James Hasik

How to Kill the Joint Strike Fighter, Part 2: just what does "unacceptable" mean?

There was an elephant in the room at the Senate Armed Services Committee hearing on the Joint Strike Fighter yesterday, and sometime this summer it's going to take a poo on Defense Secretary Robert Gates' office carpet.
        —Bill Sweetman, “Seeing the Elephant,” Ares: A Defense Technology Blog, 12 March 2010

Last week seemed a good week for Lockheed Martin’s Joint Strike Fighter program: whatever the costs, the F-35B performed very well in its short takeoffs, hovers, and vertical landings. Stephen Trimble at Flight Global was optimistic that these successes may prove a “tipping point” for the program. The trouble was that the news remained overshadowed by reverberating revelations on the real costs of the program. The financial situation has now become painfully clear the world over—at least to everyone not too closely associated with it.

Consider this Exhibit One. In a serious display of sclerosis in marketing, Lockheed Martin’s recent update of its product sheet (“current as of Jan. 14, 2010”) for the Joint Strike Fighter left in place these assertions (sic) about pricing:

“F-35A upper-$40 million”
“F-35B mid-$60 million”
“F-35C mid-$60 million”

I could insert the giggling here, and will definitely offer my congratulations to the aforementioned Bill Sweetman for finding those. The figures are rubbish, of course, as the Defense Department is now acknowledging that the JSF program isn’t just breeching its Nunn-McCurdy spending limit, but blowing right through it. The numbers above were the should-costs in 2002; in today’s terms, the Pentagon now estimates that each plane will cost at least $112 million, and the GAO thinks that number could be as high as $137 million. Even adjusted for inflation, that’s roughly a 90% cost overrun, and it’s fairly shocking for a program that has had fairly stable requirements over time. Ashton Carter, the Pentagon’s under secretary for acquisition, told the Senate Armed Services Committee (SASC) the other week that he suspected that Lockheed Martin had intentionally underbid on the development program some nine years ago, figuring that the company would get paid anyway, as the government would just accept a series of bigger bills with nothing more than harsh language.

To that point, Carter further told the SASC that the increase in estimated costs was “unacceptable”. As Inigo Montoya might put it, Pentagon officials can use that word, but it may not mean what they think it does. Is Carter saying that if Lockheed cannot decrease the price, the government cannot accept —that is, buy—the aircraft? With Air Force Secretary Michael Donley asserting that he has no alternatives to continue to put up whatever money Lockheed needs, that doesn’t seem to be Carter’s point, however meritorious the idea may be.

This gets to the question of just when that point can be made. If the various customers are indeed willing to spend at least $112 million per airplane, then it’s more than possible that Lockheed Martin will deliver. Overspending on military development programs is possible in part because actual technical failure is not the rule. A string of egregious and recent cases—the Airborne Common Sensor, the Future Combat System, the Comanche helicopter, and the bizarrely over-specified VXX helicopter—obscure the relative “successes.” Sometimes, pouring enough down the rathole really does fill it up. As Christine Fox, director of the Office of Cost Assessment and Program Evaluation, pointed out at the SASC hearing, the F-22 was also over budget, behind schedule, and short a few preferred capabilities, but it has a very loyal following as a fighter plane with its single customer.

One might also note that while $112 million was not remotely what the customers were promised, it’s roughly the going rate these days for a Eurofighter. However, that figure is known, and not subject to further escalation should the customers in the JSF program truncate their purchases, leading to lower scale economies in production. As I wrote earlier this month (“How to Kill the Joint Strike Fighter”), and before these latest revelations about pricing, peeling off a few of those customers would be very valuable in any effort that Boeing or other opponents of the JSF might make to encourage the US government to terminate, or severely truncate, the program. Given the dramatic news of the past week, it’s worth asking whether the recommended strategy has changed. The issue for the firms opposed to the JSF is whether they can finish the job that Lockheed has started for them, and push the F-35 over the edge of clear unaffordability—indeed, real unacceptability.

This moment has been a long time coming. Back in December 2008, the Norwegian Defense Ministry asserted that Lockheed had offered it a lower price on the JSF than Saab had offered on the Gripen Next Generation (NG). At the time, I asserted that the number suggested—$52 million for an F-35A—was “puzzling”. That figure now looks laughable, if not just fraudulent. Whatever the preferred opprobrium, it’s unacceptably unaffordable.

Then from Denmark last week came real hope for the anti-Lockheed coalition (this Napoleonic allusion rather works, doesn’t it?). As Bill Sweetman at Aviation Week recounted, Danish Radio had reported that the Defense Ministry in Copenhagen was prepared to recommend to the parliament that the government ditch the F-35A in favor of the F-18E/F. The Danes, it appeared, were clearly disagreeing with Secretary Donley: there is an alternative, and it’s called the Super Hornet. Then, today, word came that the replacement decision was simply being put off two years. That was bad news for Boeing and Saab, which had hoped that the newly revealed price tag of the F-35 would pull the Danes out of the project.

In the United States, though, as DoD Buzz put it, pressure is building for more Super Hornets for the carriers, and a multi-year contract for Boeing is appearing more likely. And despite the Australian government’s declarations of commitment to the F-35 program, the arrival of its first F-18Fs this week—as long-overdue replacements for F-111s—is a reminder that the RAAF could easily replace its Hornets with Super Hornets. So, regardless of how many Typhoons, Rafales, Gripens, or Silent Eagles the set of alternatives includes, the first breeches in the wall have been opened. To track my notional advice to Boeing, phase one may be underway: international expectation is starting to fracture.

If however, as South Park’s Underpants Gnomes would say, phase three is profit, we still have some work to do to figure out phase two. Boeing, after all, is probably looking for bigger coin than that found selling Super Hornets two squadrons at a time. So what’s next? From here, the key lies in understanding what the Lightning II is, and what it is not. The first two points we’ve known for some time; the third has been long suspected, but only obvious in the past few weeks.

The JSF is an industrial terror program. Mark Thompson of Time magazine this week called the JSF “a Swiss Army knife of the skies”—a fighter-bomber that was to please every possible customer with yet one more feature. The whole point of cramming all that functionality into a single airframe was to make the plane all things to all possible flyers. The programmatic juggernaut would then suck the wind from the sales of every other fighter-bomber-reconnaissance program worldwide, putting all of Lockheed Martin’s competitors out of business. It was, as the Brazilian military analyst Felipe Salles has put it, a veritable industrial terror program. Sign up with us, shut up about the source codes, and hand over your operational sovereignty, or you’ll all be stuck flying irrelevant aircraft. At least, that was how the plan was supposed to go.

The JSF is a flying frigate. Trying to pack those ten pounds of kit into a six pound bag then got to be quite a challenge. In aircraft terms, that meant internal carriage of a 2,000-lb bomb in each of the F-35A and F-35C’s twin weapons bays. (The F-35B just gets 1,000-pounder in each.) Add that huge engine, and the plane started to look pregnant. As a result, designing and building the F-35 has involved some compromises—so many compromises that it could be called a flying frigate, a do-everything airplane that does most things well, but few things exceptionally well. As a flying antenna, the airplane may prove really impressive at electronic warfare, even given the workload limitations of its single crewmember. That promise is not enough, however, to deter the US Navy from buying a whole lot of EA-18G Growlers, and the RAAF from taking an option on twelve.

After that, things run downhill a bit. It’s not said to be the dogfighter that the Gripen or Eurofighter is. When its clean lines are ruined by external stores, it’s not quite the bomber that the Super Hornet is—at least not for the money. As stealthy as it is, it’s probably a great stand-off interceptor, with its electronically scanning radar, infrared tracker, and AMRAAMs. Then again, the Eurofighter has an infrared tracker, a pretty good mechanically scanning radar, and AMRAAMs—as well as, probably eventually, the ramjet-powered Meteor.

Amongst American sailors, the term frigate navy is a bit of a pejorative—a force that doesn’t go long in areas of comparative advantage, whatever the choice might be, from carrier aviation to minehunting. That’s not a good choice for every country’s air force. Consider Austria: the Luftstreitkräfte is flying fifteen Eurofighter Typhoons because the Bundesheer as a whole doesn’t have much need for stealthy delivery of 2,000-lb bombs. Frankly, not many air forces do, and as such, a frigate may make for unaffordable overkill when a missile boat will do.

The JSF is a poster child for fiscal recklessness. Back in the day, of course, frigates were meant to be rather inexpensive warships. At least a few warship and aircraft makers have remembered that rule. Saab pitches the all-around Gripen as the “wings of your nation” because it handles fighter-bomber tasks well, but at about half the cost of the Lightning II. Indeed, the other week’s the revelation about that price is now providing tangible evidence that the wheels have come off the budget bus. Just rolling over on a 90 percent price hike is remarkably bad (if sadly, remarkably familiar) public policy. First, it encourages future Lockheeds to consciously and recurrently underbid massive development programs. Second, as I have written repeatedly, it pretends to spend money that governments throughout the world just don’t have. It’s so bad that some congressmen are starting to get a bit more than angry: Frank Labiondo of New Jersey told Ash Carter that he “feels like a second-grader being patted on the head,” as he is condescendingly told that all will be well as long as he keeps sending more money (the YouTube video is really worth watching).

In short, the JSF was supposed to be a do-it-all airplane that would conquer the market with an irresistibly low price. When that price became not just a fiction, but a bad joke, the formula evaporated. Pretty much everyone outside the Office of the Secretary of Defense has figured that out; it’s just that not everyone is yet saying it. The sooner they admit it, the better off Boeing, Saab, Dassault, and Eurofighter will be. Sooner is better than later because not all those production lines will be equally warm in a few years.

So, is there a window of opportunity for this anti-Lockheed coalition? Definitely—it’s a matter of convincing customers that “unacceptable” really does now mean not acceptable, and that they owe the troops and the taxpayers better than ill-targeted promises. As I argued last month, sticker-shock over the F-35 can help kick-start a real shift to a mix of aerial weaponry more appropriate for 21st century security challenges. In an era of highly precise weapons, in which JDAMs are giving way to SDBs, and in which Hellfire missiles are often considered overkill, it’s hard to imagine any essential use for bombs of that size besides busting bunkers. Sinking ships and dropping bridges are quite properly accomplished with cruise missiles; one can buy a hundred of those for the cost of a single F-35. Close air support works pretty well with missile-armed rotorcraft, turboprops, and drones; all of those come at least half-a-dozen per F-35.

We could call these eighty percent solutions at twenty percent of the cost, but that would belie the advantages of the richer mix of smaller aircraft and weapons. It’s quite mystifying how military platform designs continue creeping up in size just as increasing computing power facilitates miniaturization and remote operation. One can imagine the lines in the marketing pitch already: trading each F-35A order for an F-18F order adds a seat, an engine, a bunch of Harpoons, and if you call right now, an Apache Block III. Your grunts in Helmand will appreciate that last part in particular.

Should the WTO's decision bear upon the KC-X competition?

Colin Clark of DoD Buzz had a nice summary yesterday (“Airbus Naughty, Says WTO”) of the reactions to the final decision on the United States federal government’s complaint against several European countries’ launch aid to Airbus in the A380 project. Boeing’s supporters in the US Congress have been waiting for this day for a long time, as the outcome, while a considerable victory for US trade policy, was not shocking. Nor were the resulting histrionics.

For example, Todd Tiahrt, a federal congressman from Kansas with a Boeing factory in his district, showed himself to be as senseless as usual, asserting in a press release that “giving a vital national security component like the aerial refueling tanker to a foreign entity is reckless and extremely dangerous.” It’s a fair question what Todd thinks that an alliance like NATO is for. Something other than relying on one’s comrades in another color of uniform to watch your back? From his logic, is it not “reckless and extremely dangerous” that the Aeronautica Militare Italiana is flying KC-767s? Does he think that European air forces should never again buy from Boeing, lest they too rely on a “foreign entity”? The trouble with a congressman becoming an attack dog is that eventually he appears to be a lap dog.

Patty Murray, the federal senator from Washington State, continued her customary windbaggery on the subject with a pronouncement how “it’s clear that the A330, the very plane Airbus would offer our military, has received illegal subsidies that have hurt American workers.” One wonders whether Todd and Patty have computers writing their press releases for them. The words are pretty much recycled from past utterances, and if the process were automated, their staffs could be watching March Madness unfold instead. As I’ve noted before, the language of the treaty doesn’t call the subsidies illegal, but simply disallowed. The decision also does not apply to the A330 program, but merely (if reports of the still-confidential report are correct) to the A380 program. Granted, the A380 effort wasn’t exactly funded with classic project finance, and thus that fungible money helped the company as a whole, but the decision is still rather more narrow than Patty pretends. Her hyperbole isn’t helpful here.

The trouble for EADS, though, is that the senator has a point. If the EU’s subsidies to Airbus had been intended to simply remedy a perceived market failure (see below), then loans at commercially available rates would have been sufficient. Rather, European soft money gave Airbus’s workers and EADS’s investors an illegitimate advantage. As Tiahrt did fairly put it yesterday in a press release, “we finally have a concrete ruling to justify what we have been saying for years.” Boeing and its people got hosed. The question now is what to do about it.

In thinking about that, it’s important to consider who else did and did not get hosed. In general, a subsidy is effectively a tariff in reverse: rather than raising the price of imported goods, it lowers the price of exported goods. (As the WTO observed in its decision, that was quite the objective of those generous loan terms.) As Arnold Harberger’s (1971) triangles have deftly shown us for decades, in both cases the result generally degrades economic efficiency, but unevenly. In the countries whose governments subsidize the local firms, workers and investors in the subsidized industry obviously benefit, and taxpayers lose out. In countries with competing firms, workers and investors are discomfited, but consumers as a whole benefit. As is not widely realized amongst Boeing’s boosters in the United States, European subsidies to Airbus constitute an income transfer from European taxpayers to air travelers the world over. Lower prices on airliners trickle down into slightly lower airfares, and somebody else pays for it.

Admittedly, the equivalence between subsidies and tariffs is not ironclad: as Dixit and Kyle argued in their seminal 1985 paper (see the reference at the end), a case can reasonably be made that a subsidy, but not a protective tariff, could enhance global welfare if it encourages competitive entry. Monopoly may be natural, but if not, it’s a remediable market failure. That was possibly the case for Airbus as a whole in the 1970s, but it’s clearly not the case for the company in any particular program today. Even if the unavailability of a jumbojet larger than the 747 from a specifically European supplier was somehow a market failure, aid must come on the market’s term lest it distort the market’s discipline. That the A380 isn’t exactly a smashing commercial success even with all that easy cash is quite possibly symptomatic of the problem, and with effects more pernicious in Europe than in the United States. After all, part of what won Paul Krugman (reference below) that recent Nobel Prize was demonstrating how strategic trade theory is a dicey and generally losing proposition.

For the moment, though, let’s bypass all that. Very well—Airbus’s soft loans are disallowed under the WTO accord. So they’re a bad idea for the world as a whole, and certainly for those long-suffering European taxpayers. The question now, assuming that EADS does choose to bid in the KC-X competition, is whether the US government should factor the WTO’s decision into its buying decision.

The answer is again not so obvious, as we need to consider the question of who does and does not benefit in the United States, and in the several states. Awarding the KC-X contract to Boeing would relatively benefit the people of Washington State; awarding it to EADS would relatively benefit those of Alabama. In this matter, their interests are not somehow so patriotically aligned. As a Texan, I can’t personally say that I have a dog in this fight, except to see a good fight for good value for money. So let’s look at this from the standpoint of a US government that theoretically cared more for policy than payola. Any decision to consider the WTO’s decision should consider its effects in at least three respects. Of course, if the Defense Department follows its evaluation criteria to the letter, as it has promised, none of this will matter. All the same, what follows are the factors to consider, if they cared, and how a decision to let the WTO’s ruling slide by might affect the US government’s interests.

The short-term effect on defense economics would be beneficial. For half a century, if especially during the Cold War, US governments have been complaining that (most) European governments have underspent on their armed forces. If Mancur Olson’s collective action problem did not rear its ugly head, it was because, as Bill Buckley once put it on Firing Line, subsidizing European laxity was perceived to be less expensive than enduring the potential consequences. (For the long form of the argument, see George Kennan’s famous ‘X’ article of 1947).

Today, though, Boeing’s supporters argue that Europeans governments are subsidizing a bid in a US defense program—or in the balance, that European governments are subsidizing US defense. As one of the comments on Colin Clark’s article asks, “why would we [Americans] complain that European taxpayers are willing to provide American jobs on their dime, while ensuring cheaper, more capable refuelers for US taxpayers...?” Sure, we might all prefer a panzergrenadier battalion fighting hard in Helmand, but we might not turn down this offer out of some misapplied spite.

As I wrote a few weeks ago, without a bid from EADS, the Pentagon has no guarantee that Boeing won’t inflate its bid. If the Pentagon handicaps the bid for some fuzzy notion of fairness, it might as well just cut Boeing a check for the amount of the handicap right here and now. That figure will get baked into the bid, and US taxpayers will wind up paying for it. Rather, if it turns a Nelsonian blind eye to the decision, the Pentagon itself can reap the cascading effect of that subsidy through a lower price, whether from Boeing or EADS.

The long-term effects in industrial strategy would be beneficial. In the pricing of the KC-X contract, Boeing’s interest and those of the US government are thus, in the short run, obviously opposed. In the long run, they are perhaps not diametrically opposed: both parties should want to transact with a price that allows Boeing to make money and the government not to sour on too-high-a-price of aerial refueling. Where their interests are less aligned in the long run is the matter of industrial strategy. As I argued in a 2007 working paper (see below), for decades the US Air Force has made intermittent jabs at industrial strategy in the transport aircraft industry. Every ten years or so, it has tried to boost the prospects of Lockheed (1971), McDonnell Douglas (1982, 1990), and Boeing (2002) through loan guarantees, accelerated payments, and cross-subsidy through purchase of related products. If the intent has been largely unstated, the efforts have been remarkably unsuccessful. Airbus has relatively bested all of them, as it now leads the market.

In this round, though, awarding a KC-X contract to EADS would have a new, if probably unintended, strategic effect on the industry, and one which Boeing loathes far more than earlier closure of its 767 production line. The establishment of an Airbus factory on American soil would not just shift more of its competitor’s costs into the dollar zone. It would shoot Boeing’s home team argument in the kneecaps. The effect would be worse than for Boeing than Eurocopter’s planting factories in Texas and Mississippi was for Bell. Airbus might become as American a company as BAE Systems, and any lingering loyalties in the US Air Force would be permanently split.

This turnabout would be half the allure to the government: Boeing’s sometime loose grip on military policy would be broken, and the political dynamics of the industry would become looser yet than those between General Dynamics and BAE Systems in armored vehicles. Two arguably American companies would vie for the larger contracts involving heavier platforms, while some smaller and eager entrants would keep their duopoly honest. (Think here of Bombardier or Embraer playing a role akin to that of Oshkosh, Navistar, or Force Protection.)

The other half would be found in the creation of yet another center of aircraft assembly in the United States, adding Mobile to the already illustrious list of Seattle, Wichita, Fort Worth, and (to a degree) Palmdale. Long Beach and Marietta may eventually stop building cargo aircraft, at which point those company towns (in the respect of aircraft, at least) would entirely exit the business. The net effect would be delicious: the same subsidy that eventually knocked southern California out of the cargo aircraft business in would now work in part to put southern Alabama into it.

The long-term effects in trade policy would be questionable, but negotiable, and possibly irrelevant. The trouble with inaction lies in how it may encourage ongoing bad behavior. After the announcement, Airbus immediately asserted that the ruling did not apply to launch aid it is receiving for the A350 project. That’s strictly true, though some quick-but-thorough scrutiny of the terms of the loans would tell us whether they were made at market rates—and that’s not likely. More troubling, Airbus also said in its statement that “resolution will finally only be found in trans-Atlantic negotiations.” We should hope not. Bilateral trade deals are usually not exactly rules-based, and in the end, frequently entrench politically-connected producers at the expense of global consumer welfare.

On the other hand, the trouble with action lies in its mutual effects. The WTO accord provides for the imposition of countervailing duties on French and German aircraft exports to the United States. While these would benefit Boeing’s camp, they would harm Americans as a whole by allowing Boeing to increase its domestic prices above global levels. Todd Tiahrt hasn’t gotten the message, asserting in that last pronouncement that “in the midst of an economic recession, we should be doing everything possible to keep these high-quality jobs here on American soil.” Todd was clearly joy-riding in the GT California during Ben Stein’s class on the Smoot-Hawley Act. He’s also obfuscating a bit as to just who we are, as his figuring clearly excludes people in Alabama as much as it does those in the Midi-Pyrénées or the Free City of Hamburg.

But some action seems almost mandated. Those who run the federal government may still think that they are obliged to deal even-handedly with the people of all the states. After the Frontier States medicare exemption and the Louisiana Purchase of this week’s health insurance mandate act, that’s a big if. But if so, then the government’s interest in preserving competition, and not thus hurriedly writing up a contract for Boeing’s tanker, is mirrored by its interest in leveling the playing field for Boeing’s exports, and thus continuing to pursue the WTO case until the A350 matter is resolved.

It’s not yet clear that governments on the other side of the Atlantic are getting the message. Pierre Lellouche, the French Minister for Europe (a portfolio nonpareil, of course, in the United States) asserted after a cabinet meeting almost two weeks ago that

        This is a serious matter... Naturally, we're talking about the arms market, so it's not a classic matter of international law and the World Trade Organisation, but we're going to respond. I can assure you that there will be consequences. The president will act on the matter at the appropriate time. This matter is in no way finished.

Consequences! Yes, we’ll stand by for those. And that was just over the terms of the RFP. Lellouche (which, economically speaking, rhymes with Larouche) did correctly note that the arms trade is exempt from WTO rules (and even from the EU’s rules on member states’ trade with each other and the world at large) But more so, ordering tankers from Airbus was not exactly going to induce orders from Paris and Berlin for more American aircraft and armaments. So, it’s really unclear what not ordering them would do in that respect.

Still, the first move lies with the Americans, who will likely do nothing. Handicapping Airbus’s bid is clearly self-defeating. Not handicapping may send no immediate signal to the French and Germans that future launch aid must come on commercial terms, but it can be easily excused as an expediency of an urgent procurement schedule. Worse, given the advantage of Boeing’s smaller, cheaper jet under the terms of the RFP, heaping a duty on one’s own potential purchase could plausibly be taken as an unfriendly piling-on.

The thorny question, then, lies with the French and Germans in the second move. The sheer magnitude of the USAF’s transport and tanker fleet indicates how KC-X will be followed by KC-Y and KC-Z. All those decrepit C-5s will eventually start falling apart (hopefully before one falls from the sky), and it has long been clear that the C-130 can’t haul an armored vehicle a meaningful distance. EADS would like shots at all these replacement programs; at some point, the company must make a dispassionate business decision as to whether the basis points on the soft money are worth the opprobrium they generate in the world’s largest aircraft and armaments market.

If there’s a silver lining to this dilemma, it’s that this dispute may appear, with the passage of time, someday rather quaint. If Airbus and Boeing once constituted a duopoly, AVIC, Bombardier, Embraer, Mitsubishi, and Sukhoi are increasingly moving into the smaller end of their market. In all likelihood, UAC’s Ilyushin will not be the last foreign company needing to disavow any knowledge of its agents’ actions. And for both the military budget and the interests of innovation, that will be a good thing.

References

Arnold C. Harberger, “Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay,” Journal of Economic Literature, vol. 9, no. 3 (September 1971), pp. 785-797. For an excellent short form of the story, see “The Tyranny of Triangles: International Economic Benefits of Free Trade,” The Economist, 16 July 1994.

Avinash K. Dixit & Albert S. Kyle, "The Use of Protection and Subsidies for Entry Promotion and Deterrence," American Economic Review, vol. 75, no. 1 (March 1985), pages 139-52.

For an excellent (if dated) collection of essays on the question of strategic trade theory, see Paul R. Krugman (ed.), Strategic trade policy and the new international economics, The MIT Press, 1986.

George Kennan, “The Sources of Soviet Conduct,” Foreign Affairs, July 1947.

James Hasik, “Unstated and Unsuccessful: Observations on thirty years of the United States Air Force’s efforts at industrial policy in the transport aircraft industry,” working paper, April 2007.

Informational asymmetries about enduring demand: the opportunity for private equity in defense

This morning we all awoke to read how the Carlyle Group is selling Vought Aircraft Industries to Triumph for about $1.44 billion in cash and shares. As Carlyle bought Vought (from Northrop Grumman) in 2000 for about $1.2 billion, one might not assess the investment as a huge ten-year return. In Carlyle’s defense, though, not many of us back then had forecast two sharp downturns in the commercial aircraft business over the ensuing ten year. Thus, I have to hand it to them and everyone at Vought for weathering those storms reasonably well. Prediction is difficult, as Yogi Berra’s joke goes, but particularly about the future.

The deal reminds me of a seemingly dissimilar one by another private equity firm last year. Back in November, I wrote about the sale of Atlantic Inertial Systems (AIS) to Goodrich, and how J. F. Lehman & Company had sold for $375 million a company that it had bought two years before from BAE Systems for just $140 million. At the time, I asked rhetorically why BAE Systems itself couldn’t have realized this value from the asset, and answered by pointing at the big contractor’s strained span of control. A 100,000-person company that makes everything from nuclear submarines to fighter jets may simply have been unable to focus the required attention on an 800-person subsidiary that makes embedded systems. That’s no indictment of BAE Systems; it’s just an economic and technological reality. The limits of bureaucratic control are amongst the very things that make the dynamic discovery processes of the marketplace so important.

These two deals remind us in general that even if credit conditions have been challenging, private equity hasn’t been standing still in defense. We have seen considerable activity from not just the aforementioned Lehman and Carlyle, but also from KKR, Onex, General Atlantic, DC Capital, Arlington Capital, Veritas Capital, New Mountain Capital, and Ranger Aerospace. They’ve taken over companies like TASC, Sequa, Raytheon Aircraft, Allison Transmission, and the public sector side of the once-and-future Booz Allen Hamilton. They’ve sold companies like Vought and AxleTech and AIS—and they assuredly have more deals in mind. But what is driving their success, and why would defense be a compelling sector for them?

A few months ago, at a talk on private equity management, I heard an experienced partner in the business (if not in the defense business per se) tell of his firm’s internal study of their returns over time. Companies bought from family owners, they found, had produced considerably inferior returns to divisions carved out of large companies, and to whole companies taken off the public markets. As he put it, to mix some delightful Texan metaphors, the insiders usually “know when that horse is about to run out of gas.” They’ve also typically under-invested in the business, in their efforts to pay out the closely-related owners of their closely-held companies.

Informational asymmetries and managerial attention—those then are arguably the factors that differentiate defense as a target for buyouts today. Fortuitously for private equity investors, there is myopia and distraction throughout the industry, most notably in the head offices of some very large companies, about what the future portends.

Sure, it’s true that a handful of industrial countries today (Australia? anyone? anyone...) aren’t spending money they don’t have like drunken sailors. But the US federal government, which accounts for over 40 percent of military spending worldwide, is taking in some 30 percent less than it is laying out. That situation is not just unnecessary, it’s unsustainable. It’s thus unlikely that the Pentagon’s procurement accounts will be smaller bill-payers than income transfers and as of last weekend, even bigger medical guarantees. There is little point in speculating as to whether military spending will drop, for as Ben’s dad Herbert Stein put it, that which cannot go on forever will eventually stop. Thus, the industry as a whole needs to be planning for a drop of more than one-third in US procurement spending.

As I have argued for some time, that sharp shift in the budget constraint will lead to two classic results: an income effect, and a substitution effect. With less money coming in, the immediate bureaucratic response will be to spend less on everything, to peanut-butter spread, to salami-slice, as they say in The Building. That is itself will be unsustainable, as won’t address the fixed costs of doing business in all the old segments simultaneously. Alarm over average costs will lead smarter procurement officials then to increase spending on alternatives that offer much lower costs—even if they need to trade off aspects of performance and quality that they had hitherto considered inalienable. This substitution effect will thus produce a razor-sharp focus on value-for-money, and a general eschewing of large, complex programs and leading-edge developments. Who knows? They may even skip that generation of weapons after all. But whether with this government or the next, something’s got to give.

The trouble for much of the industry is that there’s little sign of such planning on their side yet, at least outside a handful of consultants and professional investors. This asymmetry is their opportunity—the chance to leverage their insights and skills in sectors of enduring demand with underperforming suppliers. Underperforming can mean a lot of things—undercapitalized, under-leveraged, over-leveraged, plain-old operationally askew, or just focused on inoptimal market segments. Carlyle, not known for taking on basket cases, got selective parts of this with Vought, and thought that it had enduring demand as well. Lehman figured on that with AIS, and got it quickly.

Together, the returns that Lehman and Carlyle did or did not achieve with AIS and Vought point to an important aspect of how to proceed. In 2000, with air travel booming, aerostructures seemed a solid bet. In 2007, hardened inertial systems were not so obviously a winner, at least not to everyone. That baseball wisdom is particularly operative here: forecasting is difficult, which means that there’s a lot of work to be done. The job lies in figuring out not just which segments of the industry will do well, but which will do well despite public perceptions of other priorities for military strategy, and which companies therein are the sources of untapped value. Private equity, after all, has been making money for decades betting not so much against the market, but on its own ability to move the market in efficiency-enhancing directions. If private equity continues this involvement in defense, the investors will make a truckload of money, and for their trouble, we’ll all wind up with an industry that is more responsive to the more practical needs of global security in this century.

Could the GCV be a KMW?

A few weeks ago, another consultant asked me what the Army was going to do about Ground Combat Vehicle—the GCV, or the hoped-for replacement for the Bradley troop carrier. I could only tell him that the one thing that I did know was that the Army didn’t know. Of course, not long thereafter, the Army actually released its RFP for technology development (TD) efforts aimed at building prototype GCVs. The Army is at least now claiming to know. And according to the chief of staff’s preferences, this new GCV should have

• the off-road mobility of the Bradley
• the over-the-road mobility of the Stryker (LAV-III)
• the blast protection of an MRAP
• ballistic protection better than that of a Bradley, and with modular armor
• more firepower than a Bradley
• seating for twelve (commander, driver, gunner, and nine passengers)

If this sounds like trying to stuff 10 pounds of kit into a five pound bag, well, I’ll get to that below. For now, let me at least say that fortunately, no one is asking that all this be air-transportable in a C-130. After an unhelpful experience with that requirement in the Interim Armored Vehicle (or Stryker) program, and a real disaster with it in the Future Combat System program, the Army is merely specifying transportability by C-17. That puts an effective upper weight limit on the whole bag at 70 tons, which may have been the basis for Reuters’ interesting report that the GCV would necessarily weigh 70 tons. If you give a mouse a cookie, after all, he’ll quite likely fill the parametric space.

What has not been generally noticed, though, is that the Army is considering awarding up to three 27-month, cost-plus-fixed-fee TD contracts. Three? Time was, we were all told that there were only two companies that could ever undertake this sort of project in the United States: General Dynamics Land Systems (GDLS) and what is now BAE Systems Land & Armaments (BAE L&A). The three part seems calculated to induce some other qualified party to bid—otherwise, what would be the point? And just who might that be? A quick check of the sign-in sheet from the recent GCV Industry Day in Warren, Michigan indicates who:

Krauss-Maffei Wegmann. KMW. Or as they say in Deutschland, Kay-Em-Vay.

KMW and Rheinmetall Landsysteme GmbH are partners in the consortium PSM (an abbreviation for the oddly Anglo-Saxon Project and Systems Management), which has been designing and building the Puma infantry fighting vehicle for the Bundeswehr. What we here in the US call initial operation capability (IOC) should occur sometime this year. The Puma is the closest thing on the market today to what the US Army wants. It’s not what the Army professes to want; it’s just the closest thing. The Puma, that is, has

• the off-road mobility of a Bradley, more or less (we’ll wait for the rodeo to find out)
• pretty decent blast protection with its double armored floors. (That might not be MRAP-performance, but only so much can be done with low-riding flat bottoms.)
• more firepower than a Bradley, with its 30 mm cannon (including airbursting ammunition) and antitank missiles (and in a remotely operated turret for more internal space and greater survivability)
• better ballistic protection than a Bradley, with modular armor that takes the maximum combat weigh to almost 41 tons (which leads to the unusual air-transportability profile of four panzers in five A400Ms)
• room for a crew of three

What the Puma distinctly lacks are the two things that led the Army away from the Bradley, and towards the Stryker, back in 1999:

• room for nine passengers (the Puma seats on six; the Bradley six or seven)
• that high road speed, in what presumably must be a tracked vehicle, just to manage the off-road mobility

The first issue is addressable. We should not just breezily wave a hand and insist oh, KMW can just stretch it, maybe make a station wagon version. All the same, if KMW can build one for nine, it can build one for twelve. Stretching that design, however, and however it is done, could produce a vehicle of more than 50 tons.

That’s still transportable by C-17, but it gets to what is not so addressable: road speed in a vehicle with room for twelve that sports enough armor to withstand 30 mm armor-piercing cannon rounds. Managing that could require at least a huge powerpack. The US Marines have already had an interesting experience in the Expeditionary Fighting Vehicle program with supercharged diesels. Gas turbines? It’s a plausible suggestion. The GCVs are, after all, supposed to run (see below) with the updated Abrams, right?

It’s not clear just how that general on-road, off-road mobility conundrum can be worked out, and whether it should be at all. But with the Puma specifically, there is another off-putting matter: its price, or at least its fully-loaded price in Germany. The consortium’s contract with the Defense Ministry for 410 Pumas exceeds €3 billion, or roughly $10 million per vehicle at today’s exchange rates. That’s a bit above the going rate for an infanteriepanzer, even if it is an impressive vehicle.

On the other hand, if there’s good news here, it’s that the US Army won’t need to buy many. To begin, even if it could, the money is just not there. As Zen Pundit put it the other month,

        in all the recent elections, Democrats have been clobbered by a “Revolt of the Moderates”—socially liberal, fiscally conservative, independent voters who came out in 2008 for Obama and are now shifting radically away from him. For the next year, politicians of both parties will be competing hard for this bloc, which means “deficit hawks” will soar higher than defense hawks.

This effect has already taken hold up North. The Ottawa Citizen’s David Pugliese wrote back in January that the Canadian Army’s Close Combat Vehicle (CCV) was looking a lot less essential against the federal government’s C$55 billion budget deficit. The vehicle viewed most favorably for the CCV role was BAE Systems Hägglunds’ CV90, but with the right pricing, the Puma could have been a contender. Neither is likely to happen now, at least not for quite a while.

Fortunately, given the US Army’s force structure, not too many GCVs are required. The Army is reducing its lineup of heavy brigades to just fifteen, all to be eventually equipped with the M1A3 Abrams, the M109A6 Paladin, and this future GCV. Each heavy brigade has, alongside its four companies of tanks and two batteries of howitzers, four companies of infantry in (today) 13 infantry fighting vehicles. If the TO&E continues forward, that’s just 15 x 4 x 13 = 780, or not much more than 1000 GCVs, after factoring in training, prepositioning, war reserve, and other marginal requirements. The National Guard could take more, but that depends on the long-term plan for heavy brigades in the Guard. Military police and engineers are a bit more useful to state governors, so don’t count on that indefinitely.

Even so, that’s more than twice the number of vehicles the Bundeswehr is buying, so one can easily imagine KMW and Rheinmetall’s interest. Two things make KMW (presumably with Rheinmetall) a particularly probable bidder. As noted, its people showed up in Warren, Michigan for industry day. They’re clearly interested. But critically, the company is one of very few, not controlled by either GD or BAE, and in a clearly friendly country, that could credibly propose to design and build this vehicle.

Israeli Military Industries (IMI) is arguably another firm with the right stuff—particularly through its experience with designing and building the Namer heavy infantry fighting vehicle built with the chassis of a Merkava IV tank. While firms like Elbit Fort Worth have shown that Israeli arms businesses can prosper in the US, IMI is state-owned, which could give the Army the conflict-of-interest willies.

Would either company want to facilitize a factory in the US to build something like Pumas or Namers? For the right price, sure, but that wouldn’t be necessary in any event. For who else showed up at industry day? Navistar and Force Protection. Neither company builds tracked vehicles, both know a lot about protection technologies, and both can be expected to have capacity to spare in a few years. Textron had earlier expressed interest in the build-to-print requirements of the Israeli Namer program, which to make use of US financial assistance, may need some assembly in the US. The American connection may be important for corporate citizenship, as the Army has indicated that it is looking for a third American company for that third TD contract. A teaming arrangement would make that happen right away.

Besides, for KMW at least, it all makes sense geographically. Navistar builds armored vehicles in Texas and Mississippi, Force Protection in South Carolina, and Textron in Louisiana. From Werner von Braun to BMW and Benz, we know that German industrialists like the South. So why not?

There’s just one reason that comes to mind: this whole thing may never happen. It’s not that the Army can’t make the case for a new armored troop carrier. Rather, it’s that no one can make an armored troop carrier that combines all the attributes the Army is requesting. At some point soon, the generals will need to choose whether they want road speed or cross-country mobility. The first points to wheels; the second to tracks. Unless someone has a revolutionary solution available—and the Army has sworn off “revolutionary” this time—whoever are chosen as the development teams are going to spend a lot of money chasing another technically elusive objective.

Would anyone be particularly discomfited? GDLS may not crave more competition, but it’s BAE L&A, for sure, that will be put out. It’s notable that the US Army’s plans for its armored fleet involve upgrading vehicles from GDLS (the Abrams and the Stryker), but mostly discarding vehicles from BAE (the Bradley and the M113). The Paladin Integrated Management (PIM) program is a potential bright spot for the moment, but note again that the Regulars will only keep 30 armored artillery batteries in the long run. Even with the aforementioned marginalia, that’s fewer than 400 howitzers. With the winding down of MRAP purchases, the loss of the FMTV program to Oshkosh, and the disappearance of recapitalization opportunities for Bradleys and M113s, that’s not a lot on which to sustain a business. GCV is then a must-win for L&A, which helps explain why Northrop Grumman was recruited onto the bidding team. At this point, they’ll readily share the proceeds if it means getting those hulls through the factory.

As happened the FMTV and KC-X disputes, we can expect to hear howls of indignation about the fate of something called “the industrial base” (a term which exists not outside the rarified world of military contracting). We’ll hear how “capabilities” will vanish forever with any exit from the industry, and how the Army’s probably single source approach will result in an eventual monopoly on heavy armored vehicle production in the United States. This is hogwash. For as the introduction of so many overseas designs in the MRAP program demonstrated, enough money can induce almost anyone to bid. Call that Biden’s Law, for the onetime federal senator who said so in debate.

As the United States spends more on its armed forces than any other country in the world, and by a big margin, the threat of entry by capable companies like KMW or IMI will most often be enough to put those concerns to rest. Once those firms come to the very lucrative US market, with local production facilities and American boards of directors, they become meaningfully American firms. So, if no one is soliciting KMW in particular, it’s probably time to ask.

Note to Mike Donley: How to manage Boeing before the KC-X deal gets done

As a naval captain friend once told me from his experience in buying ships, there are just three leading Rules of Management:

1. Know how they’re going to screw you.
2. Share the pain.
3. Remember that hope is not a strategy.

The third rule is useful counsel today for those (as I recently suggested) watching the Joint Strike Fighter program, and for anyone who voted for that Obama guy. The second rule has been shown stunningly this week by Airbus Military: its penance for the disastrous A400M development contract is to be a few billion euros more from its customers. The first rule, though, is the overarching one that will hopefully preserve you from needing to invoke the others. It’s also now one for consideration at the Pentagon in regards to the KC-X program.

That is, the US Defense Department has willingly wedged itself into a difficult spot. Deputy Secretary Bill Lynn said yesterday that he was “disappointed” that Northrop Grumman would be declining to bid. As a salty former naval person, I’m inclined to suggest that Bill pack sand; if the government had really wanted Northrop and EADS to bid, it could have written an RFP that would induce a bid. It didn’t, so now it’s stuck with that awkward problem of double monopoly: one buyer, one interested seller, and a Kabuki dance of bilateral contracting relations on the way.

Using the hedonic framework that I introduced in that essay of 9 February, the situation has now migrated from that of an undesirable vertical demand curve and dissimilar supply curves—

—to a vertical demand curve but only one supply curve—

 

As indicated, the net effect ex ante, in the absence of potential countermoves by the customer, should be an even higher price from the remaining bidder. Once the contract is signed, Boeing will have a price against which it must deliver, and limited potential for adjustments based on changes in commodity input prices. Until then, Boeing may feel like a monopolist: the only game in town, and one who knows it. Until then, I must say that I will not envy Air Force Secretary Michael Donley in his position. So, because dealing with a monopolist is rarely less onerous ex post, I offer two bits of managerial advice—in an economic context—on what signals to send and not send Boeing before it submits that bid.

Don’t pretend that the DCAA will save you. One could be tempted to hope (there’s that word again) that once the legion problems at the Defense Contract Audit Agency (DCAA) are corrected, the watchdog will reclaim its teeth. Sure, it’s a fixed price contract, but Boeing must disclose both its costs and its profit margin, so even without competition from Northrop and EADS, the government will get a good deal, no? Eh, no. The problem is that effective regulatory regimes are generally elusive, and for four reasons:

This is true in the first place because the informational asymmetries in regulation are severe, so the perspectives that regulators develop on their subjects are almost always distorted. In theory, the government needn’t spend too much time and effort trying to gin up should-cost numbers for the 767, as that airplane has been in production for 30 years. However, with a large, technically complex, and sun-setting system like the KC-X, the problem is serious. As relative prices shift, and commercial customers for this plane that no one else wants fall away, what it should cost becomes anyone’s guess.

Further, the appropriate contracting mechanisms are not obvious. Whether contractors are regulated according to price or cost, they, their managers, or their labor forces generally find some way of gaming the system to extract at least a portion of the rents they desire. Auditors and regulators can set rules, but smart people will always find a way around them.

Besides, regulatory capture is a near certainty. Regulators are very frequently observed to go native in the firms they regulate. The problem is particularly severe in technologically intensive industries where the regulators, by virtue of the domain knowledge required to participate in the regulatory process, most frequently hail from the industry itself. Sooner or later, factions within the KC-X program office, the DCAA, and AFCAA, and any other organization with what people on Capitol Hill like to call “oversight” would come to think about Boeing’s interests as synonymous with the Air Force’s interests. It’s an industrial base thing.

Finally, the regulatory burden itself is costly, which contributes to the overall cost of the project, even if no further rents accrue to Boeing. Ultimately, the Air Force has to pay for those squadrons of bean-counters and fact-checkers, and all those clipboards and green eye shades cost money. But more significantly, at a certain point, the managerial cost of the added oversight, through gummed-up processes and drawn-out schedules, exceeds its marginal returns.

Instead, threaten to do as Northrop does: to take your marbles and go home. Boeing had earlier made noises about “launch customer pricing” for the KC-767. At this stage, the folks there may think that the only number they must beat is the $184 million per plane that Northrop said that it would have bid. Exceeding that could embarrass even the machinists’ union. More practically, it would lead to immediate insistence in the congress for a reopening of the competition on terms more conducive to a bid from Airbus.

That is, for all the Pentagon’s insistence that tanker replacement must start yesterday, the RFP does contain this standard boilerplate (on page 8 of Section M):

    2.3.1.1.    A price analysis will be conducted in accordance with FAR 15.404-1 in order to ensure a fair and reasonable price has been proposed. The government may determine that an offer is unacceptable, and therefore unawardable, if prices are found to be not fair and reasonable.

Should-cost, as I note above, is guesswork. Fair and reasonable, however, are so vague and subjective as to lack all meaning. As a professor under whom I studied in graduate school once put it to us, fairness basically means “I like it”. And that’s the beauty of the language here: if the Air Force doesn’t like the price, it can balk, and tell Boeing to pack sand. Then, the Pentagon can restart the process with an RFP more likely to solicit competitive bids.

Late last month, I offered several reasons for why Northrop Grumman might decide to bid after all, even though the cards were so clearly stacked against them in this RFP. Herein, we may have a good reason for not bidding: it’s just possible that Boeing will get greedy, price like it’s a monopolist, and wind up with yet another restart. It’s unlikely, but it’s arguably a better shot than bidding a ten-pound hog in a seven-pound contest.

Then again, as one reads carefully, that press release from EADS nowhere says that the company won’t bid on the KC-X alone. After all, as its own prime contractor in the already-successful Light Utility Helicopter program, and corporate citizenship established through its American board of directors, there’s little to stop EADS North America from undercutting a complacent Boeing at the last minute.

Either way, there’s ample reason for Boeing to keep its pencil sharp—and the Air Force might do well to firmly reinforce that point.

How to Kill the Joint Strike Fighter

There are now very few options for Gates or Congress. Anything done will result in greater costs in the long run. They have made their bed and now they are stuck with having to sleep with doo-doo between the sheets. —        US congressional staff member quoted in Colin Clark, “Hill Reacts to F-​​35 IOC Shift,” DoD Buzz, 22 February 2010. 

Back in February, we all got to watch Congressman Todd Akin of Missouri, who represents the area around the factory that makes the F/A-18E/F Super Hornet, rather lecture US Defense Secretary Bob Gates about the difference between his favorite plane and the F-35 Joint Strike Fighter (JSF). Akin was particularly miffed that the secretary wouldn’t commit to another multiyear contract for Super Hornets, which would lower the cost per aircraft (according to Gates) by roughly six percent. As the congressman’s press release put it, “the Super Hornet [has] an active production line, and is dramatically cheaper than the JSF, which may not deliver anywhere close to on time.” 

Indeed, as Air Force Chief of Staff Gen. Norton Schwartz acknowledged on 18 February, the JSF program is breaching its Nunn-McCurdy spending limit. Moreover, it’s now not just hugely over budget, but another thirteen months behind schedule. As Defense News reported, the plane's system design and development will now run through at least 2015, two years after the US Air Force had planned to begin operating its F-35As. 

Having doubled down on his bet, but without all the information he should have gotten, Gates is understandably torqued. The secretary does have a reputation for results through righteous indignation: just witness the MRAP phenomenon. Thus did Bill Sweetman of Aviation Week cite Voltaire’s Candide in describing the defense secretary’s firing the JSF’s program manager, Major General of Marines David Heinz: dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres. It is true, as Stephen Trimble of Flight Global pointed out, that Lockheed Martin’s program manager is still in place. But while “Dan Crowley doesn’t work for the secretary of defense,” as General Schwartz told him, “he’s short $600 million. That ain’t trivial.” 

Let’s take this a stage further. Would it be possible not just to shoot a general or a program manager, but rather, the whole program? The challenges appear overwhelmingly huge. In the United States, the leadership of the USAF and the USMC see no clear alternative to simply continuing to pour whatever money they must into the program. (The Navy is an exception, and I’ll get to that below.) But the US has a further problem: the airplane is not just joint, it’s international. Like the International Space Station, the JSF is still stumbling along in part because it’s too international to deorbit. 

Those partner countries that have signed up for the program do have alternatives, and that points to the list of parties with a commercial or political interest in termination. Even Lockheed Martin, though, should think long and hard about how its competitors might work this issue. Boeing could stand the most to gain, and has a particular interest in killing the F-35C, the tailhook version which competes for the Navy’s funding with the F/A-18E/F—an airplane for which the Navy has shown increased affection of late. Close behind though would stand Saab, Dassault, and EADS (as the one shareholder in Eurofighter GmbH with little interest in the JSF program). These three European companies have an interest in killing the F-35A, the conventional land-based version, as Norway, Denmark, the Netherlands, Italy, Canada, Turkey, and Australia would all open up as marketing targets (Belgium and even Portugal might eventually make that list as well). Northrop Grumman, BAE Systems, and Alenia are perhaps of split opinions, in that all are major subcontractors to Lockheed Martin for the F-35, but that each has interests in the X-47B or Eurofighter programs, which would stand to gain from the F-35’s loss. In short, most of the combat aircraft industry would arguably like to kill this thing, and the rest is at best dispassionate. 

So, whether as an ambition or a red-teaming exercise, just how would one go about trying to kill the JSF? There is a host of arguments to make to every government involved today, and there are two fronts on which to press:

1. Fracture international expectation
2. Skip that generation of weapons

These points cover what the JSF isn’t today, and won’t be in the future, so they’re worth considering in sequence. 

FRACTURING INTERNATIONAL EXPECTATION 

The first move, that is, may be best made overseas. If more than one participating state could be pulled off its commitment to JSF purchases, particularly before the JSF enters full-rate production, then the United States government’s commitment to see the program through for its partners could abate. The most tempting targets could be those countries with commitments both to recapitalize military equipment and for collective security activities overseas: money for troop carriers that certainly will be used is probably more emergent than that for fighter aircraft that probably won’t. And almost any alternative the the JSF—Eurofighter, Gripen, Rafale, Super Hornet, even Lockheed’s own F-16 Block 60—offers budgetary certainty that the JSF program cannot deliver. 

This gets to the first argument against the program, and in almost any country in the program (the possible exception is Australia). Today’s budgetary madness has to stop. It is almost amusing when Ashton Carter, the Pentagon’s procurement chief, says that military spending will keep on rising for the foreseeable future. It is slightly more reassuring when Pentagon comptroller Robert Hale admits that Pentagon budgets will drop, but less so when he claims that spending for the F-35 will be effectively ring-fenced. More realistically, any bipartisan commission for balancing the federal budget, as announced just last month, will not be able to avoid recommending military spending cuts, and the JSF is simply the unavoidably biggest part of the investment accounts. Thus, the response to any Nunn-McCurdy breach shouldn’t be another reach for the rubber stamp. [1] 

In light of the aforementioned misfortunes with the program, some bet-hedging in the US is already under way. As Andrea Shalal-Esa of Reuters wrote back in January, the draft Pentagon budget for fiscal year 2011 requests another 12 EA-18Gs and 22 F/A-18E/Fs for not quite $3 billion. That would bring total orders of -18s, both Growlers and Super Hornets, to 304 aircraft, at an average cost of about $86 million each. 

 This gets to the second argument against the program, and one which Boeing has been cautiously advancing so far. The JSF is just not militarily vital. Several years ago, I asked the head of strategy at a European aircraft manufacturer why his company had no obvious plans for a fighter beyond the current model. “All our customers,” he said, “have enough fighters for chasing Cessnas for the next fifty years.” The next generation of unmanned strike aircraft is alluring, but the air sovereignty mission is just not so compelling today. For frankly, there’s just no threat anywhere that calls for such a huge fleet of land-based fighter aircraft. 

 Consider the United States, just to start. The Air Force, Navy, and Marine Corps together have not just the most powerful air fleet in the world, but also the largest in number of jet-powered combat aircraft. The next largest armadas is probably Russia’s, with almost 2200 aircraft. Even if Russia were a plausible opponent, the rest of NATO has its air force outnumbered even without the US on board. And given Russia’s long-term finances and demographics, that number will be shrinking. China’s air fleet is of comparable size—read, smaller than America’s—but it’s also remarkably unimpressive. China’s most numerous jet fighter is a copy of the MiG-21. Then again, one doesn’t fight the Chinese without necessarily having either the Japanese or the Taiwanese—and their significant air forces—on board. After that, the ranks thin out fast. Sidestepping India (another implausible opponent), the next largest air force is North Korea’s: more than 600 aircraft on paper, but not so many that are flyable or fueled. Besides, South Korea has over 500 aircraft, and of far better quality in men and materiel. Iran? Not half that many flyable machines. 

Worst of all, the F-35 definitely fails to address the biggest deficiency in combat aviation today: electronic warfare. There’s no plan yet for an EF-35, and the idea of mating jamming pods to a stealthy airframe could be a little strange. Besides, as Shalal-Esa of Reuters noted, the FY11 budget has more EF-18G Growlers because “military commanders considered them an urgent need.” The JSF? Not so much. 

It’s notable that this anxiousness over flight line numbers doesn’t quite get called a gap. Not so with naval fighters, for naval aviation is far more important than land-based aviation. Go back, for the moment, to the point about China. If one does fight the Chinese, comparatively short-ranged land-based fighters like the F-35A won’t be of much help. Where would they fly from? Taiwan is over 1400 nautical miles from Guam. Worse, as a group of researchers at RAND noted in 2001,

         the current USAF base at Kadena [on Okinawa] is nearly 500 nautical miles away from the Strait. As a result, F-15 or F-16 fighters operating from that base would probably need to maintain combat air patrol (CAP) orbits near Taiwan, since they could not launch and transit in response to warnings of a Chinese air attack headed for Taiwan. This is in contrast to, say, a carrier stationed 50 nautical miles off Taiwan’s east coast, whose aircraft would need to fly only about 175 nm to get to the centerline and could therefore be more responsive to incoming raids.

         Kadena may also suffer from limitations in its ability to support high-tempo operations by a large force of combat aircraft. The base currently hosts two squadrons totaling 48 F-15C fighters, a special operations group, an air refueling squadron, a reconnaissance squadron, an AWACS squadron, and a search-and-rescue squadron. In addition, it is an important transit point for airlift activity in the Western Pacific. Kadena is, in other words, a busy place even day to day, and it is not clear how many more aircraft could be operated out of the base under combat conditions. [2] 

Change the phase to “two squadrons totaling 48 F-22 fighters,” and the result isn’t much different vis-à-vis the F-35A. That airfield is also an easy target for a SCUD-type missile, as the nearest Chinese territory is only 450 nautical miles away. So, until the American government develops the intestinal fortitude needed to actually offer the Taiwanese a USAF fighter wing on its home soil, there’s no point in talking about the utility of the F-35A against China. 

Of course, the F-35C—the tailhook shipboard version—could be very helpful, but that aircraft is said to have significant structural problems at this late stage in the game. Still, as the Royal Navy and the US Marines know, there is more than one way to send fighter aircraft to sea. It may be useful for Lockheed’s opponents to concede the value of the F-35B as a short takeoff, vertical landing (STOVL) aircraft. If crassly, it’s the one variant that directly offends neither the American (Boeing) nor European (Saab, Dassault, EADS) branches of any anti-Lockheed coalition. Indeed, as an Anglo-Italian-American airplane, it provides plenty of work to BAE Systems and Alenia. Encouraging the DoD and the MoD to pour their money into that corner could lessen enthusiasm for the F-35A, which is the least essential airplane for the Americans, and the only one that anyone outside those three countries wants. 

What everyone wants, though, is not just aircraft, but that which the JSF program explicitly denies. The F-35 offers no operational sovereignty to overseas customers. All three European alternatives the JSF—Eurofighter, Rafale, and Gripen—come with access to software codes that the US government steadfastly refuses to provide. Without those, the F-35 is not locally upgradeable.Worse, the JSF program expects everyone’s aircraft to fly to Texas for servicing, which means that it’s not locally maintainable either.

SKIPPING THAT GENERATION OF WEAPONS 

The whole situation is just plain crazy for customers, and particularly in the long run. Lockheed’s unflinching acceptance of the government’s withholding of funds is quite telling here. The JSF, after all, was supposed to put everyone but Lockheed and Sukhoi out of the fighter aircraft business. Six hundred million dollars is a small price to pay for that. This gets to the possibility, as presidential candidate George W. Bush spoke in September 1999, of skipping the generation of weapons of which the F-35 is a part. That time may seem a world away now, but as noted above, what hasn’t increased is potential enemies fighter aircraft fleets. If there are near-peer challengers out there, they lie over a decade away. There’s some safety, for now at least, in another ten year rule. 

In this context, the case against the JSF rests not just with its high costs, faltering schedule, and centralized control, but with what would be possible if a fraction of the money freed up. If the F-35A won’t be greatly helpful against the Chinese, then the Pentagon ought to get working on what would be. As they have gotten squeezed out of manned combat jet purchases around the world, Northrop and Boeing have turned towards pushing the envelope in the unmanned field. From here, striving for breakthrough performance with modest technical risk, but grounded in the existing asset base, assails the investment of so much money in Lockheed’s plane. Could an F-18F be equipped to control a wingman X-47B? Boeing and Northrop may find common ground to pursue such a demonstration. The Navy Department would have its own reasons for supporting such a project, as it would point to a future beyond the Super Hornet, but cost-effectively bridged by it. 

Northrop Grumman may not be the only partner in this enterprise. Specifically, we should ask whether Boeing ought to cooperate in this matter with Saab. Boeing, for the immediate future, doesn’t have a stake in anything but the -18 program. The Gripen and the Super Hornet could be reasonable cousins in respect of marketing, in that they are both pitched as affordable aircraft, well down the learning curve of production, that have proven upgradeable over time. Further, both companies have big problems with the F-35. Saab is competing against a single-engine machine whose program has been holding forth vast promises of (yet mostly unrealized) offset business for years. Boeing is competing for the future of its whole combat aircraft franchise. Perhaps critically, Saab and Boeing are arguably, on the international market, the least rivalrous of all the possible pairs. It’s a single engine versus multi-engine thing. 

For companies like Boeing, there is a political angle here as well. Todd Akin may merely be doing his Missourian duty in boosting Boeing, but it’s important to note that he’s also a Republican. Now that Barack Obama has permanently sundered the Democratic party’s illusions of being more fiscally responsible than the GOP, it’s worth wondering how Republican candidates might approach the question of military spending in not just 2010, but 2012. They can repeat the usual mantras, or they can actually argue for across the board cuts in all federal spending, including that for entitlements and the armed forces. Like the Tories today in the UK, preparing for the general election late this year, they can browbeat the government of the day on its management of military more than its commitment to it. They can argue for spending less money, but spending it smarter. And that’s a case that any politician can make with a straight face. 

 NOTES 

1.        See Jim Cooper and Russell Rumbaugh, “Real Acquisition Reform,” Joint Forces Quarterly, 4th quarter 2009. 

2.        Zalmay Khalilzad et al., The United States and Asia: Toward a New U.S. Strategy and Force Posture, RAND, 2001, pp. 70–71.