defect-free aircraft,” Winter said. “Right now, Lot 10 aircraft are coming off defect-free, but these quality issues during the production line process is causing those late monthly deliveries and increased cost to the contract.”

The new Lot 11 contract is designed to reward Lockheed Martin with boosts to its profit margin if the production process is improved, Winter said.

“I’m not incentivizing them to make fee. I’m incentivizing them to change their performance, and that’s a big key. That’s a dialogue we have not done on previous contracts,” Winter said. “We have taken a portion of that same fee amount, a portion of it – not an increase, same portion – chiseled it out and said, if you don’t increase your performance you won’t get this fee. If you increase your performance, then you get the same fee you have in the past.”

The propulsion contract with F-35 engine maker Pratt & Whitney has similar production incentives, Winter said. The goal is to build an F-35A – the variant using standard runways for takeoffs and landings – for less than $80 million per aircraft. Winter thinks squeezing savings from the production line, as the rate of production steadily increases with each lot, should accomplish this goal by the time a Lot 14 contract is signed.

“This will be the way we do business and the construct for the future,” Winter said.

  • Bubblehead

    The biggest threat to the F35 is no longer production costs but cost per hour/maintenance costs of $50,000 hour.

    • NavySubNuke

      Exactly – we only buy the plane once but we spend decades maintaining it. To date no one has figured out how to maintain a stealth aircraft at a reasonable cost — hopefully we are able to do that with F35 or we are in for a world of pain.

      • RunningBear

        We expect that when the final a/c rolls off the assembly line and the total count exceeds 3,000+ a/c, the incurred costs of ops. and maint. will be significantly reduced below those costs of our legacy a/c.
        IMHO
        Fly Navy
        🙂

        • Duane

          Total production is likely to be well up in the 4,000s by the time they’r done, with foreign sales figured in.

          By 2020 – one year from now – LM and the DOD expect to ink a contract for purchase of F-35As at less than $80M fly away. That is much less than the current sales price of nearly all fourth gens, including new build F-16s which are well into the $120M+ range. The only exception is the F/A-18 Super Hornet, which is an extremely mature production line and supply chain at $78M each.

          In fact today an F-35 A at $89M is already far cheaper than a new build F-16 V which is still in production. Much cheaper than a Euro Typhoon., and still a few million less than a Rafale.

    • Duane

      They’re already down to about half that number today. You’re using extremely old data from before the aircraft went operational. The AF reports that their O&M costs for the F-35A are about the same today as for the F-16, and about half of what it costs to operate an F-15.

      The higher the number of aircraft in the fleet, the lower the cost per hour because of fixed O&M costs. Similar to the downward cost curve for manufacturing. Because the Navy is getting their C models last, the Navy will also be further up the cost curve, and behind the AF and Marines by several years.

      There is also the cost of having a non-operational aircraft. The operational availability for the F-35 is well over 90%,while for the F/A-18 Super Hornet and F-15s, the operational availabilities are far below that, around 50%. Whether the aircraft is operational or not, it still costs the same to buy.

      • EyeInTheSkye

        Duane, do you have a source on that lowered cost? Last I heard (April-May), the AF was trying to get O&S that low, but hadn’t actually reached that target yet.

        • Duane

          The AF reported in the media about a year ago that the cost for the A was down to about what it costs for the F-16, which is about half the hourly cost of a F-15. They don’t like links here at USNI but you can google it.

          Keep in mind that hourly costs are not just a single fixed number for a given aircraft type … many of the costs vary a lot depending upon location due to factors like supply chain sources, construction costs (yes,hangars and warehousing of parts figures into the total O&M costs for aircraft), etc.

          I read an analysis of USAF hourly operating costs for the F-16 about two years ago that varied from a low of around $14K per hour to as high as nearly $29K per hour, based upon the operational base location for the aircraft. The average across all those locations was in the low to mid 20sK per hour. Same factors apply to any aircraft including the F-35.

          Also, one has to be careful in defining O&M costs and what they include, and apples and oranges comparisons are all too common in discusing hourly operating costs. To be real, the hourly cost needs to take into account everything, from variable costs like fuel and lube and consumable parts and supplies, to allowances for engine inspections and overhaul, to fixed costs like hangarage, parts and supplies inventory, and training and operational costs for maintenance personnel.

          I’ve also seen bogus “hourly operating costs” claims that attempt to include an hourly allocation for the original purchase cost of the aircraft – that amounts to “double counting” of the purchase cost. But opponents of a given aircraft type (such as the F-35, or the MV-22) slyly try to slip that in to try and make the hourly operating cost look huge by comparison to another aircraft type that conveniently does not include such an allocated purchase price in the hourly cost.

          The main things that have driven down the operating costs for F-35s are the 1) increased numbers of aircraft, thus spreading fixed O&M costs across a larger fleet of aircraft, and 2) the improvements in ALIS over the last three years.

          Three years ago ALIS was not working very well, but by 2017 it was working great. ALIS is a huge help, because it collects, stores, reports, and analyzes aircraft data in real time allowing condition-based maintenance scheduling rather than hourly based maintenance. Also, ALIS helps tremendously in the amount of time it takes to do a given maintenance task by eliminating a lot of manual troubleshooting previously required to isolate a given issue.

          • EyeInTheSkye

            Yeah, most F-16 costs I see hover around the $20k-25k mark. Just found a Forbes (yeah, I know…) article talking about LRIP 11, where operating costs/hour for the F-35 were down to a $30k average. Fingers crossed on it dropping below the $25k mark, since I think that’s really what’s needed to stave off a procurement quantity cut.

          • Duane

            Admiral Winters just stated to the media (see post on BD today) that the hourly op cost across all models of the F-35 last year dropped by $12K per hour. I don’t know exactly what he’s comparing it to, but if that is compared to the 2012 costs compiled by RAND in 2013, then it is already $5K an hour cheaper than a F-16. We’ll need to get some more clarification by the PEO as to what baseline he’s comparing his $12K an hour reduction to, but I’d say they’re already at the goal, if not well below.

    • NEC338x

      …and it only “derided by critics as an overly expensive aircraft” when used as a stubbly legged non-stealthy bomb truck as shown in the article’s picture. I can see where it has value delivering ordnance in opening days of a conflict. Doubt creeps in when you’re considering a role for pounding the rubble ala Intruder & Skyhawks. Supporters will say that pounding the rubble is sooooo 20th century and that LICs will never last that long again. I guess we’ll see.

    • RunningBear

      This article addresses the issue of LM delivering “broken” a/c, not ops. and maint. costs. I encourage Winters to persuade LM to deliver unbroken a/c, on schedule, per the contract. As the program a/c costs are continuing to be reduced towards and below the goal of $80M, the unprecedented lower costs for the “state of the art, leading edge technology” of these a/c is only noteworthy for us taxpayers.

      IMHO
      Fly Navy
      🙂

    • Marauder 2048

      Data rights ownership. It’s the big issue here and I would have liked to have heard move from VADM Winter on this.

    • Corporatski Kittenbot 2.0

      Lot lower than that nowadays

  • RunningBear

    LM continues to improve their manufacturing assembly process for the F-35, yet the late deliveries of broken a/c is not improving proportionately. Either the parts are not of adequate quality or the assembly process is being botched by LM employees, thus incurring expensive rework. Is it not possible to do it “right the first time”?
    IMHO
    Fly Navy
    🙂

    ps: the wings are not optional!

    • Marauder 2048

      Yeah. That was my initial reaction as well. Is it:

      Factory Scrap, Rework and Repair

      or

      Supplier responsible Scrap, Rework and Repair

    • Duane

      Actually, the F-35s have not suffered any such defects this year … the reports at the beginning of this year were about a very small handful of aircraft delivered with defects the year before. The debate wasn’t over fixing the small number of defects, but was about how much payment would be held back by the government for how long – a contract argument, in other words.

      So yes, the quality is ramping up along with production rates and opposite to production costs.

      • RunningBear

        “but these quality issues during the production line process is causing
        those late monthly deliveries and increased cost to the contract”, not my words.

        Again, either the LM guys are botching the assembly the first time or the sub-vendor’s quality is less than contracted. Either way the supply chain must improve, where the line will continue to grow from 90 – 150+ a/c per year. Winter is griping “yet” about the touch work by LM and demands more robotics to perhaps mitigate the re-touch (increased costs).
        IMHO
        Fly Navy
        🙂

        • Duane

          It’s all in the learning curve. Manufacturing 101 stuff. We experience exactly the same stuff in production of every single product the government buys.

          Commercial manufacturers experience the same thing .. whether it is Ford making cars, or Apple making iPhones, or Samsung making TVs..

          • RunningBear

            The fact that Winters is advocating more robotics is representative that someone is whispering in his ear for a more repeatable (less touching) assembly line. LM, by far, is generations ahead of their competition in a/c assembly of the new materials technology and the robotics, even at this point and now their client is advocating even more, is more than coincidental. It is imaginable that PEO Adm. Winters has access to the B-21 processes and even as a courtesy visitor, being able to compare what LM is showing him versus what NG is gearing up, may be the incite he is conveying! $60-70M ea. may be achievable!
            IMHO
            Fly Navy
            🙂

  • airider

    The thing that bothers me about this “contract efficiency” story being told is that now miraculously the contract will drive performance. The reality is that after many rounds of cost plus “LRIP” aircraft, LM is comfortable that their workforce’s learning curve can support a good profit margin because they’ve ironed out most of the issues in their production lines. The learning curve effort was paid for by the taxpayers, not LM. Now we get to “incentivize” LM to actually do it. What a racket.

    The only way to drive efficiency in the MI complex that I’ve seen is fixed, firm price contracts. It forces industry to put up or shut up. Folks may say that what the DoD is asking for is too risky for companies to bid on without cost plus contracts. My response to that is fine, DoD will do the R&D with its own labs, and hand it to industry for production once it has reduced the risk.

    • Duane

      There is nothing miraculous about high volume production efficiencies. It is totally well understood by everybody in the manufacturing business, it is Econ 101 type knowledge.

      It is a combination of fixed costs spread over a growing production volume, plus manufacturing “learning curve” (i.e., the longer a manufacturer produces a given product, the more it learns how to increase production efficiency and avoid errors); and the value of ordering parts and supplies in long term volume purchases, which enables suppliers to cut their costs.

      Every single bit of this cost reduction was planned decades ago, it was always baked into the cake. When the F-35 program was re-baselined in 2012 (after going through several years of funding uncertainty from Congress, including a virtual halt to the program due to the Sequester), it forecast exactly these reductions in production flyaway cost. The total production cost for all F-35s, including R&D, is still about $400B, just as it was 6 years ago, hovering within a small range of a few billion plus or minus year to year … hedging toward the minus side now.

      It only looks “miraculous” if you are ignorant of the facts.

  • Jack D Ripper

    With one lost,,one totaled engine,,it looks a bit dim on the first deployment,,

    • Go back and check how many F-14/15/16/18’s we lost early in those programs. The F-35 is by far the safest fighter airplane in history.