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Thursday, December 4, 2014

Lockheed Martin CFO Talks Navigating F-35 Program

Juliet Van Wagenen

[Avionics Today 12-04-2014] Speaking at the Credit Suisse Global Industrials Conference, Bruce Tanner, executive vice president and CFO at Lockheed Martin noted the progress put forth in the last year behind the F-35 Lightning II, Joint Strike Fighter program. The program, touted as the most costly program in the Pentagon’s history, is seeing headway in the way of orders, deliveries and production, even in the face of possible budgetary constraints and recent mechanical setbacks.

The F-35B at Elgin Air Force Base, Fla.
The F-35B at Elgin Air Force Base, Fla. Photo: Lockheed Martin

“We think we’ve made very, very good progress throughout 2014. We’re very excited about what happens in 2015,” said Tanner. Currently, eight countries have ordered more than 200 of the fifth generation aircraft from the long-anticipated and closely watched F-35 program. To date, Lockheed Martin has delivered 115 F-35 variant aircraft with further deliveries scheduled to begin in 2016, and Tanner only sees that number rising from here, despite government roadblocks in the budget such as sequestration or a Continuing Resolution (CR) on the horizon.

“I think things changed as recently as last night with FY16 and the potential for CR. We’re more optimistic based on some of the events that occurred in congress, even as soon as yesterday, that might result in an omnibus bill passing by Dec. 11. Obviously you can’t guarantee that, that happens, but I think there’s more potential for that happening than I would’ve guessed even at the start of this week,” said Tanner, speaking at the conference Wednesday.

An omnibus bill could provide more stable funding than a continuing resolution for the F-35 program, which would enable a smoother 2016 for the company, especially as Lockheed looks to ramp-up production in light of new contract negotiations. The bill would be welcome news to the program who, despite promising purchases and orders, has also come up against a series of setbacks this year, including a fire involving its Pratt & Whitney 135 engine in June that grounded the entire fleet of Navy fighter jets. Program officials noted the engine fire was limited to the jets still in development and have since eased the required engine inspections from every three flight hours to every 13. Pratt & Whitney has also investigated the mishap and concluded “a ‘hard rub’ between the Rotor 3 and the polyimide stationary seal on Stator 2 led to excessive heating and fracturing of the rotor in the fan section of the engine,” according to a statement released by the engine manufacturer in October.

The engine failure set up against frozen pensions for Lockheed Martin workers represent further setbacks in the long-troubled program.

Still, Tanner remains optimistic that the Pentagon will bump up spending for the program in 2016 above limits set in place by the Budget Control Act of 2011 that capped spending. “The belief is that the administration is going to come in with an FY16 budget higher than the current Budget Control Act. We believe that will be the case,” Tanner said. He attributes this expected increase in allowance to the current political climate.

“If you just look at what’s going on in the world with all the world dynamics and all the threats that are occurring out there and you look at the readiness levels of and the capability of our services today,” Tanner said. “I think there’s a compelling need to have that increase of above the budget control act. That was pure mathematics, completely de-linked from strategy at the time. I think that most people on both sides of the aisle today believe that’s not the way we should be managing our budgets and the budgets of our allies.”

An increase could mean a lot for the program as well, both in terms of ramp up — for which production is expected to nearly triple in the next four years from 43 to 100 jets — and new programs. While enabling the bump is important, Tanner believes the new programs that could be initiated through an uptick in funding offer greater benefit.

“So things like the long-range strike bomber, things like the Joint Light Tactical vehicle, I think there’s greater certainty, obviously, that they will start and progress in a post-sequestration environment than potentially in a sequestration environment,” said Tanner in reference to new programs coming onto the scene. “Those new starts are critical for a lot of reasons, they bring with it engineering content, which is sort of the lifeblood of this business, that’s one we’re watching very closely and as I said I’m feeling more optimistic about that today than I was a year ago.” And he believes that increase in funding, should it come to fruition in 2016, will extend to 2017 and beyond.

In the meantime, both Lockheed Martin and partner companies Northrop Grumman and BAE Systems have contributed funds totaling something in the way of $175 million, with the government looking to pitch $300 million, in order to keep the momentum of the program going and drive down costs. In the last four years, the cost of the aircraft has dropped 57 percent, and partners in the program are looking to continue the manufacturing and engineering innovation they’ve seen evolve throughout the two-decade lifespan of the program to get aircraft prices low and keep them there.

“We started the concept development phase of this program in the mid-1990s, we won the SDD contract, the System Design and Development contract, in the early 2000s, so we’re now arguably 15 or 20 years into this program,” said Tanner. “During that period of time, as you can imagine, there have been improvements in manufacturing capability, there have been improvements in a number of the ways to build the aircraft, including some of the IT-enabled ways to build the aircraft that weren’t the original plan. So, when we sit here now, 15 years out from when we started, there are opportunities that we think can bring down the cost of the aircraft more than simply building it the way we intended to build it.”

Ramp up rate and new technologies will drive the cost reduction moving forward, but providing quality aircraft alongside reliable maintenance and sustainment programs will keep the program going for decades, according to Tanner.

“We don’t assume anything is a given. We have to earn this every day and we don’t take as a given at any stretch,” said Tanner. “We take this very seriously because that’s the tale that goes on for decades well beyond the production quantity.”

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