F-35 fighter at risk of budget 'death spiral'

It's called the "death spiral," and America's newest warplane, the F-35 Joint Strike Fighter, is in danger of falling into it before the plane has even gone into service.

The term - recently invoked by top brass involved in the F-35 programme - refers to a budgeting Catch-22 that plagues the defence industry. To keep the cost per airplane low, you need to build and sell a lot of planes. But in tough economic times, governments cut orders to save money. That pushes up the cost per plane, leading to more cancellations, pushing up the cost, leading to more cancellations. And so on.

The U.S. military is in the process of making tough decisions due to mandatory budget from sequestration went into effect March 1 and could lop off $46 billion of Pentagon spending this fiscal year.

Earlier this year, Pentagon budgeteers crunched the numbers on Lockheed Martin Corp's F-35 in an exercise that spoke volumes about the troubles facing the world's most expensive weapons system and the Navy's uncertain commitment to it.

Postponing orders for about 40 of the 260 Navy models of the plane, which will take off from and land on aircraft carriers, would save money in the short-term, according to several defence officials familiar with the analysis, which has not been made public.

But it would also add from $1 billion to $4 billion to the eventual price of the F-35 program, already at a record-setting $396 billion.

Seven years behind schedule and 70 percent over early cost estimates, the stealthy F-35 "Lightning II" appears to have overcome myriad early technical problems only to face a daunting new question: is it affordable in an era of shrinking defence budgets?

According to a congressional watchdog agency, the average price per plane has already almost doubled from $69 million to as much as $137 million since the F-35 program began in 2001. Any further price rise could scare off potential buyers -including vital foreign customers.

"It's a house of cards," said one senior defence official who is familiar with the F-35 program, but was not authorized to speak publicly. "We have finally started improving performance on the program and efficiency in testing, and bang, we get this budget challenge."

Steve O'Bryan, one of Lockheed's top F-35 executives, says the company has already cut F-35 production costs by 50 percent, and is making progress on flight tests and software development.

"While there are still challenges and room for improvement, the program is heading in the right direction and we see no insurmountable obstacles to delivering the F-35 and its unprecedented 5th generation capability to our three U.S. service and international customers," he said.

Built by Lockheed and designed to be the next-generation fighter jet for decades to come for the U.S. Air Force, Navy and Marines, as well as key U.S. allies in Asia and Europe, the F-35 appears bullet-proofed against cancellation.

There are no other new fighter jets in the pipeline; the U.S. military's fleet of warplanes is aging; and 10 allies including Britain, Japan and Israel are deeply invested.

Manufacturing - and jobs - spread across 46 states ensure a vital layer of political protection as well.

With 10 million lines of software code onboard, and another 10 million lines in its logistics and ground systems, the F-35 is a flying computer with radars and other sensors that can see enemy threats 200 miles away in any direction.

In what was meant to be a money-saving move, U.S. officials designed the F-35 as one basic fighter (with three variants) to replace a dozen warplanes flown by the U.S. Air Force, Navy and Marine Corps, as well as U.S. allies worldwide.

The U.S. armed forces currently plan to buy 2,443 F-35s in total, comprising 1,763 A-models for the Air Force, 420 B- and C-models for the Marines, and 260 C-models for the Navy. Foreign orders are now slated to total 721.

The Marine Corps, under pressure to replace its aging fleet of Harrier AV-8B "jump jets", Boeing Co F/A-18 Hornets, and EA-6B Prowlers, is scheduled to be the first U.S. military service to use the jet, by late 2015.

Given the tight schedule and huge cost of keeping its aging current fleet flying, top Marine Corps officials are vigilant about the program and the budgetary risks it faces.

"Any delay in fielding the F-35 brings added risk to the Marine Corps' ability to execute our mission as the nation's crisis response force and it affects our ability to augment U.S. Navy carrier air wings," Lieutenant General Robert Schmidle, Deputy Commandant of Aviation, said in a statement to Reuters.

Schmidle and other planners at the Pentagon are desperate to avert the "death spiral" that gutted the Air Force's plan to buy 750 F-22 Raptor stealth fighters down to just 187 jets.

Behind closed doors, some U.S. officials fret that sequestration budget cuts could trigger a similar dynamic on the F-35, which has already seen 410 orders pushed back beyond 2017.

Depending on how the cuts are implemented, the purchase of up to nine F-35s could be deferred in fiscal 2013 alone, Navy and Air Force officials have said. That might not seem like much out of more than 3,100 destined for U.S. and foreign clients.

But initial calculations show that while cutting nine jets would save about $1.3 billion, it would also raise the cost of the remaining aircraft by nearly $800 million, said one defence official, who was not authorized to speak publicly.

The Pentagon budget analysis, which Reuters is reporting for the first time, found that postponing the 40 Navy C-model jets would raise the cost of the Navy version by about $4.5 million per plane, and add between $1.5 million to $2.6 million to the per-plane cost of the Air Force and Marine Corps versions, according to several defence officials familiar with the study.

"Cutting tails to pay bills is inefficient. Whether it's nine planes in one year, or 40 across the (future years defence plan), you're going to pay later," said one of the officials. This official and others cautioned that the studies were hypothetical for now.

Air Force Lieutenant General Christopher Bogdan, the often blunt F-35 program chief, invoked the dreaded "death spiral" this week as he pounded on the need to cut costs and keep foreign orders - which will account for half of all F-35s produced through 2017 - on track.

"The one thing that our partners care most about is how much this airplane is going to cost," he said. "If ... we want to sell the 600-plus airplanes to our partners and a couple hundred more projected to our (foreign military) customers, we better be darned sure we keep reducing the price on this airplane."

Even a two-year delay in Turkey's initial order of two jets had added $1 million to the cost of each of the remaining planes in the original order year, Bogdan told a defence conference.

No one knows exactly how much of a price tag will be too much to bear for countries like Australia and Canada, whose F-35 orders are already on shaky ground. "The tipping point will be different for each country," said one U.S. official.

In Australia, defence contractors involved in building the new jets are worried that $5.5 billion in expected orders will be in jeopardy if Canberra cuts its plans to buy 100 jets by 30 to 50 jets, as many experts expect.

Lockheed remains optimistic that international orders will hold up and even grow. South Korea is expected to c