It's not every day that a defence contractor tells you you're planning to pay way too much for their latest high-tech gizmo.
But don't say it can't happen. When buyers are drowning in debt and sticker shock sets in, it's only natural for sellers to announce that they've got a great deal, just for you.
Still, who knew we could snag 65 state-of-the-art F-35 fighter jets for just $65 million a pop?
If that sounds like a lot, you obviously don't spend much time shopping for fighter jets. That price is a cool $10 million less for each fighter than Canada's Defence Department has already budgeted. Let's see: we ordered 65 planes … multiply that by a saving of $10 million each and … hey! We could save a ton of money here!
As strange as it may seem, that is what Lockheed Martin vice-president Stephen O'Bryan told CBC News in an interview at the company's vast F-35 manufacturing plant in Fort Worth, Texas, last week. Sure, the early prototypes are hideously costly — more than $150 million a copy, but Canada won't be buying until 2016, when production is at full speed, says O'Bryan, so the cost of each jet will fall.
By then, he says, "average unit price of the airplane would be $65 million." Is that with an engine? "Yes, sir."
An ex-fighter pilot who flew "shock and awe" missions in Iraq, O'Bryan says he means a "fully combat airplane," including an $11-million engine, sensors, guns, stealth coatings, the works. What about all those estimates that it's going to cost much, much more than $65 million? O'Bryan has locked on to that little missile before you even launch it.
"Some people use different numbers and those numbers are not necessarily relevant," he says. They include development costs, he adds, which Canadians will not pay. So, can we count on that price of $65 million each in 2016 when we have to pay up?
"You can!" says O'Bryan.
But can we really?
Those who have followed this tangled tale from the beginning will know, like Senator John McCain, that we have come a long way since Lockheed Martin first told us their new fighter would cost only $65 million. That was 10 years ago, before an epic saga of delays, software snafus, design changes, restructurings and runaway cost overruns which now has the project five years behind schedule. Even the hawkish McCain, who's no stranger to fighters, calls the F-35 program "a train wreck."
He said that in May, at a hearing of the Senate armed services committee which featured his searing indictment of the F-35 program. Instead of $65 million, he said, the real cost of each F-35 would be $133 million and will likely go higher.
Since he got that number from the Pentagon, the assembled Pentagon brass could only nod glumly and agree that the program is "unaffordable" unless a way is found to drive the cost down. McCain doesn't see that happening. We must start looking for options, he said. Consider this ominous exchange between McCain and Ashton Carter, the Pentagon's chief buyer:
McCAIN: "Right now, it's not an affordable program and the sustainment costs are not affordable — is that correct?"
CARTER: "That is correct. If you believe … if we live the estimates, we can't afford to pay that much."
McCAIN: "It seems to me we have to start at least considering alternatives."
Easy to say — but where is that alternative? Defence Minister Peter MacKay, visiting the Pentagon last week, said bluntly that it doesn't exist.
"The reality is," said MacKay as Defence Secretary Leon Panetta stood beside him, "this is the best and only fifth-generation aircraft available to Canada."
Little else available
So, doesn't that mean that Lockheed Martin has the taxpayer over a barrel? Back at the F-35 plant, program boss Stephen O'Bryan says, "I wouldn't say so right now. There's always competition."
There's really nothing on offer, however, that has the stealth capabilities of the F-35, and its "interoperability" with the U.S. and its allies — assuming they all go ahead with their plans to buy it.
And there's the rub: what if they don't? Some of those allies, like the U.S. itself, are awash in debt. Some are delaying or reducing their orders. Canada's Parliamentary Budget Officer Kevin Page thinks the real price will be closer to $148 million a plane. Such doubts are so widespread that there is talk of what the aviation industry tactlessly calls a "death spiral."
A "death spiral" is where fewer orders mean smaller economies of scale, leading to higher prices for each plane, leading to fewer orders, which means … well, you see where this is going.
We're not there spiralling downward yet. But it's easy to see why Lockheed Martin might be very keen to keep buyers on the line with promises of low, low prices. And Canada has no signed contract yet. In 2016, who knows what the real cost will be?
A money-saving plane
The question of the real cost has dogged Ottawa for years. The former Liberal government signed up for the F-35 program because, for our $65 million, we'd get a so-called "fifth-generation" stealth fighter, loaded with the latest technology. Who needs a boring old heads-up display for the pilot when he can now have a helmet-mounted one? He turns his head and the display moves with him! Or it will, if they ever get the thing to work. So far, it doesn't.
But the plane was not just supposed to be advanced. It was also going to be cheap. It would be a multi-purpose design which would eliminate the need to build different planes for different tasks — bombing runs, or carrier takeoffs, or Harrier-type vertical landings. (Actually, that last part isn't going too well, either. The Pentagon has put the vertical-landing version of the F-35 on "probation" for two years.)
The theory was that the U.S. and its allies would have one common airframe, one production line, one engine … think of the economies of scale!
Well, the Pentagon, Lockheed Martin and allied governments around the globe are thinking hard now. The plan could still fly if buyers hang in. But will the bargain prices come true? For a clue, check the Israeli defence budget. The Israelis, like John McCain, know something about fighters, and currently their budget for 20 planes is not anywhere close to $65 million each. It's more than double that: $137 million each.
Perhaps they don't believe in deals that seem too good to be true.