By Doug Cameron
A senior Pentagon official lashed out at Pratt & Whitney,
saying that the United Technologies Corp. unit is failing to meet
commitments to cut costs for the engines for the delayed and
over-budget F-35 Joint Strike Fighter.
The estimated cost of building the F-35 rose in 2013 after two
years of decline, according to new Pentagon figures released
Thursday. The report said the forecast price of the advanced jet's
engines is rising far faster than for other parts of the jet, which
is due to enter combat service next year.
The F-35 has become notorious for being one of the most
expensive weapons programs in history. The Pentagon report said the
program's anticipated cost, which encompasses the production of
2,443 jets, rose 1.9% from last year's estimate to $398.6 billion,
despite years of efforts to trim the price tag.
The Defense Department has focused its cost-cutting efforts
increasingly on Pratt, after having improved relations with the
F-35's prime contractor, Lockheed Martin Corp., securing lower
prices for each batch of new airframes and closing deals far
quicker than in the past. Pratt has said it has cut the average
cost of providing the jet's single engine by 40% since the program
started, and continued to lower the cost of each successive batch
bought by the Pentagon for the Air Force, the Navy and the Marine
Corps., and for international customers.
But Lt. Gen. Chris Bogdan, the military official in charge of
the program, said the company isn't doing enough. "Pratt is not
meeting their commitment. It's as simple as that," he said.
Pratt said it had an "aggressive" cost reduction program in
place, and that federal budget cuts had reduced the number of
engines it would deliver from 2013 to 2016 by 25%, compared with
forecasts made five years ago.
"Delays in procurement have an effect on costs," the company
said in a statement. "We need production program stability in order
to meet the cost objectives on the program."
United Technologies is the world's 10th-largest military
contractor by revenue, with the bulk of the $9.9 billion in sales
to the U.S. government last year stemming from its Sikorsky
helicopter business. That proportion is set to shrink as F-35
production increases. Pratt delivered 50 F-135 engines last year,
representing around a third of its defense revenue, and this is
expected to rise to 200 a year by 2020, when F-35 production is
expected to peak.
While the Pentagon has withheld some payments to Pratt as the
two sides wrangle over the price of existing and future engine
deliveries, Gen. Bogdan said he had limited sanctions since the
company is the only supplier.
The U.S. stopped funding a rival engine project led by General
Electric Co. in 2011, after GE had poured millions of dollars into
an effort to maintain a share of a market estimated to be worth
over $100 billion.
Gen. Bogdan said that when faced with single suppliers, it is
"difficult to find the right levers and motivation to drive costs
down."
Pratt spokesman Matthew Bates said the company hadn't slowed its
cost-cutting efforts since GE pulled out, and is confident of
securing a "fair" deal with the Pentagon for the next two batches
of engines by the end of June.
Competition is central to the Pentagon's efforts to cut
acquisition costs. The Pentagon hired BAE Systems PLC in 2011 to
develop an alternative helmet for the F-35 after the original one
developed by Rockwell Collins Inc. and Israel's Elbit Systems Ltd.
ran into technical problems. It canceled the BAE contract last year
and said it had secured a better price with the original
vendors.
The estimated cost of operating the F-35 through its expected
lifetime from 2015 to 2065 fell by almost 9%, to $1.02 trillion,
but the average price of buying the plane over the life of the
program rose 2% last year. The total cost of acquiring the planned
2,443 airframes and associated systems rose 1%, while engine costs
climbed 6.7%.
The sticker price of new F-35s is lower than the lifetime cost,
and Gen. Bogdan said the latest F-35A version cost $112 million
apiece. While this was lower than the last batch of jets acquired
by the Pentagon, the price wasn't falling as much as in previous
years nor as fast as the Pentagon would like.
Part of the increase in the program cost last year came from
exchange rate movements. Some 30% of the jet's content is built
outside the U.S. The Pentagon, unlike its contractors, is barred
from using currency hedges to limit forex losses.
The new estimate of the F-35's cost was part of the Pentagon's
annual update on its most expensive weapons programs.
The agency has threatened two programs with cancellation after
they breached agreed spending limits. The two--the unmanned Fire
Scout Navy helicopter built by Northrop Grumman Corp. and a ship
landing system made by Raytheon Co.--were among four programs that
last year breached the Nunn-McCurdy law governing weapons-systems
costs. None of the Pentagon's big programs broke the agreed
spending thresholds in 2012.
Defense officials said the breaches were mainly due to
reductions in orders for the equipment that had pushed up average
prices, though they have to complete a mandatory review of the two
programs by June.
Write to Doug Cameron at doug.cameron@wsj.com
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