Bloomberg Reveals F-35 Budget Changes; Big Shifts But Modest Revenue Impact

Tony Capaccio of Bloomberg Business News scooped the competition yesterday by revealing Pentagon plans to make major budget adjustments to its biggest weapons program, the F-35 fighter. Capaccio reported that the fiscal 2011 budget request being sent to Congress in February will propose shifting $2.8 billion out of production accounts and into development over the next five years to increase testing on the three variants of the plane. The bad news is that this will slow the rate at which production ramps up to the planned peak of 240 planes per year. The good news is that there will be so much up-front testing that no unpleasant surprises are likely to be encountered during production.

The actual amount of money being shifted out of production year by year is not much for a $300 billion program: $340 million in 2011, $544 million in 2012, $716 million in 2013, $872 million in 2014, and $356 million in 2015. But the reduction in production funding means only 42 planes will be built in 2011 rather than 52, and 45 rather than 62 in 2012. Additional production cuts totaling 122 planes through 2015 are proposed in following years, although whether those cuts actually occur will depend on how the program progresses. The government is clearly creating incentives for prime contractor Lockheed Martin to perform well, implying that lost production planes will be added back towards the end of the planning period if its promises of steady progress pan out. For now, though, policymakers are assuming there might be problems and they therefore are adopting a more conservative funding profile.

Lockheed Martin probably doesn’t like these changes, because as Bloomberg’s Capaccio points out, companies typically make more money in production than in development. However, the government may be doing Lockheed a favor by reducing risk in the program, so that any problems are found early and production can unfold as smoothly as possible. Lockheed and the joint program office have been arguing strenuously that the effort was going well and was only a few months behind schedule, so there was no need for additional testing. But the operational test and evaluation community has been complaining ever since the Bush Administration slashed funding for developmental tests that unless every feature of the plane was thoroughly tested up front, the program would reach high-rate production with potentially unresolved issues. The proposed funding shifts make that quite unlikely.

I have argued here before that the F-35 program is in much better shape than some critics realize, and that there really is no alternative to proceeding with what will soon be the world’s only stealthy fighter still in production. America’s future success in the global aerospace market depends heavily on bringing F-35 to fruition so that dozens of overseas customers have the opportunity to buy it before their cold war fighters wear out. If the plane proves as popular as some analysts predict, it could significantly reduce the U.S. trade deficit in manufactured goods, currently running at about a billion dollars per day. Equally important, America and its allies must have an affordable next-generation fighter that cannot be targeted by the increasingly agile missiles of other nations. So why should Lockheed Martin care if it has to wait a couple more years to reach peak production? F-35 is the most valuable franchise in the history of aviation, and policymakers are making it even more of a sure thing.