    Defense Acquisitions: Air Force Operating and Support Cost Reductions
    Need Higher Priority (Letter Report, 08/29/2000, GAO/NSIAD-00-165).

    Pursuant to a congressional request, GAO reviewed the Department of
    Defense's (DOD) efforts to reduce the Air Force's operating and support
    costs, focusing on: (1) operating and support cost trends; (2) cost
    reduction initiatives; and (3) factors influencing the success of cost
    reduction efforts.

    GAO noted that: (1) Air Force operating and support costs are growing at
    about 4 percent per year, even though the total number of aircraft, the
    number of hours these aircraft are flown, and the number of personnel
    who fly and maintain them have been declining for years; (2) from fiscal
    year (FY) 1997 to FY 1999, operating and support costs for aircraft
    increased from about $15.3 billion to $16.6 billion; (3) higher costs
    for repair parts were the principal cause of these increasing costs, and
    about 25 fault-prone parts on each system GAO examined were the biggest
    cost drivers; (4) to help reduce the operating and support costs of
    fielded systems, the Air Force has established several initiatives,
    including the Reduction in Total Ownership Cost program; (5) under this
    program, the Air Force developed a standardized methodology for
    assessing operating and support costs, identifying likely areas for cost
    reduction, proposing cost reduction projects, and tracking associated
    savings; (6) initially applied to several pilot programs in 1999,
    including the F-16 and B-1B, the program is now being expanded to other
    systems, as experience with the pilots increases; (7) however, the
    projected cost reductions from these efforts average only about $343
    million each year, well short of the $2.6 billion to $7 billion needed
    to achieve DOD's goals; (8) several factors hinder greater operating and
    support cost reductions; (9) the Air Force does not give operating and
    support cost management the same high priority it assigns to other
    program concerns such as weapon performance during system development or
    improved combat capability after fielding; (10) instead of establishing
    an operating and support cost requirement and managing to meet it, new
    programs focus on initiatives to improve reliability, supportability,
    and maintainability; (11) although these initiatives do help lower
    operating costs, their impact on a system's operating and support costs
    is not tracked; (12) projects that could lower these costs in fielded
    systems cannot complete effectively for funding against projects that
    enhance safety, readiness, or combat capability; (13) because they are
    not given the same management priority, operating and support costs are
    not emphasized; (14) poor visibility of operating and support costs has
    been a key factor inhibiting management of operating costs, but the
    establishment of the new Air Force Total Ownership Cost data system
    appears to be overcoming this barrier; and (15) despite program
    managers' limited authority and low incentives, some programs, such as
    the B-1B, continue to champion cost reduction projects.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  NSIAD-00-165
         TITLE:  Defense Acquisitions: Air Force Operating and Support Cost
    	     Reductions Need Higher Priority
          DATE:  08/29/2000
       SUBJECT:  Weapons systems
    	     Defense procurement
    	     Military cost control
    	     Military aircraft
    	     Defense capabilities
    IDENTIFIER:  B-1B Aircraft
    	     C-17 Aircraft
    	     C-5 Aircraft
    	     F-16 Aircraft
    	     Joint Strike Fighter
    	     F-22 Aircraft
    	     DOD Joint Primary Aircraft Training System
    	     Air Force Reduction in Total Ownership Cost Program
    	     B-52 Aircraft
    	     KC-135 Aircraft
    	     F-15 Aircraft
    	     A-10 Aircraft
    	     T-37B Aircraft

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    GAO/NSIAD-00-165

    Appendix I: Scope and Methodology

    28

    Appendix II: Comments From the Department of Defense

    29

    Appendix III: GAO Contacts and Acknowledgments

    33

    Table 1: Comparison of Projected Aircraft Operating and Support
    Costs and DOD's Goals 11

    Table 2: Annual Operating and Support Costs of Predecessor
    Aircraft Compared With Those Estimated for New Systems 16

    Table 3: Comparison of F-15 and Estimated F-22 Operating and
    Support Costs 17

    Figure 1: Nominal Life-Cycle Cost of Typical 1980 DOD Acquisition Program
    With a 30-Year Service Life 6

    Figure 2: Major Components of Air Force Aircraft Operating and
    Support Costs (constant year dollars in billions) 8

    Figure 3: Air Force Aircraft Operating and Support Costs
    (constant year dollars in billions) 10

    Figure 4: Aircraft Operating and Support Costs, Out-Year Cost
    Trends, and DOD Goals (constant year dollars in billions) 14

    DOD Department of Defense

    National Security and
    International Affairs Division

    B-278932

    August 29, 2000

    The Honorable James M. Inhofe, Chairman
    The Honorable Charles S. Robb, Ranking Minority Member
    Subcommittee on Readiness and Management Support
    Committee on Armed Services
    United States Senate

    The increasing cost of operating and supporting weapon systems is a growing
    concern because these escalating costs reduce funds available to develop and
    acquire new weapon systems and modify existing ones. A top Defense official
    has characterized this problem as a potential "death spiral." Operating and
    support costs include those for fuel, repair parts, maintenance, and
    contract services, as well as the costs of all civilian and military
    personnel associated with a weapon system. History indicates that these
    costs can account for about 70 percent of a system's total life-cycle
    costs.1 In 1999, the Air Force spent more than $16 billion2 to operate and
    support its aircraft. To help control operating and support costs, the
    Department of Defense (DOD) has set cost reduction goals for each military
    service, both for fielded weapon systems and for those being developed.

    This is the first in a series of reports we plan to issue in response to
    your request that we evaluate DOD's efforts to reduce operating and support
    costs. For this report, we focused on the Air Force's aircraft and assessed
    (1) operating and support cost trends, (2) cost reduction initiatives, and
    (3) factors influencing the success of cost reduction efforts.

    We reviewed the operating and support costs of fielded aircraft, focusing on
    some of the larger programs, including the B-1B bomber, the C-17 and
    C-5 transports, and the F-16 fighter, which together account for most of the
    Air Force's operating costs. We also examined new programs under development
    such as the Joint Strike Fighter, the F-22 fighter, the Global Hawk unmanned
    reconnaissance aircraft, and the Joint Primary Aircraft Training System
    aircraft. Our objectives, scope, and methodology are described in appendix
    I.

    Air Force operating and support costs are growing at about 4 percent per
    year, even though the total number of aircraft, the number of hours these
    aircraft are flown, and the number of personnel who fly and maintain them
    have been declining for years. From fiscal year 1997 to fiscal year 1999,
    operating and support costs for aircraft increased from about $15.3 billion
    to $16.6 billion. Higher costs for repair parts were the principal cause of
    these increasing costs, and about 25 fault-prone parts on each system we
    examined were the biggest cost "drivers." If they continue to grow at recent
    rates, operating and support costs of aircraft will exceed $20 billion by
    fiscal year 2005. To achieve DOD's cost reduction goals for 2005 that range
    from 7 to 20 percent, the Air Force would have to reduce these costs by $2.6
    billion to as much as $7 billion.

    To help reduce the operating and support costs of fielded systems, the Air
    Force has established several initiatives, including the Reduction in Total
    Ownership Cost program. Under this program, the Air Force developed a
    standardized methodology for assessing operating and support costs,
    identifying likely areas for cost reduction, proposing cost reduction
    projects, and tracking associated savings. Initially applied to several
    pilot programs in 1999, including the F-16 and B-1B, the program is now
    being expanded to other systems, as experience with the pilots increases.
    However, the projected cost reductions from these efforts average only about
    $343 million each year, well short of the $2.6 billion to $7 billion needed
    to achieve DOD's goals. Also, while the estimated operating and support
    costs of the Joint Primary Aircraft Training System are much lower than the
    aircraft it is to replace, the costs of the F-22 and the Joint Strike
    Fighter could be higher than the aircraft they are expected to replace.
    Since these two developmental aircraft could account for over one-quarter of
    all the Air Force's future operating and support costs of its aircraft,
    their higher costs could jeopardize attempts to control operating and
    support costs well into the future.

    Several factors hinder greater operating and support cost reductions. The
    Air Force does not give operating and support cost management the same high
    priority it assigns to other program concerns such as weapon performance
    during system development or improved combat capability after fielding.
    Instead of establishing an operating and support cost requirement and
    managing to meet it, new programs focus on initiatives to improve
    reliability, supportability, and maintainability. Although these initiatives
    do help lower operating costs, their impact on a system's operating and
    support costs is not tracked. Projects that could lower these costs in
    fielded systems cannot compete effectively for funding against projects that
    enhance safety, readiness, or combat capability. Because they are not given
    the same management priority, operating and support costs are not
    emphasized. Poor visibility of operating and support costs has been a key
    factor inhibiting management of operating costs, but the establishment of
    the new Air Force Total Ownership Cost data system appears to be overcoming
    this barrier. Despite program managers' limited authority and low
    incentives, some programs, such as the B-1B, continue to champion cost
    reduction projects.

    We are recommending that the Air Force establish operating and support cost
    requirements for developmental and fielded aircraft and periodically measure
    their progress toward meeting them. In addition, we have included a matter
    for congressional consideration that would require the Secretary of the Air
    Force to annually report its progress in achieving these requirements. While
    agreeing that significant steps remain to be taken to reduce operating and
    support costs, the Department believes that it is premature to establish
    operating and support requirements for aircraft systems. In addition, the
    Department disagreed with the need to provide the Congress with an annual
    operating and support cost report. As discussed in the agency comments
    section of this report, we believe these are essential steps to take to
    reduce operating and support costs.

    Operating and support costs reflect the purchases of fuel, lubricants, and
    repair parts and their associated maintenance and contract services, as well
    as modification kit procurement and installation. These costs typically
    account for about 70 percent or more of life-cycle costs, depending on how
    long a system remains in the inventory. Figure 1 depicts the typical
    life-cycle cost distribution of many weapon systems.

    Source: Defense Systems Management College Acquisition Guide.

    For some systems (such as the B-52 bomber and KC-135 refueling aircraft)
    that continue to be used many years beyond their expected service life,
    operating and support costs can amount to a higher percentage of life-cycle
    costs.

    The Under Secretary of Defense for Acquisition, Technology, and Logistics
    has expressed concern that rising operating costs threaten the Department's
    modernization efforts. In 1998, he observed:

    "Unfortunately, we are trapped in a `death spiral.' The requirement to
    maintain our aging equipment is costing us much more each year: in repair
    costs, down time, and maintenance tempo. But we must keep this equipment in
    repair to maintain readiness. It drains our resources--resources we should
    be applying to modernization of the traditional systems and development and
    deployment of the new systems. So, we stretch out our replacement schedules
    to ridiculous lengths and reduce the quantities of the new equipment we
    purchase−raising their costs and still further delaying
    modernization."

    The Congress also identified a need to reduce operating and support costs.
    Section 816 of the Strom Thurmond National Defense Authorization Act for
    Fiscal Year 1999 directed the Secretary of Defense to designate 10 pilot
    programs to test increased program manager oversight of product support. In
    a February 1999 report, DOD designated the 10 pilot programs to experiment
    with several broad cost management initiatives over the coming years. DOD
    has also set broad goals for each service to lower the operating and support
    costs of its weapon systems. Systems under development are expected to have
    projected life-cycle costs 20 to
    50 percent lower than the actual costs of the systems they are replacing.3
    The actual operating and support costs for fielded systems are expected to
    be reduced 20 percent by fiscal year 2005.

    The Air Force spent more than $16 billion to operate and support its
    aircraft in fiscal year 1999, an increase of $1.3 billion over fiscal year
    1997. Operating and support costs are growing at about 4 percent per year,
    even though the total number of aircraft, the number of hours these aircraft
    are flown, and the number of personnel who fly and maintain them have been
    declining for years. Higher costs for repair parts are the principal cause
    of these increasing costs, and a small number of parts on each system are
    the biggest cost drivers. If operating and support costs of the Air Force's
    aircraft continue to grow at recent rates, they could exceed $20 billion by
    fiscal year 2005.

    Declined

    Air Force operating and support costs for 36 aircraft systems increased by
    $1.4 billion from fiscal year 1997 to fiscal year 1999. Most of the increase
    occurred in the major aircraft programs, including the F-15 and the F-16.
    While aircraft operating and support costs are increasing, the total number
    of aircraft, the number of hours these aircraft are flown each year, and the
    number of personnel who operate and maintain them are decreasing. Air Force
    statistics show that the number of operational aircraft has decreased
    steadily, from 9,519 in fiscal year 1986 to 6,228 in fiscal year 1998.
    During this period, the number of hours these aircraft were flown each year
    also decreased by 39 percent. Similarly, the number of Air Force military
    personnel declined from 608,199 in 1986 to 375,512 in 1998--a drop of
    38 percent.4 More recently, from 1996 to 1998, aircraft, flying hours, and
    personnel decreased 2 to 3 percent.

    We analyzed aircraft operating and support costs in fiscal years 1997
    through 1999 to identify the principal costs and those most responsible for
    the cost growth. The largest components of aircraft operating and support
    costs are personnel, fuel, repair parts, depot maintenance, contractor
    services, and installation support. The costs of personnel and fuel both
    decreased in fiscal years 1997-99, while the costs of repair parts,
    associated maintenance, contractor services, and installation support
    increased. Figure 2 shows the change in the major components of the
    operating and support costs of Air Force aircraft in fiscal years 1997-99.

    Source: Our analysis of Air Force data.

    Together, repair parts and depot maintenance costs increased about
    31 percent during the period and were responsible for nearly all the
    increase in aircraft operating and support costs. Most of these costs were
    for replaceable repair parts such as transistors, gaskets, and fluids--and
    those that can be refurbished and reused such as engine subcomponents.
    According to program managers, repair parts are the top candidates for cost
    reductions because new and more reliable parts and processes can be designed
    and manufactured to replace parts that fail often or are difficult to
    obtain. More reliable parts fail less often and require less maintenance.
    For example, replacing the F-16 main aircraft battery with a
    maintenance-free battery is expected to cost $3.4 million fleet wide and
    save $3.8 million over the next 9 years and $6.9 million over the next 25
    years.

    About 25 parts on each system, especially parts associated with engines and
    electronic subsystems dominate the maintenance and repair costs of the
    aircraft we examined. For example, the F-16 fighter has nearly
    7,000 repairable parts. Of these, the 25 most fault-prone parts cost
    $224 million to repair in fiscal year 1998 and accounted for about
    44 percent of the system's total repair parts cost. Sixteen of these 25
    parts were for the aircraft engine, while another 4 were for the radar
    system. F-16 personnel told us these parts break often and are expensive to
    replace.

    If aircraft operating and support costs continue to grow at recent rates,
    our projections indicate they could exceed $20 billion by fiscal year 2005.
    This would be more than $5 billion higher than in fiscal year 1997. To
    determine the impact of continued growth in aircraft operating and support
    costs, we projected recent cost increases for Air Force aircraft from fiscal
    year 2000 to 2005. Our projection is shown in figure 3.

    Source: Our analysis of Air Force operating and support cost data.

    Our projection of Air Force operating and support costs reflects a recent
    growth rate of over 4 percent per year in fiscal years 1997-99. As figure
    3 shows, if aircraft operating and support costs continue to grow at the
    recent 4-percent rate, they would exceed $20 billion by fiscal year 2005.
    Our projection is based upon the actual costs from fiscal years 1997 through
    1999 for personnel, fuel and lubricants, repair parts, maintenance,
    contractor services, and other support costs associated with Air Force
    aircraft. After converting these costs to base year 2000 dollars, we used a
    cost projection model to project these cost trends through fiscal year 2005.

    Concerned that growing operating and support costs threaten planned force
    modernization, DOD has set cost reduction goals for both fielded and new
    weapon systems. The multibillion dollar cost reductions to aircraft
    operating and support costs needed to meet DOD's goals, however, are
    unlikely to be achieved in the near term and are uncertain in the long term.
    Although the Air Force has established several programs to reduce operating
    costs, currently projected savings fall far short of DOD's goals.

    To help control and reduce growing operating and support costs, DOD has set
    goals for each military service to reduce these costs over the next
    5 years. For fielded systems--those already operating by fiscal year
    2000--DOD wants to reduce operating costs by 7 percent compared with fiscal
    year 1997 costs (excluding fuel and personnel costs). The reduction goal
    increases to 10 percent in fiscal year 2001. A `stretch' goal of 20 percent
    in operating and support cost reductions is set for fiscal year 2005.

    We applied DOD's goals to fielded aircraft and determined that in fiscal
    year 2000, aircraft operating and support costs should not exceed
    $14.7 billion. DOD's goals, and our projections of aircraft operating and
    support costs for fiscal years 2000-05, are shown in table 1.

     Constant year 2000 dollars in billions
     Fiscal     Projected operating and             Difference between
     year       support costs             DOD goal  projection and goal
     2000       $17.3                     $14.8     $2.6
     2001       18.0                      14.5      3.5
     2002       18.7                      14.3      4.4
     2003       19.3                      14.1      5.2
     2004       20.0                      13.9      6.1
     2005       $20.7                     $13.7     $7.0

    Source: Our analysis of Air Force operating and support cost data.

    The Air Force needs to reach an operating and support funding level below
    $14 billion in fiscal year 2004 to meet DOD's cost reduction goal. If these
    costs for aircraft continue to grow at recent rates, however, our projection
    shows that in fiscal year 2005 they will exceed $20 billion. Thus, for the
    Air Force to meet the 2005 goal, operating and support costs would need to
    be reduced by about $7 billion.

    DOD has also set a goal to reduce the projected life-cycle costs of new
    systems by 20 to 50 percent below the historical experience of at least half
    its programs. The higher cost reduction goals for new systems recognize the
    higher potential for savings if appropriate decisions are made early in the
    life of a new system. In fact, according to DOD, design decisions with the
    most impact on operating and support costs are usually made soon after
    program initiation. As system designs are finalized during the development
    process, the opportunities to influence operating and support costs
    diminish, and the costs of making design changes increase.

    To help lower life-cycle costs, the Air Force has begun implementing both
    the DOD-wide Cost as an Independent Variable initiative and its own
    Reduction in Total Ownership Cost initiative. The first applies mostly to
    developmental systems, the second primarily to fielded systems. Guidance for
    developmental systems stresses that (1) system costs are capped, and any
    additional funding obtained by one system comes at the expense of others and
    (2) trade-offs between cost and performance are required if maximum cost
    effectiveness is to be achieved. These reforms require setting realistic and
    aggressive goals early and periodically measuring progress. Once a system is
    fielded and actual operating and support cost data becomes available, the
    reforms require establishing baselines identifying the cost drivers and
    implementing cost reduction initiatives.

    Beginning in December 1997, the Air Force established a new initiative,
    Reduction in Total Ownership Cost, to lower operating and support costs.
    Under this initiative, the Air Force developed a standardized methodology
    for assessing operating and support costs, identifying likely areas for cost
    reduction, proposing cost reduction projects, and tracking associated costs.
    This methodology was initially applied to several pilot programs in 1998,
    including the F-16 and B-1B. As more experience with the initial programs is
    obtained, it is being expanded to other Air Force programs. Among the
    objectives of the methodology are to have comprehensive, consistent business
    cases; sound, executable action plans; and effective, all-inclusive
    mechanisms for identifying and reporting cost savings associated with
    Reduction in Total Ownership Cost initiatives.

    As of February 2000, the Air Force had approved 43 cost reduction projects
    that use the Reduction in Total Ownership Cost approach and are either under
    way or planned for 8 fielded aircraft over the next several years. Between
    fiscal year 2000 and 2009, the Air Force plans to invest $7.9 billion in
    these projects. Annual average savings over the next 10 years are expected
    to reach $343 million. The Reduction in Total Ownership Cost Program Manager
    told us that savings for many projects are realized slowly because, once
    they are approved and funded, it takes several years to design, test, and
    produce the new part or process and install it in all the affected aircraft.
    Once installed, however, many projects realize savings over the aircraft's
    remaining useful life, which can be 20 years or more. By 2009, the Air Force
    expects savings and avoided costs to exceed
    $3.4 billion.

    Our examination of the 43 proposed projects for fielded aircraft shows that
    some of them, particularly those having the largest investments, are
    intended principally to provide readiness and performance improvements.
    Reduced operating and support costs are a secondary benefit. For example,
    the two largest B-1B projects are to replace the bomber's main computer and
    electronic defensive systems. Together, these two projects account for more
    than $980 million of the $1 billion in planned investment for all B-1B
    projects. These two projects have been justified for years on the basis of
    mission performance shortfalls and needed combat capability improvements.
    While both projects provide significant operating and support cost savings,
    neither has the high near-term return on investment required to meet Air
    Force criteria for approval as a project justified solely on the basis of
    operating and support cost reduction.

    Even if all the proposed initiatives are included, however, the projected
    cost reductions of about $343 million a year, or $3.4 billion over 10 years,
    fall far short of DOD's goals. In fact, projected savings are not sufficient
    to reverse the current trend of rising operating and support costs. Figure 4
    shows actual aircraft operating and support costs for fiscal years 1997-99,
    our projection of those costs for fiscal years 2000-05, and the level of
    operating and support costs needed to meet DOD's goals.

    Source: Our analysis of Air Force operating and support cost data.

    We estimate that the Air Force must further reduce its operating and support
    costs by about $2.6 billion to $6.1 billion to reach DOD's reduction goal
    for fiscal years 2000-04. Operating and support cost reductions of more than
    $7 billion will be needed to meet DOD's "stretch" goal of a
    20-percent operating cost reduction in fiscal year 2005.

    DOD has set goals to lower life-cycle costs of new aircraft by 20 to
    50 percent below the historical experience of predecessor systems. Assuming
    these new systems are retained for 30 years or more and are consistent with
    past programs, about 72 percent of their life-cycle costs would be for
    operating and support. Therefore, in order to reduce life-cycle costs by 20
    to 50 percent, operating and support costs would have to be reduced by at
    least an equal percentage.

    We reviewed efforts by new aircraft programs to lower operating and support
    costs, including those of the Air Force variant of the Joint Strike Fighter,
    which is to replace the F-16 and the A-10; the F-22, to replace the
    F-15; and the variant of the Joint Primary Aircraft Training System, to
    replace the T-37B. The F-15, the F-16, the A-10, and the T-37B aircraft
    accounted for 31 percent of all fiscal year 1999 aircraft operating and
    support costs. Were the new replacement systems to meet DOD's minimum
    operating and support cost reduction goal (20 percent by fiscal year 2005),
    overall operating and support costs for Air Force aircraft would be reduced
    by about 6 percent. This could be sufficient to reverse the recent growth
    trend in operating and support costs. Accordingly, the new aircraft being
    developed could have a powerful effect on the Air Force's long-term
    operating and support costs.

    In fiscal year 1999, operating and support costs of the four existing
    aircraft to be replaced were $5.1 billion. As shown in table 2, the Joint
    Primary Aircraft Training System and, perhaps, the F-22 are expected to have
    significantly lower operating costs and achieve DOD's goals.

     Constant year 2000 dollars in millions
                 Fiscal year                 Projected
     Predecessor 1999 annual     New         annual       Annual    Annual
     aircraft    operating       aircraft    operating    savings   savings
                 and support                 and support            (percent)
                 costs                       costs

     F-16 and                    Joint
     A-10        $3,305          Strike      $4,124       ($819)    (25)
                                 Fighter
     F-15        1,503           F-22

                                 Contractor  1,481        22        1
                                 estimate

                                 Air Force   952          551       37
                                 estimate
                                 Joint
                                 Primary
     T-37B       296             Aircraft    82           214       72
                                 Training
                                 System

    Source: Our analysis of Air Force operating and support cost data.

    The F-22 is already designed and undergoing testing, with a production
    decision planned for fiscal year 2001. However, the F-22 may not achieve the
    substantial cost reductions needed to reach DOD's goals. In July 1999, the
    systems contractor estimated annual operating and support costs for the F-22
    fleet to be about $1.5 billion. Because that estimate was considerably
    higher than earlier ones, the F-22 program office and the Air Force Cost
    Analysis Agency reexamined the contractor's estimate and identified several
    changes that would reduce costs to about $952 million. The Air Force plans
    to continue its analysis of the estimate during the summer of 2000 and
    finalize it in time for the program's production decision.

    Nevertheless, even if the Air Force's lower estimate for the F-22 is
    affirmed, overall operating and support costs for Air Force aircraft may not
    be lower. Table 3 compares the operating cost of F-15 and F-22 aircraft at
    the fleet, squadron, and individual aircraft level.

                       Constant year 2000 dollars in millions
                                                     Operating and support cost

     Aircraft Number of                              Fleet     Each aircraft
              aircraft
     F-15     522                                    $1,503    $2.9

     F-22     339                  Contractor        1,481     4.4
                                   estimate
              339                  Air Force estimate952       2.8

    Source: Our analysis of Air Force operating and support cost data.

    As table 3 shows, when both aircraft are considered at fleet level, the
    $1.5-billion operating costs of the F-15 are comparable with the high
    estimate of F-22 costs. The F-22's lower operating cost estimate of
    $952 million per year would represent a 36-percent reduction and would meet
    DOD's cost reduction goal for new systems. When the operating cost per
    aircraft is considered, however, the cost of the F-22 aircraft is about the
    same or higher than that of the F-15. Moreover, the Air Force does not plan
    to retire the F-15s as F-22s are fielded. According to the Air Force's Force
    Structure Plan for 2000, 179 F-15s will be retained until at least 2030.
    These F-15s cost about $519 million to operate in 1999. Assuming the
    operating costs of these 179 aircraft remain about the same and are combined
    with the projected F-22 costs, the operating costs of all these aircraft are
    likely to be about as high or higher, not lower, than those of the current
    F-15 force.

    The Joint Strike Fighter fleet will likely be the most expensive to operate
    and support on an annual basis than any aircraft currently in development or
    operated by the Air Force. The Joint Strike Fighter is expected to replace
    the existing Air Force fleet of 1,3725 F-16s and 368 A-10s, which together
    cost $3.3 billion to operate and support in fiscal year 1999. To meet DOD's
    20-percent cost reduction goal, the Joint Strike Fighter would need to
    reduce its operating and support costs to about $2.6 billion a year.

    The Joint Strike Fighter program office has not issued an estimate of the
    operation and support costs of the system. At present, the only goal or
    target for the Joint Strike Fighter is the program direction to the
    contractors that the aircraft not cost more to operate and support than the
    aircraft it is replacing. Based on our analysis of program office data, the
    cost ceiling provided to the contractors is $4.1 billion per year. This is,
    however, 25 percent higher than the $3.3-billion operating and support cost
    of the F-16 and A-10 aircraft fleets combined in fiscal year 1999. We
    believe that unless significant cost reductions are achieved, the Joint
    Strike Fighter is unlikely to meet DOD's goals. Moreover, considering that
    the F-22 and the Joint Strike Fighter could account for over 25 percent of
    the Air Force's future operating and support costs, these costs are likely
    to be higher, not lower, in the future.

    Our evaluation disclosed several factors that limit greater attention to
    operating and support cost reductions. The Air Force does not give operating
    and support cost management the same high priority it assigns to other
    program issues such as weapon performance during system development or
    improved combat capability after a system is fielded. Instead of
    establishing an operating cost requirement and managing in such a way as to
    meet it, new programs focus on initiatives to improve system reliability,
    supportability, and maintainability. While these initiatives do help lower
    operating costs, their impact on the system's operating and support costs is
    not tracked. Projects that could lower operating and support costs are
    unable to compete effectively for funding against projects that enhance
    safety or readiness or improve combat capability.

    Poor visibility of operating and support costs has been a key factor
    inhibiting management of operating costs, but the establishment of the new
    Air Force Total Ownership Cost data system appears to be overcoming this
    barrier. Although program managers of pilot programs have been given greater
    responsibility for weapon system support, they told us that limited
    authority and few incentives are major obstacles to managing operating
    costs. The Air Force has decided not to increase program managers' authority
    over operating and support costs, but it is working to increase incentives
    for major commands to invest in cost reduction initiatives.

    Remain Relatively Unconstrained

    DOD and Air Force guidance direct program managers to optimize system
    performance and minimize the cost of ownership. Weapon systems in
    development have requirements for acquisition costs, program schedule, and
    system performance, but they have no similar requirement for operating and
    support costs. The system requirements for performance, acquisition costs,
    and schedule are usually clear, well defined, and frequently tracked to
    actual performance. They are incorporated into key program baselines and
    other management documents. Through these documents, the program's most
    important characteristics are projected, tracked, measured, and reported
    within the Air Force, to the Office of the Secretary of Defense, and to the
    Congress. In other words, the system requirements are an important means of
    establishing accountability and priority. They are key guides for setting
    design limits, making trade-offs among requirements, and formulating
    investment decisions.

    As DOD recently reported to the Congress, setting performance requirements
    early in an acquisition program without adequate knowledge of the total cost
    can lead to very costly and unstable system designs.6 Yet the new programs
    we examined do not have comparable operating and support cost requirements.
    Further, they are not required to determine and justify the consequences of
    design decisions that are based on the system's projected operating and
    support costs. Without such a requirement, there is no accountability for
    minimizing the systems' operating and support costs.

    Of particular concern to us are the F-22 and the Joint Strike Fighter
    programs, which together are to replace aircraft that accounted for
    33 percent of all the Air Force's aircraft operating and support costs in
    1999. The F-22 low-rate initial production decision is scheduled for
    December 2000. The aircraft was designed without a specific top-level
    operating and support cost requirement. As its low-rate initial production
    decision approaches, the program office, the principal contractor, and the
    Air Force Cost Analysis Agency are trying to determine how much more or less
    the F-22 will cost to operate and support than the F-15 it will replace.
    Because the F-22 design is mature, there are now few opportunities to
    significantly reduce its operating and support costs, yet these costs will
    continue for at least the next 30 years.

    Like the F-22, the Joint Strike Fighter does not have a system-level
    operating and support cost requirement. Its managers are also pursuing
    several efforts to improve its supportability, reliability, and
    maintainability. This system, however, is in the early design stage. Without
    an operating and support requirement to guide design decisions that are now
    being made, there is no assurance that the fighter will cost 20 percent less
    to operate and support than the F-16 and A-10 aircraft that it will replace.
    Cost data provided by the program office and our analysis indicate that the
    fighter may cost more, perhaps considerably more, to operate.

    Unknown Effects on Operating and Support Costs

    The developmental programs we examined do not have operating and support
    cost requirements for the total system, but they generally have efforts
    underway to improve supportability, reliability, and maintainability.
    Improving these characteristics can lower operating and support costs. For
    example, development of a system that can diagnose and predict engine
    problems in the Joint Strike Fighter before they develop is expected to
    reduce significantly, engine maintenance and downtime. In essence, a system
    component that is easier to access, remove, and replace costs less to
    maintain. Similarly, a more reliable component requires less maintenance and
    repair. Improvements to all of these characteristics increase system
    readiness and can lower operating and support costs.

    However, an Air Force acquisition reform official told us that focusing on
    reliability-related characteristics historically has not been sufficient to
    control future operating and support costs. Accordingly, we asked program
    officials about the effects of their reliability improvement efforts on the
    total system's operating and support costs. The program offices generally
    did not know what these effects would be. For example, the Joint Strike
    Fighter program has evaluated numerous methods to improve the aircraft's
    reliability, but program officials could not tell us what effects these
    changes would have on total operating and support costs. While these efforts
    are expected to result in weapons that cost less to operate and support than
    they would otherwise, the missing linkage between improvement efforts and
    their effect on overall operating and support costs limits the ability of
    programs to predict and manage these costs.

    Against Other Priorities

    Projects that could reduce operating and support costs of fielded systems
    have a lower priority and are generally less able to compete for investment
    funds than those offering improved safety, readiness, or combat capability.
    This happens primarily for two reasons. First, most cost reduction
    initiatives require up-front investments of procurement funds that take many
    years to pay back the initial investments. This slow pay-back, and the many
    uncertainties that accompany improvement projects, make it difficult for the
    initiatives to compete against investments that provide near-term
    improvements in safety, availability, or combat capability. In fact, the
    largest of the 43 cost reduction initiatives approved by the Air Force are
    not specifically aimed at operating and support cost reduction but at
    improving readiness and combat capability.

    Second, the Air Force sees improved combat capability as the most important
    priority. Decisionmakers we spoke with, whether in program offices, major
    commands, product centers, or air bases, told us that their principal focus
    is to improve combat capability. They work continuously to enhance system
    safety, increase readiness, and improve performance. While they acknowledge
    the importance of managing operating and support costs and recognize that
    growth of these costs may threaten the Air Force's ability to modernize,
    they also told us that near-term combat capability is their top priority.

    Two Air Force surveys conducted in 1999 showed that very few projects aimed
    specifically at reducing operating and support costs through improvements to
    fielded aircraft were carried out in 1997 and 1998. Both program managers
    and major command leaders told us the reason for this was that limited funds
    available were invested in improvements in combat capability and that there
    is a general reluctance to forego improved combat capability in the near
    term for uncertain savings in the longer term.

    We visited the Air Combat Command and the Air Mobility Command and found
    that both have a comprehensive and detailed process for proposing,
    reviewing, and approving procurement funds for aircraft improvements, but
    this process strongly favors projects that enhance combat capability. They
    told us that their primary mission is to prepare for combat and ensure those
    pilots and support crews have the best equipment and support possible. But,
    they acknowledged that controlling operating and support costs is becoming
    increasingly important. Leaders at both commands told us that they were
    reassessing the process used to evaluate aircraft improvement projects so
    that those providing operating and support cost reductions will compete
    better in the future.

    Cost Management

    Accurate and complete operating and support cost data and estimates are
    important for cost management because they often serve as the basis for
    establishing cost requirements that guide design choices and other
    trade-offs during development. Similarly, reliable cost data is necessary
    for managers of fielded aircraft to guide investment and system management
    decisions. Until very recently, however, tracking aircraft operating and
    support costs was difficult because the cost data was either unavailable in
    a usable format or of poor quality. The Air Force's Total Ownership Cost
    system is making operating and support cost data more available and usable
    and may, with time, enable improved management.

    In 1998, the Air Force began to set up a Total Ownership Cost database,
    which is expected to make it easier not only to track costs of fielded
    systems over the long term, but also help establish clear cost goals for
    systems in development. Accurate and reliable operating and support costs
    are a fundamental starting point for setting cost goals, gauging overall
    progress, identifying shortfalls, and making informed decisions on
    improvements to fielded aircraft. In the past, accurate, complete, and
    comparable operating and support cost data was not readily available.
    Program managers and cost analysts told us that past operating and support
    cost estimates were weakened by poor cost data.

    According to its program manager, the new database is fully functional and
    is being steadily improved. Cost data, however, will have to be accumulated
    for several more years before the full benefits of the system are realized.

    In 1999, the Air Force established 10 pilot programs in which program
    managers were given more responsibility for and oversight of weapon system
    support. Program managers, however, have limited authority and opportunity
    to control or influence the operation and support costs of fielded aircraft.
    Similarly, they do not control, influence, or have incentives to encourage
    investments in cost reduction initiatives.

    Air Force program managers have limited visibility over a system's operating
    and support costs. Control over the essential resources and processes that
    determine how these functions are managed, however, remain largely with the
    major commands and headquarters organizations. Operating and support costs
    for a system are largely determined when an aircraft is designed. Once a
    system is fielded, however, a program manager of a system such as the F-16,
    for example, can directly influence no more than about 14-17 percent of the
    system's operating and support costs. Program managers can influence the
    cost of maintenance by acquiring a more reliable part or revising a
    maintenance procedure, but they cannot control when or how often a system is
    used. They cannot decide the number of pilots or support personnel that are
    needed, the number of hours a system is to be used, or major maintenance
    schedules. Thus, significant personnel, base operations, maintenance, and
    overhead costs are outside their control or influence.

    Similarly, program managers do not manage or control the funds used to pay
    for operations and support functions and activities or the investment funds
    used to make cost reduction improvements. Authority for managing operating
    and support funds, as well as aircraft improvement funds, again rests with
    the major commands and Air Force headquarters. Program office personnel told
    us that there are few incentives for promoting investments in cost reduction
    initiatives because the Air Force's top priority is to improve readiness and
    combat performance. Also, the major commands or Air Force headquarters
    routinely deduct the estimated savings from programs' future budgets before
    the savings are actually realized. If a cost reduction initiative does not
    go as planned or does not achieve the estimated savings, the program must
    make up for the insufficient investment or unrealized savings. As a result,
    and in spite of the widespread belief that there are many available
    opportunities to reduce operating and support costs, many worthy projects or
    ideas go unfunded.

    The Air Force considered giving program managers more control over operating
    and support as well as investment funds, but it rejected this idea because
    it believes fund management must be accomplished above the individual
    program level to ensure optimum use of limited funds. To encourage greater
    investment in cost reduction initiatives, the Air Force is considering
    allowing the major commands to retain savings obtained from cost reduction
    projects to use as investment funds for future projects.

    Operating and support costs of Air Force aircraft have grown over the last
    3 years, and if this growth continues at the same rate, the service could
    face difficult choices over whether to cut research and development funds,
    procurement funds, or readiness levels in the years ahead. We project that
    operating and support costs for aircraft could exceed $20 billion by fiscal
    year 2005, about $7 billion higher than DOD's goal. With planned budgets of
    $13 billion for research and development and $11 billion for aircraft
    procurement in fiscal year 2005, the projected $7-billion growth in
    operating and support costs poses a serious problem. The Air Force's
    operating and support cost reduction initiatives for fielded systems are
    projected to save only a relatively small amount. Further, the projected
    operating and support costs for new aircraft may be more, instead of less,
    than those of currently fielded aircraft.

    The absence of clear, well understood, and frequently reported operating and
    support cost requirements for new systems undermines effective cost
    management during the critical design phase, when most future operating and
    support costs are determined. Similarly, the absence of an operating and
    support cost requirement for fielded systems precludes management attention
    and inhibits investments in cost reduction projects needed to meet DOD's
    goals. Accordingly, it is unclear what maximum acceptable operating and
    support costs the Air Force is willing to pay during a system's life;
    therefore, there is no way of knowing whether incurred or projected costs
    are reasonable. Ultimately, because there is no accountability for operating
    and support costs of aircraft programs, oversight and management remain
    difficult.

    To establish accountability for reaching DOD's goals of significant
    operating and support cost reductions, the Air Force needs to establish
    operating and support cost requirements for aircraft it is developing and
    for those that are already in service.

    We recommend that the Secretary of Defense direct the Secretary of the Air
    Force to

    � establish an operating and support cost requirement for developmental and
    fielded weapon systems to ensure full consideration of these costs among
    other program priorities and

    � measure and periodically assess progress toward meeting individual program
    operating cost requirements.

    The Congress may also wish to require the Secretary of Defense to direct the
    Secretary of the Air Force to submit an annual report summarizing each
    program's operating cost requirement, its actual costs, and the actions
    planned to achieve the requirement.

    In written comments on a draft of this report, DOD agreed that significant
    steps remain to be taken to reduce operating and support costs. The
    Department also stated that it shares some of our concerns about the pace,
    risk, and costs associated with reducing operating costs and acknowledged
    the difficulty of devising a strategy that allows meaningful cost reductions
    while focusing on its highest priorities−improving safety, readiness,
    and combat capability. DOD noted that pilot programs are investigating
    various cost reduction approaches, but that it was too soon to determine
    which approaches would yield the best results. DOD also stated that our
    calculations of potential operating and support costs and needed reductions
    were unclear. We modified our report to clarify these calculations.

    DOD partially agreed with our recommendation to establish an operating and
    support cost requirement for both developmental and fielded systems and to
    periodically assess progress in meeting those requirements. As for fielded
    systems, DOD stated that it is premature to establish such a requirement
    because the ability to track total operating and support costs is still
    evolving. While we agree that the Air Force's ability to identify and track
    operating and support costs is still evolving, we believe improvements to
    the Air Force Total Ownership Cost system have progressed to the point that
    the system can be used effectively to track operating and support costs.
    This system, for example, is being used to track the operating costs of Air
    Force pilot programs, including the F-16 and B-1B, two of its largest and
    most costly. As DOD noted in its comments, the Air Force and other military
    services are already reporting operating and support costs of pilot programs
    and their progress toward meeting DOD's cost reduction goals. Accordingly,
    we believe DOD can implement our recommendation for the other fielded
    systems as well.

    For developmental systems, DOD only noted that the operational requirements
    documents, selected acquisition reports, and pilot program baselines
    establish cost goals or report costs that, in some cases, may include total
    ownership costs. None of these documents, however, establishes a specific
    operating and support cost requirement that would ensure full consideration
    of these costs along with other program priorities or demand trade-offs
    between these requirements. We believe such trade-offs are essential to
    lowering the Department's operating and support costs. We also believe such
    requirements should be consistently established and periodically assessed
    for all major developmental programs.

    DOD did not agree with our matter for congressional consideration and noted
    that the Department already addresses life-cycle costs, which are similar to
    total ownership costs, in a variety of documents and does not wish to have a
    separate reporting system imposed on it. As noted in our report, we do not
    believe the Department currently provides sufficient emphasis on operating
    and support costs. In addition, existing requirement documents cited by the
    Department do not include a requirement for operating and support costs, nor
    do these documents report on these costs in the same way. We believe an
    annual reporting requirement would provide a stronger emphasis on operating
    and support costs and a more consistent reporting mechanism.

    We have provided additional clarifications in our report to address other
    technical comments included in DOD's letter. Appendix II contains the full
    text of DOD's comments.

    We are sending copies of this report to the Honorable William S. Cohen,
    Secretary of Defense; the Honorable F. Whitten Peters, Secretary of the Air
    Force; the Honorable Jacob J. Lew, Director, Office of Management and
    Budget; and other interested congressional committees. We will also make
    copies available to others upon request.

    If you or your staff have any questions concerning this report, please call
    me on (202) 512-4841. Key contributors to this report are listed in
    appendix III.

    James Wiggins
    Associate Director
    Defense Acquisitions Issues

    Scope and Methodology

    We reviewed the Air Force's Total Ownership Cost assessment methodology and
    discussed its use with aircraft program office officials. We also assembled
    and analyzed data on fielded weapon systems from the Air Force's Total
    Ownership Cost information system. In addition, we discussed operating and
    support cost data with the programs reviewed in this report.

    To determine how the Air Force identifies and resolves operating and support
    cost issues for fielded aircraft, we visited and obtained information from
    Air Combat Command, Langley Air Force Base, Virginia, and Air Mobility
    Command, Scott Air Force Base, Illinois. We obtained specific information
    from the B-1B, C-17, F-16, and F-117A program offices at Wright-Patterson
    Air Force Base, Ohio. We discussed F-117A support at the 49th Fighter Wing,
    Holloman Air Force Base, New Mexico, and B-1B support at the Oklahoma City
    Air Logistics Center, Oklahoma City, Oklahoma, and the Warner Robins Air
    Logistics Center, Warner Robins, Georgia. We obtained and analyzed
    information on the Air Force Reduction of Total Ownership Cost program from
    Air Force Headquarters, Washington, D.C.

    To determine how the Air Force is minimizing operating and support costs
    during the design and development phase of new aircraft, we obtained and
    analyzed information from the Joint Strike Fighter program office at Crystal
    City, Virginia. We also obtained information from the F-22 System Program
    Office, the Joint Primary Aircraft Trainer System Program Office, the Global
    Hawk Program Office, and the C-5 Development Office at Wright-Patterson Air
    Force Base, Ohio. We reviewed Department of Defense and Air Force
    acquisition guidance and discussed the guidance, including cost as an
    independent variable acquisition reform effort, with officials from the
    Office of the Secretary of Defense, Program Analysis and Evaluation; the
    Defense Systems Management College; and the Air Force acquisition reform
    office.

    We conducted our review from February 1999 through June 2000 in accordance
    with generally accepted government auditing standards

    Comments From the Department of Defense

    GAO Contacts and Acknowledgments

    James F. Wiggins (202) 512-4343
    William Graveline (256) 650-1414

    In addition to those named above, Dave Best, Matt Mongin, and Jerry Wood
    made key contributions to this report.

    (707384)

    Table 1: Comparison of Projected Aircraft Operating and Support
    Costs and DOD's Goals 11

    Table 2: Annual Operating and Support Costs of Predecessor
    Aircraft Compared With Those Estimated for New Systems 16

    Table 3: Comparison of F-15 and Estimated F-22 Operating and
    Support Costs 17

    Figure 1: Nominal Life-Cycle Cost of Typical 1980 DOD Acquisition Program
    With a 30-Year Service Life 6

    Figure 2: Major Components of Air Force Aircraft Operating and
    Support Costs (constant year dollars in billions) 8

    Figure 3: Air Force Aircraft Operating and Support Costs
    (constant year dollars in billions) 10

    Figure 4: Aircraft Operating and Support Costs, Out-Year Cost
    Trends, and DOD Goals (constant year dollars in billions) 14

    1. In addition to operating and support, life-cycle costs include those for
    development, procurement, and disposal.

    2. All operating and support costs are presented in constant year 2000
    dollars.

    3. Life-cycle costs are the total costs of acquiring and owning a weapon
    system over its full life, including development, procurement, operation,
    support, and disposal.

    4. The percent of reductions in personnel that operate and maintain aircraft
    may differ from total Air Force military personnel reductions.

    5. As of January 2000.

    6. Section 912c Report: Requirements and Acquisition (June 1999).
    *** End of document. ***