Inflation, Supply Problems Could Push F-35 Cost Higher Than Expected, Lockheed Says
Negotiations continue on three batches of jets—Lots 15 to 17—that were expected to be finalized last year.
Rising inflation and pandemic supply chain disruptions could push the cost of the F-35 stealth fighter higher than expected, delaying the Pentagon and Lockheed Martin from reaching a deal for hundreds of new jets, company executives said.
Lockheed also warned that if it does not sign a deal for the new F-35 before July, it could miss its second-quarter earnings projections.
“Our teams are diligently working with their joint program office counterparts to achieve closure on this critical milestone and both parties are striving to finish negotiations in the near term,” Lockheed CFO Jay Malave said Tuesday on the company’s quarterly earnings call. “We remain confident in our full-year projections.”
CEO Jim Taiclet said that inflation and supply issues are affecting the “underlying cost factors” of each jet.
“We've got to go all the way back to our supply chain, see what the impacts are going to be, then present that to the government,” Taiclet said. “They have to vet those estimates and those costs, assumptions, and that's what is the basis of the negotiation to follow.”
The cost of an F-35 had been declining for years as the U.S. and allies placed larger orders and Lockheed found ways to more efficiently run its production line. But in recent years supply chain issues, largely stemming from the pandemic, have delayed production and increased the costs of raw materials.
The negotiations for three batches of jets, known as Lots 15, 16, and 17, was expected to be finalized last year. Last month, Air Force Lt. Gen. Eric Fick, the F-35 program manager, acknowledged that the price tag for the batch of planes being negotiated would be higher than planned.
“[T]he global economic situation that we're in…has put pressure on the unit returning flyaway costs that we had all thought we would be looking at in this time frame,” Fick said.
But the general said he saw “light at the end of the tunnel” of the contract negotiations.
“Despite the headwinds we face in the upcoming Lot 15 through 17 production contract negotiations, this air system is also becoming increasingly affordable,” Fick said on March 9 at the McAleese and Associates conference. “We're working daily to assess and address the current degraders and put into place long-term structures that make it also increasingly available.”
Taiclet said uncertainties were delaying the talks.
“This has been longer than normal because the underlying ground has been shifting on the most important assumptions that go into the negotiation,” the CEO said. “We are going to stay with our strategy, which is constructive at which they are, and progressing negotiations on the basis of actual cost information and data that provides our shareholders a fair margin in return as well as a government-attractive contract.”
In the past year, Switzerland and Finland announced plans to buy the F-35 over other U.S. and European-made fighters. More recently, Canada announced its plans to buy 88 jets and Germany said it would buy 35.
“These four competitive wins have the potential to add 223 F-35s to our backlog when all are finalized,” Taiclet said. “All four of these recent announcements underscore that the F-35 fighter jet remains the most capable, survivable, and highly connected platform in production as well as the best value available today for our warfighters.”
The Biden administration’s 2023 budget proposal calls for buying fewer F-35s than planned, and using the money to improve existing and future stealth fighters. In all, it includes 61 F-35 for the Air Force, Navy, and Marine Corps. Congress approved 85 jets in the fiscal 2022 budget. The three branches are asking lawmakers for another 19 jets in their unfunded priority lists.
“We expect that the services' add via the unfunded priority list and increased international demand will enable us to deliver on the stabilized production profile we have previously established,” Taiclet said.
Lockheed could take a “$500 million-plus” hit in the second quarter if the contract is not signed by the end of June, Malave said. The money would be made up in the next quarter when the contract is signed.