Newport News Shipbuilding has seen a disproportionate amount of its COVID-19-related delays and inefficiencies hit its Virginia-class attack submarine production line, as the yard has prioritized its available workforce on supporting maintenance for in-service submarines and aircraft carriers, the company’s CEO told investors today.
Mike Petters, the president and CEO of parent company Huntington Ingalls Industries, said Newport News Shipbuilding in Virginia and Ingalls Shipbuilding in Mississippi saw about 65-percent attendance among its hourly production workforce during the second quarter of the year. In April and May, he said, when the company’s liberal leave policy was in place, daily attendance was closer to 50 percent, and by June and July that rose to as much as 77 percent.
But not having full attendance meant having to prioritized skilled workers across the large portfolio of work that happens at Newport News: building new Virginia-class submarines and Ford-class aircraft carriers, conducting maintenance on Los Angeles-class subs, performing refueling and complex overhauls (RCOH) on Nimitz-class carriers, and sending skilled workers to support maintenance work at the Navy’s public shipyards across the country, Petters said.
“What happens is, when you’re at less than full attendance, you start moving people from one area to another, and you start trying to make sure that you are focused on getting the right skills onto the right place. And so I think that’s unique to Newport News, I think that dealing with commissioned ships and deployable assets is a unique challenge for them in this environment” compared to other yards that just build new ships, Petters said this morning during a second quarter earnings call.
“At the beginning of this process, working with the Navy to try to make sure we prioritized deployable ships, and then unit deliveries, that starts to move around the priorities in the business a little bit,” he said.
Though Petters said the shipyard is prioritizing the work the Navy wants prioritized, this presents a problem for the Virginia-class construction cost and schedule estimates. The yard is currently building Block IV submarines, the contract for which included an aggressive learning curve that would bring construction length from about 70 months down to 60 months, with the cost of each boat coming down as the construction time also came down.
If welders, electricians and other skilled workers are moved from the Virginia assembly line to other parts of the shipyard, that means this submarine work may be done slower or out of order compared to the original plan, and the opportunity for the cost to come down on each successive submarine hull is diminished. Petters said during the call that the company faces $167 million in unfavorable adjustments this quarter, with $111 million of that coming from the cost and schedule performance of Virginia submarines alone.
“Our plan called for cost and schedule improvements as we worked down the learning curve on the Block IV boats in support of a two-boat-per-year cadence. As we conducted our regular second quarter program status reviews, it became clear that the [Virginia-class] program was particularly impacted by staffing and efficiency challenges as we prioritized work to align with our customer’s priorities at Newport News. This, in turn, disrupted the cadence of work and significantly impacted our ability to reasonably rely on the assumptions we were using in our risk registers for boat-to-boat learning and cost improvement. As a result, we are resetting our risk registers to reflect the performance trends we experienced in the quarter, including the impact of COVID-19,” Petters said.
In a news release accompanying the release of the quarterly earnings figures, HII reported that “the $111 million unfavorable cumulative catch-up adjustments on the Block IV boats of the Virginia–class submarine program included $95 million for cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends, as well as $16 million from delay and disruption directly attributable to COVID-19.”
Petters explained during the call that some costs are directly attributable to the pandemic – the cost of adding hand-washing stations, buying cleaning supplies, paying for employees to stay at home and quarantine, and more – and those costs could be reimbursed by the government. Congress has authorized the Navy to reimburse its defense contractors for these direct costs, but lawmakers have not yet appropriated the money, Petters said, leaving this situation unclear.
More unclear is who will pay the bill for the indirect costs, chiefly the inability to have a full workforce at the yard and take advantage of the planned efficiencies that would drive down cost and schedule. Petters said the Pentagon has expressed interest in helping industry cover these costs but that a plan doesn’t exist yet, and so financial statements released this week count those indirect costs as a loss for the company.
“There is no doubt that this quarter was challenging,” Petters said in the news release accompanying the earnings data. “However, when I look at the leadership team we have in place, the workforce we have hired, trained and certified over the past few years and the record backlog of work we have in front of us, I am very excited about the future of the shipbuilding business.”
The overall situation at the yard is leading to several expected delays: for the future Montana (SSN-794), float-off will be delayed from mid-2020 to late 2020, with delivery now expected in late 2021. The future New Jersey (SSN-796) will have its pressure hull complete milestone pushed from late 2020 to mid-2021, with float-off now in late 2021 and delivery in late 2022.
On the aircraft carrier side, milestones that future aircraft carrier John F. Kennedy (CVN-79) would have had in the fourth quarter of this year are being pushed into 2021, and the RCOH on USS George Washington (CVN-73) that was meant to end in late 2021 is being extended into 2022.
At Ingalls Shipbuilding the keel-laying of the 11th National Security Cutter, the future Friedman, is being delayed from 2021 to 2022.
In the rest of the portfolio, Newport News will redeliver USS Helena (SSN-725) from a maintenance availability later this year, and Ingalls Shipbuilding will deliver the ninth National Security Cutter, the future Stone, later this year.
In 2021, Ingalls will launch the future Jack H. Lucas (DDG-125), the first Flight III Arleigh Burke-class destroyer; lay the keel of the future Ted Stevens (DDG-128); and complete sea trials for the future Fort Lauderdale (LPD-28).
Despite the COVID-related challenges and delays, Petters told investors, “I would say that the focus on near-term milestones across the business has been pretty good. It’s the tail and the opportunity to recover in the tail that’s the challenge.”