Incentive payments for Lockheed Martin [LMT] in the new, possibly $6.6 billion, three-year sustainment contract to the company for its F-35 fighter are contingent upon the meeting of cost per flight hour (CPFH), parts availability, and aircraft full mission capable (FMC) rate goals for fiscal 2021, 2022, and 2023.
The F-35 Joint Program Office (JPO) and Lockheed Martin have declined to release the cost per flight hour, parts availability, and FMC targets that Lockheed Martin is to meet for fiscal years 2021, 2022, and 2023, and Defense Daily filed a Freedom of Information Act request this week to obtain those records. The Pentagon has not typically released the terms of its awarded contracts, apparently due to concerns about the disclosure of classified and company-proprietary data.
Such a PBL “will provide a more outcome-based approach that will shift risk from the U.S. government to industry with a longer term, fixed price arrangement,” Lockheed Martin said on Sept. 17.
While past F-35 sustainment contracts evaluated Lockheed Martin on the aircraft’s mission capable rates, the new sustainment contract is to judge the company on FMC rates and the on-time availability of parts to ensure FMC rates improve. Overall, the Government Accountability Office has said that the F-35’s FMC rate is 54 percent–18 points below the goal.
The F-35 JPO has said in the past that FMC rates depend on sufficient investments by the U.S. Air Force, U.S. Navy and U.S. Marine Corps in spare parts and flying hours.
“Under this contract, the cost per flight hour (CPFH) for the global fleet improves by 8% from $36.1K in 2020 to $33.4K in 2023, in constant year 2012 dollars,” the F-35 JPO said on Sept. 14. “Specifically, this represents a $3.6K reduction in CPFH for the USAF A-model from $33.6K in 2020 to $30.0K in 2023. The contract also drives improvements to performance through a refined performance incentive structure focused on year-over-year improvements in full mission capable (FMC) rates and supply metrics.”
While the $30,000 CPFH goal for the Air Force F-35A is a goal, factors could intervene that could make that goal more difficult to achieve, such as a change in requirements, rising fuel costs, or the establishment of a program for an additional or alternate engine beyond the existing Pratt & Whitney [RTX] F135 engine.
On Sept. 17, Lockheed Martin said that the fiscal 2021 through 2023 sustainment contracts “include an incentive structure for meeting both cost and performance objectives.”
“If Lockheed Martin does not meet the contract objectives, incentive payments are reduced accordingly,” the company said.
The $30,000 CPFH target for the F-35A by fiscal 2023 “is comprised of costs across Lockheed Martin, the engine (Pratt & Whitney) and the USAF operations (primarily manpower and fuel),” Lockheed Martin said Sept. 17. “We are committed to not only meeting our cost commitments in that timeframe but partnering with the government and Pratt & Whitney to help drive down the enterprise operations and support cost to meet the $30K projection.”
The three-year sustainment contract “incentivizes Lockheed Martin to deliver Full Mission Capable (FMC) rates for the F-35A, F-35B and F-35C,” per Lockheed Martin. “It also incentivizes Lockheed Martin to improve supply availability and ensure parts are delivered with required Electronic Equipment Log (EEL) data.”
Last September, the Defense Contract Management Agency and Lockheed Martin said they had reached an agreement on nearly $70.6 million in expected company investments to fix faulty EELs (Defense Daily, Sept. 30, 2020).
Lockheed Martin has said that it has invested $500 million in cost reduction initiatives for its 40 percent of the F-35 sustainment program. Pratt & Whitney and the government make up the remaining 60 percent of the sustainment program.
The $2 billion obligated for Lockheed Martin at the time of the Sept. 13 award is split among $822 million in Air Force fiscal year 2021 operation and maintenance (O&M) funds; $382 million in fiscal 2021 Marine Corps O&M funds; $177 million in fiscal 2021 Navy O&M funds; $2.3 million in fiscal 2021 Air Force aircraft procurement funds; $1.2 million in fiscal 2021 Navy aircraft procurement funds; $217 million in Foreign Military Sales funds; and $412 million in non-DoD participant funds. Of this total amount, $1.38 billion will expire at the end of this fiscal year.
The F-35 JPO wants the $2 billion to energize the Lockheed Martin supplier chain to improve the ordering of spare parts, parts availability, and F-35 FMC rates. If Lockheed Martin is able to demonstrate the latter, the company is to be eligible for a PBL contract next year.
Air Force Gen. Mark Kelly, the head of Air Combat Command (ACC), said last February that he is not confident that the F-35 will reach a program “25 by 25” goal of $25,000 CPFH by 2025 (Defense Daily, Feb. 26).
In the past two years, Pentagon officials, including those from the Cost Assessment and Program Evaluation (CAPE) office, have voiced similar skepticism about reaching the $25,000 goal. In the summer of 2020, the F-35 JPO said that the CPFH overall was $35,000, down from $44,000 in 2019.
Lockheed Martin CEO James Taiclet told defense analysts during a second quarter earnings call in July that the government, Lockheed Martin, and Pratt & Whitney have to be “all in” to meet the “25 by 25” goal.