Latest F-35 Production Contract Keeps Program On Glide-Path To Affordable Planes

The Reuters news service reported this week that the price the government is paying for the most common version of the F-35 fighter in the latest low-rate production lot is 4% below the price in the previous production lot. The Air Force variant, representing two-thirds of the F-35s destined for U.S. forces and virtually all of the F-35s likely to be sold overseas, will be priced at $107 million each in the fifth production lot, compared with $111.6 million in the fourth lot. The decrease apparently represents increased efficiency in building each plane rather than economies of scale, since the production rate did not increase from lot to lot.

The F-35 program thus remains on a glide-path that will result in the cost of each plane matching that of similarly-equipped legacy fighters (like the F-16) at the end of President Obama’s second term. By some measures the rate of decrease in costs on the program is greater than 4% — a trend obscured by the government’s relatively aggressive pricing strategy in the previous production lot. Prime contractor Lockheed Martin has managed to deliver the planes for less than government cost analysts predicted in every production lot to date. The company has strong incentives to sustain that trend in future lots, since overseas customers are unlikely to buy a fighter costing significantly more than the latest version of fighters they are operating today.

Assuming that the production ramp-up in the revised program unfolds as planned, the cost to build each Air Force variant of the plane should fall to $64 million in today’s dollars in the tenth production lot, funded in fiscal 2016 and delivered in fiscal 2018. As with the legacy fighters in the force today, that does not include the engine, which the government procures under a separate contract. When you add up all the expenses, though, the cost of manufacturing each F-35A (the Air Force variant) five years from now looks likely to be identical to what manufacturing the latest version of a single-engine F-16 costs today. That’s important because the plane was conceived mainly as a replacement of the aging F-16 — although the F-35 will be far more survivable and versatile than the F-16.

The public discussion of F-35 costs has become quite confused, because there are at least a dozen different ways of calculating what the budgetary burden of the program will be. Many of the estimates include projections of future inflation and other variables that cannot be predicted with any degree of certainty. The most reliable way of understanding how the program is likely to fare in the future is to examine how it has performed to date. What the record shows is that despite multiple restructurings that have slowed the rate at which production increased, the F-35 continues to be manufactured at a lower cost per plane than Pentagon analysts predicted, a trend which will result in an affordable, world-class fighter once full-rate production begins later in the decade.