Defense Acquisitions: Analysis of Costs for the Joint Strike	 
Fighter Engine Program (22-MAR-07, GAO-07-656T).		 
                                                                 
The Joint Strike Fighter (JSF) is the linchpin of future	 
Department of Defense (DOD) tactical aircraft modernization	 
efforts because of the sheer size of the program and its	 
envisioned role as the replacement for hundreds of aircraft that 
perform a wide variety of missions in the Air Force, Navy, and	 
Marine Corps. DOD implemented the JSF alternate engine		 
development program in 1996 to provide competition between two	 
engine manufacturers in an effort to achieve cost savings,	 
improve performance, and gain other benefits. This testimony	 
focuses on GAO's cost analysis performed in response to Section  
211 of the John Warner National Defense Authorization Act for	 
Fiscal Year 2007. We examined the following areas: (1)		 
sole-source and competitive scenarios for development,		 
production, and sustainment of the JSF engine, (2) results of	 
past engine programs and their related strategies, and (3) impact
on the industrial base in the event of the complete cancellation 
of the JSF alternate engine program. DOD did not provide comments
on our findings.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-656T					        
    ACCNO:   A67135						        
  TITLE:     Defense Acquisitions: Analysis of Costs for the Joint    
Strike Fighter Engine Program					 
     DATE:   03/22/2007 
  SUBJECT:   Aircraft						 
	     Aircraft components				 
	     Aircraft engines					 
	     Comparative analysis				 
	     Competition					 
	     Cost analysis					 
	     Cost effectiveness analysis			 
	     Defense capabilities				 
	     Defense cost control				 
	     Defense economic analysis				 
	     Defense procurement				 
	     Fighter aircraft					 
	     Life cycle costs					 
	     Procurement planning				 
	     Sole source procurement				 
	     Source selection					 
	     Strategic planning 				 
	     Benefit-cost tracking				 
	     Savings estimates					 
	     Joint Strike Fighter				 
	     Joint Strike Fighter program			 

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GAO-07-656T

   

     * [1]Summary
     * [2]Background
     * [3]Our Analysis of Alternatives Suggests Competition Benefits C

          * [4]Sole-Source Alternative Requires Less Short-term Investment
          * [5]JSF Engine Competition Could Result in Future Savings
          * [6]Competition Offers Potential Benefits beyond Financial Savin

     * [7]Past Engine Programs Show Potential Benefits from Competitio
     * [8]JSF Program Could Have Long-term Impact on Industrial Base
     * [9]Concluding Observations
     * [10]Contacts and Acknowledgments
     * [11]GAO Related Products
     * [12]GAO's Mission
     * [13]Obtaining Copies of GAO Reports and Testimony

          * [14]Order by Mail or Phone

     * [15]To Report Fraud, Waste, and Abuse in Federal Programs
     * [16]Congressional Relations
     * [17]Public Affairs

Testimony before the Subcommittees on Air and Land Forces, and Seapower
and Expeditionary Forces, Committee on Armed Services, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 2:00 p.m. EDT
Thursday, March 22, 2007

DEFENSE ACQUISITIONS

Analysis of Costs for the Joint Strike Fighter Engine Program

Statement of Michael Sullivan,
Director Acquisition and Sourcing Management

The web version of this report was reposted on May 8, 2007, to reflect a
change to the text in Figure 1 on page 9 since the original version was
posted on March 22, 2007. A typographical error was identified in that
figure wherein the Assumed Savings rates were depicted as 10, 20, and 30
percent. Those savings rates should instead be 10, 15, and 20 percent. The
change does not affect other numbers in Figure 1 or the rest of the
report.

GAO-07-656T

Mr. Chairmen and Members of the Subcommittees:

I am pleased to be here today to discuss the Joint Strike Fighter (JSF)
engine program. The JSF is the linchpin of future Department of Defense
(DOD) tactical aircraft modernization efforts because of the program's
sheer size and envisioned role as the replacement for hundreds of aircraft
that provide a wide variety of missions in the Air Force, Navy, and Marine
Corps. DOD implemented the JSF alternate engine development program in
1996 to provide competition between two engine manufacturers in an effort
to achieve cost savings, improve performance, and gain other benefits.
Today, my testimony focuses on our cost analysis performed in response to
Section 211 of the John Warner National Defense Authorization Act for
Fiscal Year 2007.1 Specifically, it examines the following areas: (1)
sole-source and competitive scenarios for development, production, and
sustainment of the JSF engine; (2) results of past engine programs and
their related strategies; and (3) impact on the industrial base in the
event of the complete cancellation of the JSF alternate engine program.
While language in the act instructed GAO to report on additional elements
related to a firm-fixed-price acquisition strategy and any other approach
that could improve cost or schedule, this statement focuses on the areas
above, as we determined those to be the most viable options under
consideration. Appendix I contains information about scope and methodology
for the cost analysis on which this statement is based. We performed our
work from January 2007 to March 2007 in accordance with generally accepted
government auditing standards.

Summary

The current estimated remaining life cycle cost for the JSF engine program
under a sole-source scenario is $53.4 billion. To ensure competition by
continuing the JSF alternate engine program, an additional investment of
$3.6 billion to $4.5 billion may be required. However, the associated
competitive pressures from this strategy could result in savings equal to
or exceeding that amount across the life cycle of the engine. The cost
analysis we performed suggests that a savings of 10.3 to 12.3 percent
would recoup that investment, and actual experience from past engine
competitions suggests that it is reasonable to assume that competition on
the JSF engine program could yield savings of at least that much. These
results are dependent on how the government decides to run the
competition, the number of aircraft that are ultimately purchased, and the
exact ratio of engines awarded to each contractor. In addition,
DOD-commissioned reports and other officials have said that non financial
benefits in terms of better engine performance and reliability, improved
industrial base stability, and more responsive contractors are more likely
outcomes under a competitive environment than under a sole-source
strategy. DOD experience with other aircraft engine programs, including
that for the F-16 fighter, has shown competitive pressures can generate
financial benefits of up to 20 percent during the life cycle of an engine
program and/or the other benefits mentioned. The potential for cost
savings and performance improvements, along with the impact the engine
program could have on the industrial base, underscores the importance and
long-term implications of DOD decision making with regard to the final
acquisition strategy. DOD chose not to provide comments on this statement
or the cost analysis on which it is based. The JSF program office reviewed
our findings and made technical comments which were incorporated as
appropriate.

1Pub. L. No. 109-364, 120 Stat. 2083, 2117-2119 (2006).

Background

The Joint Strike Fighter is DOD's most expensive aircraft acquisition
program. The number of aircraft engines and spare parts expected to be
purchased, along with the lifetime support needed to sustain the engines,
mean the future financial investment will be significant. DOD is expected
to develop, procure, and maintain 2,443 aircraft at a cost of more than
$338 billion over the program's life cycle.2 The JSF is being developed in
three variants for the U.S. military: a conventional takeoff and landing
aircraft for the Air Force, a carrier-capable version for the Navy, and a
short takeoff and vertical landing variant for the Marine Corps.3 In
addition to its size and cost, the impact of the JSF program is even
greater when combined with potential international sales (expected to be
between 2,000 and 3,500 additional aircraft) and the current U.S. aircraft
that the JSF will either replace or complement to meet mission
requirements.

Congress first expressed concern over the lack of engine competition in
the JSF program in fiscal year 1996 and in fiscal year 1998 directed DOD
to ensure that sufficient funding was committed to develop an alternate
engine. Since that time, DOD has initiated multiple studies to determine
the advantages and disadvantages of the alternate engine program. DOD
program management advisory groups conducted studies in 1998 and again in
2002, both resulting in recommendations to continue with the alternate
engine program. The advisory groups determined that developing an
alternate JSF engine had significant benefits in the areas of contractor
responsiveness, industrial base, aircraft readiness, and international
participation. They also reported finding marginal benefits in the areas
of cost savings and the ability to add future engine improvements.
However, they found no benefit with regard to reducing development risk
without restructuring the program. The advisory groups noted that these
recommendations were made independent of the services' ability to fund the
program--meaning overall affordability should be taken into consideration.

2Unless otherwise noted, all dollars in this report are fiscal year 2002
dollars.

3Eight allied nations are also participating in the JSF program: United
Kingdom, Norway, Denmark, the Netherlands, Canada, Italy, Turkey, and
Australia.

In August 2005, DOD awarded a $2.1 billion contract for alternate engine
system development and demonstration, of which $699 million has been
appropriated to date.4 In its fiscal year 2007 budget submission, DOD
proposed canceling the alternate engine program and eliminated funding
related to this effort. While Congress restored the majority of the
funding for that year, DOD again eliminated alternate engine funding in
its proposed budget for fiscal year 2008.

DOD decided to cancel the alternate engine program prior to the fiscal
year budget submission, stating that (1) no net cost benefits or savings
are to be expected from competition and (2) low operational risk exists
for the warfighter under a sole-source engine supplier strategy. We
reported last year that this decision was made without a new and
comprehensive analysis and focused only on the potential up-front savings
in engine procurement costs. We stated further that costs already sunk
were inappropriately included and long-term savings that might accrue from
competition for providing support for maintenance and operations over the
life cycle of the engine were excluded from the decision justification.
Our position was that DOD's decision to cancel the program was driven by
the need to identify sources of funding in order to pay for other, more
immediate priorities within the department.

DOD did not change the JSF acquisition strategy to reflect its proposed
elimination of the alternate engine program, and it continues a dual
engine approach. The 2007 Defense Authorization Act has now placed certain
restrictions on DOD modification of the dual engine approach. According to
current JSF program plans, beginning in fiscal year 2007, the program
office will award the first of three annual production contracts to Pratt
& Whitney for its F135 engine. In fiscal years 2010 and 2011,
noncompetitive contracts will be awarded to both Pratt & Whitney and to
the Fighter Engine Team5 for the F136 engine. Beginning in fiscal year
2012, contracts will be awarded on an annual basis under a competitive
approach for quantities beyond each contractor's minimum sustaining rate.
Full-rate production for the program begins in fiscal year 2014 and is
expected to continue through fiscal year 2034. The JSF program intends to
use a combination of competition, performance-based logistics, and
contract incentives to achieve goals related to affordability,
supportability, and safety. Through this approach, the JSF program office
hopes to achieve substantial reductions in engine operating and support
costs. Traditionally, operating and support costs have accounted for 72
percent of a program's life cycle costs.

4Prior to this contract, DOD had invested $722 million in the alternate
engine program.

Our Analysis of Alternatives Suggests Competition Benefits Could Outweigh Costs

Without competition, the JSF program office estimates that it will spend
$53.4 billion over the remainder of the F135 engine program. This includes
cost estimates for the completion of system development, procurement of
2,443 engines, production support, and sustainment. Additional investment
of between $3.6 billion and $4.5 billion may be required should the
Department decide to continue competition in the JSF engine program. This
includes additional development, procurement, support, and stand-up costs
for a second engine provider. While Pratt & Whitney design
responsibilities and associated costs may be reduced under a sole-source
contract, our analysis shows that competitive pressures may yield enough
financial savings to offset the costs of competition over the life of the
program. These results are dependent on how the government decides to run
the competition, the number of aircraft that are ultimately purchased, and
the exact ratio of engines awarded to each contractor. Given certain
assumptions with regard to these factors, the additional costs of having
the alternate engine could be recouped if competition were to generate
approximately 10.3 to 12.3 percent savings. According to actual Air Force
data from past engine programs, including for the F-16 aircraft, it is
reasonable to expect savings of at least that much. Additionally, there
are a number of non financial benefits that may result from competition,
including better performance, increased reliability, and improved
contractor responsiveness.

5The Fighter Engine Team is a single company, created in July 2002 by
General Electric and Rolls-Royce, and formed for the development,
deployment, and support of the F136 engine for the JSF program.

Sole-Source Alternative Requires Less Short-term Investment

The cost of the Pratt & Whitney F135 engine is estimated to be $53.4
billion over the remainder of the program. This includes cost estimates
for the completion of system development, procurement of engines,
production support, and sustainment. Table 1 shows the costs remaining to
develop, procure, and support the Pratt & Whitney F135 engine on a
sole-source basis.

Table 1: Costs to Complete Pratt & Whitney F135 Engine Program (based on
2,443 installed engines and spares)

Cost element                                                 Cost (FY02$B) 
System development and demonstration costs                            $1.0 
Total engine unit recurring flyaway costs                            $17.6 
Production support costs (including initial spares,                        
training, manpower, and depot stand-up)                               $3.2 
Sustainment costs of fielded aircraft                                $31.6 
Total                                                                $53.4 

Source: JSF program office data; GAO analysis.

Costs remaining for the JSF engine program can be broken down into four
categories:

           o remaining system development and demonstration contract costs;

           o engine unit recurring flyaway costs--per unit cost for aircraft,
           based on rate of learning;

           o production support costs related to production spares, training
           personnel and equipment, manpower, and depot facilities; and

           o sustainment costs to maintain fielded aircraft based on engine
           flight hour costs and usage rates.

Stable requirements and funding, a well-defined acquisition strategy, an
appropriately structured contract, and adequate oversight are keys to
ensuring the contractor is motivated to perform, especially under a
sole-source contract where competitive pressure does not exist. In a
sole-source environment, the primary benefit comes from the improved rate
of progress, or "learning," achieved by the contractor based on having all
production activity.6 In other words, the greater volume of business given
to a single contactor is expected to translate into efficiency in
production in a shorter time, thereby lowering associated costs. Learning
curves must be established in a manner so that the contractor is not only
intent on meeting that curve, but also incentivized to exceed the curve in
order to achieve cost reductions. Through analysis of program information
and in conversations with Pratt & Whitney and JSF program office
personnel, we found examples of initiatives aimed at improving the F135
learning curve. Pratt & Whitney has ongoing and planned activities in
areas such as supply chain optimization, technology development, and
manufacturing efficiency that it hopes will reduce unit costs through the
first 5 years of F135 production.

Having Pratt & Whitney as the single engine manufacturer may also provide
benefits in terms of simpler design and integration responsibilities.
Currently, in addition to development of the F135 engine design, Pratt &
Whitney has responsibility for design and development of common components
that will go on all JSF aircraft, regardless of which contractor provides
the engine core. Examples of common components include the lift fan and
roll posts for the Marine Corps variant, the exhaust nozzles, and ducts.
This responsibility supports the overall F-35 program requirement that the
engine be interchangeable--either engine can be used in any aircraft
variant, either during initial installation or when replacement is
required. In the event that Pratt & Whitney is made the sole-source engine
provider, future configuration changes to the aircraft and common
components could be optimized for the F135 engine, instead of potentially
compromised design solutions or additional costs needed to support both
F135 and F136.

JSF Engine Competition Could Result in Future Savings

In testimony last year, the Under Secretary of Defense for Acquisition,
Technology, and Logistics reported that DOD preferred a sole-source engine
strategy for the JSF program. He noted that maintaining two engine
suppliers for the program would cost, at that time, an additional $1.8
billion for the development phase which was not the most efficient use of
Department resources. In fact, when considering the costs of competition
over the full life cycle of the F136 program, the additional costs are
even greater. The government's ability to recoup the additional
investments required to support competition depends largely on (1) the
number of aircraft produced,7 (2) the ratio that each contractor wins out
of that total, and (3) the savings rate that competitive pressures drive.
We estimated costs under two competitive scenarios; one in which
contractors are each awarded 50 percent of the total engine purchases
(50/50 split) and one in which there is a 70/30 percent award split of
total engine purchases to either contractor, beginning in fiscal year
2012. Without consideration of potential savings, the additional costs of
competition total $4.5 billion under the first scenario and $3.6 billion
under the second scenario. Table 2 shows the additional cost associated
with competition under these two scenarios.

6A learning curve represents the relationship between the unit cost of an
item and the cumulative production quantity of that item.

Table 2: Additional Costs for Competition in JSF Engine Program (based on
2,443 installed engines and spares)

                                                50/50 Aircraft 70/30 Aircraft 
Additional costs (FY02$B)                       award split    award split 
System development and demonstration costs             $1.4           $1.4 
Total engine unit recurring fly-away costs             $3.0           $2.1 
Production support costs (including initial            $.13           $.13 
spares, training, manpower, and depot                                      
standup)                                                                   
Sustainment costs of fielded aircrafta                  N/A            N/A 
Total                                                  $4.5           $3.6 

Source: JSF program office data; GAO analysis.

aNo additional sustainment costs were considered because the number of
aircraft and cost per flight hour would be the same under either scenario.

The disparity in costs between the two competitive scenarios reflects the
loss of learning resulting from lower production volumes that is accounted
for in the projected unit recurring flyaway costs used to construct each
estimate. The other costs include approximately $1.4 billion in remaining
F136 development costs and $127 million in additional stand-up costs,
which would be the same under either competitive scenario.

7In conducting our cost analysis of the alternate engine program, we
presented the cost of only the U.S. aircraft currently expected for
production (2,443). These costs assume the quantity benefits of the 646
aircraft currently anticipated for foreign partner procurement.

DOD implemented the JSF alternate engine development program to provide
competition between two engine manufacturers in an effort to achieve cost
savings, improve performance, and gain other benefits. For example,
competition may incentivize the contractors to achieve more aggressive
production learning curves, produce more reliable engines that are less
costly to maintain, and invest additional corporate money in technological
improvements to remain competitive. To reflect these and other potential
factors, we applied a 10 to 20 percent range of potential cost savings to
our estimates, where pertinent to a competitive environment.8 Further,
when comparing life cycle costs, it is important to consider that many of
the additional investments associated with competition are often made
earlier in the program's life cycle, though much of the expected savings
do not accrue for decades. Therefore, a net present value calculation
(time value of money) must be included in the analysis and, once applied,
provides for a better estimate of program rate of return. Figure 1 shows
the results of our analysis under different scenarios and accounting for
the time value of money.

8Our review of DOD data as well as discussions with defense and industry
experts, confirmed this as a reasonable range of potential savings to
consider.

Figure 1: Net Present Value of JSF Engine Competition

Note: Net present value calculated based on fiscal year 2002.

When we assumed overall savings due to competition, our analysis indicated
that recoupment of those initial investment costs would occur at somewhere
between 10.3 and 12.3 percent, depending on the number of engines awarded
to each contractor. A competitive scenario where one of the contractors
receives 70 percent of the annual production aircraft, while the other
receives only 30 percent reaches the breakeven point at 10.3 percent
savings. A competitive scenario where both contractors receive 50 percent
of the production aircraft reaches this point at 12.3 percent savings.9 We
believe it is reasonable to assume at least this much savings in the long
run based on analysis of actual data from the F-16 engine competition.

9These savings amounts reflect net present value calculations that
discount costs and savings for both inflation and the time value of money.

Competition Offers Potential Benefits beyond Financial Savings

Competition may also provide benefits that do not result in immediate
financial savings, but may result in reduced costs or other positive
outcomes to the program over time. DOD and others have performed studies
and have widespread concurrence as to these other benefits, including
better engine performance, increased reliability, and improved contractor
responsiveness. In fact, in 1998 and 2002, DOD program management advisory
groups assessed the JSF alternate engine program and found the potential
for significant benefits in these and other areas. Table 3 summarizes the
benefits determined by those groups.

Table 3: 1998 and 2002 Program Management Advisory Group Study Findings on
the Benefits of an Alternate Engine Program

                              Beneficial Marginal  No value
Factor assessed            1998  2002 1998 2002 1998 2002 
Costs                                  X    X             
Development risk reduction                       X    X   
Engine growth potential                X    X             
Fleet readiness              X    X                       
Industrial base              X    X                       
International implications   X    X                       
Other considerationsa        X    X                       
Overall                      X    X                       

Source: DOD data; GAO analysis and presentation.

aOther considerations include contractor responsiveness, improved design
solutions, and competition at the engine subsystem level.

While the benefits highlighted may be more difficult to quantify, they are
no less important, and ultimately were strongly considered in recommending
continuation of the alternate engine program. These studies concluded that
the program would

           o maintain the industrial base for fighter engine technology,

           o enhance readiness,

           o instill contractor incentives for better performance,

           o ensure an operational alternative if the current engine
           developed problems, and

           o enhance international participation.

We spoke with government officials from various organizations who widely
concurred with our analysis of the potential benefits of engine
competition. Many of these were important benefits realized by past
competitions such as that for the Air Force F-16 aircraft engines.
Discussions with the Air Force engine manager who co led both advisory
group studies explained that these benefits are valuable when trying to
manage significant numbers of fighter-type engines to ensure combat
readiness. He told us that problems are magnified when trying to manage a
single engine system, which can require substantial manpower and extra
hours to keep aircraft flying when engine problems occur. In his opinion,
the benefits of a dual-source engine would outweigh the costs. He stated
that he had not seen anything that would change this conclusion since the
last advisory group study was conducted.

The ability of competition to deliver such benefits is important for the
JSF program. In addition to considering engine price, the program office
has identified a range of potential criteria for competition during the
production and support phases of the program, which could include other
costs, reliability, and sustainability. It is reasonable to assume that
competition under these criteria may drive better engine performance and
reliability over the life of the program. Such improvements can positively
affect fleet readiness and schedule outcomes while avoiding costs in
various other areas for the JSF program.

Another potential benefit of having an alternate engine program, and one
also supported by the program advisory group studies, is to reduce the
risk that a single point, systemic failure in the engine design could
substantially affect the fighter aircraft fleet. Though current
performance data indicate it is unlikely that engine problems would lead
to fleet wide groundings in modern aircraft, having two engine sources for
the single-engine JSF further reduces this risk as it is more unlikely
that such a problem would occur to both engine types at the same time.
Because the JSF is expected to be the primary fighter aircraft in the U.S.
inventory, and Pratt & Whitney will also be the sole-source provider of
F119 engines for the F-22A aircraft,10 DOD is faced with the potential
scenario where almost the entire fleet could be dependent on similar
engine cores, produced by the same contractor in a sole-source
environment.

10The F135 engine is a derivative of the F119 engine, which means many of
the same or similar parts and processes are used to manufacture both
engines. It also means that the F135 can benefit from lessons learned or
be susceptible to any systemic problems associated with the F119.

Past Engine Programs Show Potential Benefits from Competition

Results from past competitions provide evidence of potential financial and
non financial savings that can be derived from engine programs. One
relevant case study to consider is the "Great Engine War" of the
1980s--the competition between Pratt & Whitney and General Electric to
supply military engines for the F-16 and other fighter aircraft programs.
At that time all engines for the F-14 and F-15 aircraft were being
produced on a sole-source basis by Pratt & Whitney, which was criticized
for increased procurement and maintenance costs, along with a general lack
of responsiveness with regard to government concerns about those programs.
For example, safety issues on the single-engine F-16 aircraft were seen as
having greater consequences than the twin-engine F-14 or F-15 aircraft. To
address concerns, the Air Force began to fund the development and testing
of an alternate engine to be produced by General Electric; the Air Force
also supported the advent of an improved derivative of the Pratt & Whitney
engine. Beginning in 1983, the Air Force initiated a competition that Air
Force documentation suggests resulted in significant cost savings in the
program. For example, in the first 4 years of the competition, when actual
costs are compared to the program's baseline estimate, results included

           o nearly 30 percent cumulative savings for acquisition costs,
           o roughly 16 percent cumulative savings for operations and support
           costs, and
           o total savings of about 21 percent in overall life cycle costs.

While sole-source competitions have been the general rule for engine
program strategies, evidence shows that when competition was utilized for
even part of those programs, positive outcomes were often realized. Other
than the Great Engine War, there have been a number of U.S. competitions
for modern fighter engines, including those for the F-15, F/A-18, and
F-22A fighter aircraft. During the course of this review, government and
contractor personnel told us that the difference between these programs
and the F-16 was that competition was limited to only one phase of the
program (i.e., program initiation or production phase). For example, the
General Electric F404 engine, which today powers the Navy F/A-18 aircraft
and the Air Force F-117A aircraft, was competed in the mid-1980s. In that
case, the Navy had decided to upgrade the A-6 aircraft to the A-6F model
with two F404 engines, thereby increasing the number of F404 engines in
the fleet. The Navy leadership recommended a second source for that
engine, and Pratt & Whitney was awarded a "build-to-print" contract, which
meant it would produce additional F404 engines according to the General
Electric design. While this competition did provide some improvements in
contractor responsiveness, government and contractor officials told us
this was not an optimum competitive environment as it provided no design
competition.

The Great Engine War was able to generate significant benefits because
competition incentivized contractors to improve designs and reduce costs
during production and sustainment. Competitive pressure continues today as
the F-15 and F-16 aircraft are still being sold internationally. While the
other competitions resulted in some level of benefits, especially with
regard to contractor responsiveness, they did not see the same levels of
success absent continued competitive pressures.

JSF Program Could Have Long-term Impact on Industrial Base

The economic stakes in the JSF engine program are likely to be high given
the size of the program, international participation, and the expected
supplier base. Participation in the development, production, and support
of the JSF engine program will position Pratt & Whitney, the Fighter
Engine Team, and their respective supplier base to compete for future
military development and acquisition programs. According to government
officials, Pratt & Whitney faces a decline in the area of large commercial
engines, which could result in a shift of workforce and overhead costs to
military programs. While it is the sole-source provider of the engine for
the Air Force F-22A aircraft, production will likely end in 2012 for that
program. Pratt & Whitney will at a minimum provide at least some of the
engines for the JSF program, the extent to which is to be determined by
whether or not the Fighter Engine Team remains a competitor and, if so,
the amount of contract awards that company can win. Should the JSF program
suffer substantial schedule slips beyond 2011 or 2012, the gap between the
end of F-22A production and the onset of JSF production could grow,
resulting in workforce disruptions or other negative effects.

General Electric is a significant entity in the market for large
commercial engines. However, the company faces declining production within
its other fighter engine programs, such as the Navy's F/A-18E/F, which
could result in erosion of specialized skills should the company not
continue as a participant in the JSF program. While the overall health of
the company is very strong, business decisions as to where to invest
company resources could favor the commercial side, should military
business decline substantially.

Due to the size of the JSF program, the industrial base implications reach
far beyond Pratt & Whitney and the Fighter Engine Team. With JSF contracts
awarded to suppliers within both the U.S. and international partner
countries, JSF propulsion production and support business will contribute
to the global engine industrial base for almost 60 years. While companies
that participate are likely to see increased business opportunities, if
the JSF comes to dominate the market for tactical aircraft, as DOD
expects, companies that are not part of the program could see tactical
aircraft business decline.

Concluding Observations

DOD officials noted in 2006 that canceling the F136 engine program would
save DOD $1.8 billion in needed investments over the remaining 7 years of
development, which could be used to fund higher-priority programs.
According to our analysis that figure is now $1.4 billion; and does not
include the approximately $2.2 billion to $3.1 billion of additional
investments for procurement, production support, and stand-up investments
necessary for competition. However, our analysis indicates that this
investment may be recouped under a competitive approach if it generates
savings of 10.3 to 12.3 percent. Historical data indicate that it is
reasonable to assume savings of that much and more. Choices made today
will ripple forward and influence additional, and perhaps even more
challenging, decisions in the future. The JSF engine acquisition strategy
is one such choice facing DOD today. The results of our work indicate that
with the proper structure and attention, and the up-front investments, the
alternate engine can ultimately recover those investments and potentially
provide additional benefits to the program. Prior engine programs and more
recent DOD studies and analyses also suggest these outcomes to be
reasonable. DOD is now faced with prioritizing its short-term needs
against potential long-term payoffs through competition for JSF engine
development, procurement, and sustainment.

Mr. Chairmen, this concludes my prepared statement. I will be happy to
answer any questions you or other members of the subcommittee may have.

Contacts and Acknowledgments

For future questions regarding this testimony, please contact Michael J.
Sullivan, (202) 512-4841. Individuals making key contributions to this
testimony include Brian Mullins, Assistant Director; J. Kristopher Keener;
Daniel Novillo; Greg Campbell; Charles Perdue; and Adam Vodraska.

GAO Related Products

Joint Strike Fighter: Progress Made and Challenges Remain, [18]GAO-07-360
. Washington, D.C.: Mar. 15, 2007.

Tactical Aircraft: DOD's Cancellation of the Joint Strike Fighter
Alternate Engine Program Was Not Based on a Comprehensive Analysis,
[19]GAO-06-717R . Washington, D.C: May 22, 2006.

Recapitalization Goals Are Not Supported By Knowledge-Based F-22A and JSF
Business Cases, [20]GAO-06-487T . Washington, D.C.: Mar. 16, 2006.

Joint Strike Fighter: DOD Plans to Enter Production before Testing
Demonstrates Acceptable Performance, [21]GAO-06-356 . Washington, D.C.:
Mar. 15, 2006.

Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for
Tactical Aircraft Modernization, [22]GAO-05-519T . Washington, D.C.: Apr.
6, 2005.

Defense Acquisitions: Assessments of Selected Major Weapon Programs,
[23]GAO-05-301 .Washington, D.C.: Mar. 31, 2005.

Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike Fighter
Program with Different Acquisition Strategy, [24]GAO-05-271 . Washington
D.C.: Mar. 15, 2005.

Tactical Aircraft: Status of F/A-22 and JSF Acquisition Programs and
Implications for Tactical Aircraft Modernization, [25]GAO-05-390T .
Washington, D.C.: Mar. 3, 2005.

Joint Strike Fighter Acquisition: Observations on the Supplier Base,
[26]GAO-04-554 . Washington, D.C.: May 3, 2004.

Joint Strike Fighter Acquisition: Managing Competing Pressures Is Critical
to Achieving Program Goals, [27]GAO-03-1012T . Washington, D.C.: July 21,
2003.

Appendix I: Scope and Methodology

In conducting our analysis of costs for the Joint Strike Fighter (JSF)
engine program, we relied primarily on program office data. We did not
develop our own source data for development, production, or sustainment
costs. In assessing the reliability of data from the program office, we
compared that data to contractor data and spoke with agency and other
officials and determined that the data were sufficiently reliable for our
review.

Other base assumptions for the review are as follows:

           o Unit recurring flyaway cost includes the costs associated with
           procuring one engine and certain nonrecurring production costs; it
           does not include sunk costs, such as development and test, and
           other costs to the whole system, including logistical support and
           construction.
           o Engine procurement costs reflect only U.S. costs, but assumes
           the quantity benefits of the 646 aircraft currently anticipated
           for foreign partner procurement.
           o Competition, and the associated savings anticipated, begins in
           fiscal year 2012.
           o Engine maturity, defined as 200,000 flight hours with at least
           50,000 hours in each variant, is reached in fiscal year 2012.
           o Two years are needed for delivery of aircraft.
           o Aircraft life equals 30 years at 300 flight hours per year.

For the sole-source Pratt & Whitney F135 engine scenario, we calculated
costs as follows:

Development

           o Relied on JSF program office data on the remaining cost of the
           Pratt & Whitney development contract. We considered all costs for
           development through fiscal year 2007 to be sunk costs and did not
           factor them into analysis.

Production

           o For cost of installed engine quantities, we multiplied planned
           JSF engine quantities for U.S. aircraft by unit recurring flyaway
           costs specific to each year as derived from cost targets and a
           learning curve developed by the JSF program office.
           o For the cost of production support, we relied on JSF program
           office cost estimates for initial spares, training, support
           equipment, depot stand-up, and manpower related to propulsion.
           Because the JSF program office calculates those numbers to reflect
           two contractors, we applied a cost reduction factor in the areas
           of training and manpower to reflect the lower cost to support only
           one engine type.

Sustainment

           o For sustainment costs, we multiplied the planned number of U.S.
           fielded aircraft by the estimated number of flight hours for each
           year to arrive at an annual fleet total. We then multiplied this
           total by JSF program office estimated cost per engine flight hour
           specific to each aircraft variant.
           o Sustainment costs do not include a calculation of the cost of
           engine reliability or technology improvement programs.

For a competitive scenario between the Pratt & Whitney F135 engine and the
Fighter Engine Team (General Electric and Rolls-Royce), we calculated
costs as follows:

Development

           o We used current JSF program office estimates of remaining
           development costs for both contractors and considered all costs
           for development through fiscal year 2007 to be sunk costs.

Production

           o We used JSF program office data for engine buy profiles,
           learning curves, and unit recurring flyaway costs to arrive at a
           cost for installed engine quantities on U.S. aircraft. We
           performed calculations for competitive production quantities under
           70/30 and 50/50 production quantity award scenarios.
           o We used JSF program office cost estimates for production support
           under two contractors. We assumed no change in support costs based
           on specific numbers of aircraft awarded under competition, as each
           contractor would still need to support some number of installed
           engines and provide some number of initial spares.

Sustainment

           o We used the same methodology and assumptions to perform the
           calculation for sustainment costs in a competition as in the
           sole-source scenario.

Savings

           o We analyzed actual cost information from past aircraft
           propulsion programs, especially that of the F-16 aircraft engine,
           in order to derive the expected benefits of competition and
           determine a reasonable range of potential savings.
           o We applied this range of savings to the engine life cycle,
           including recurring flyaway costs, production support, and
           sustainment. We assumed costs to the government could decrease in
           any or all of these areas as a result of competitive pressures.
           o We did not apply any savings to the system development and
           demonstration phase or the first five production lots because they
           are not fully competitive. However, we recognize that some savings
           may accrue as contractors prepare for competition.

In response to the request to present our cost analyses in constant
dollars, then year dollars, and using net present value, we:

           o calculated all costs using constant fiscal year 2002 dollars,
           o used separate JSF program office and Office of the Secretary of
           Defense inflation indices for development, production, production
           support, and sustainment to derive then year dollars; when
           necessary for the out years, we extrapolated the growth of
           escalation factors linearly; and
           o utilized accepted GAO methodologies for calculating discount
           rates in the net present value analysis.

No cost analysis was performed for the scenario where a fixed-price
contract would be awarded in fiscal year 2008 for the entire life of the
engine program because neither the contractor nor the Department of
Defense calculates the necessary cost data. During our discussions with
both DOD officials and contractor representatives, it was determined that
neither viewed a fixed-price contract as a viable option for which they
could quantify a risk premium.

We did not perform cost analyses of alternative strategies, as we
determined no other alternative could be implemented without disruption to
the JSF program's cost and schedule.

Our analysis of the industrial base does not independently verify the
relative health of either contractors' suppliers or workload.

(120639)

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www.gao.gov/cgi-bin/getrpt?GAO-07-656T .

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Highlights of [35]GAO-07-656T , a testimony before the Subcommittees on
Air and Land Forces, and Seapower and Expeditionary Forces, Committee on
Armed Services, House of Representatives

March 22, 2007

DEFENSE ACQUISITIONS

Analysis of Costs for the Joint Strike Fighter Engine Program

The Joint Strike Fighter (JSF) is the linchpin of future Department of
Defense (DOD) tactical aircraft modernization efforts because of the sheer
size of the program and its envisioned role as the replacement for
hundreds of aircraft that perform a wide variety of missions in the Air
Force, Navy, and Marine Corps. DOD implemented the JSF alternate engine
development program in 1996 to provide competition between two engine
manufacturers in an effort to achieve cost savings, improve performance,
and gain other benefits. This testimony focuses on GAO's cost analysis
performed in response to Section 211 of the John Warner National Defense
Authorization Act for Fiscal Year 2007. We examined the following areas:
(1) sole-source and competitive scenarios for development, production, and
sustainment of the JSF engine, (2) results of past engine programs and
their related strategies, and (3) impact on the industrial base in the
event of the complete cancellation of the JSF alternate engine program.
DOD did not provide comments on our findings.

           o Continuing the alternate engine program for the Joint Strike
           Fighter would cost significantly more than a sole-source program
           but could, in the long run, reduce costs and bring other benefits.
           The current estimated life cycle cost for the JSF engine program
           under a sole-source scenario is $53.4 billion. To ensure
           competition by continuing to implement the JSF alternate engine
           program, an additional investment of $3.6 billion to $4.5 billion
           may be required. However, the associated competitive pressures
           from this strategy could result in savings equal to or exceeding
           that amount. The cost analysis we performed suggests that a
           savings of 10.3 to 12.3 percent would recoup that investment, and
           actual experience from past engine competitions suggests that it
           is reasonable to assume that competition on the JSF engine program
           could yield savings of at least that much. In addition,
           DOD-commissioned reports and other officials have said that
           nonfinancial benefits in terms of better engine performance and
           reliability, improved industrial base stability, and more
           responsive contractors are more likely outcomes under a
           competitive environment than under a sole-source strategy.

           o DOD experience with other aircraft engine programs, including
           the F-16 fighter in the 1980s, has shown competitive pressures can
           generate financial benefits of up to 20 percent during the life
           cycle of an engine program and/or improved quality and other
           benefits.

           o The potential for cost savings and performance improvements,
           along with the impact the engine program could have on the
           industrial base, underscores the importance and long-term
           implications of DOD decision making with regard to the final
           acquisition strategy solution.

References

Visible links
  18. ://www.gao.gov/cgi-bin/getrpt?GAO-07-360
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-06-717R
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-06-487T
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-06-356
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-05-519T
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-05-301
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-05-271
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-390T
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-04-554
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-03-1012T
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-07-656T
*** End of document. ***