President-elect Donald Trump on Monday continued his rhetorical assault on Pentagon spending by tweeting that the cost of the Lockheed Martin [LMT] F-35 Joint Strike Fighter is “out of control” and promising to save millions on that and other active defense contracts.
“The F-35 program and cost is out of control,” Trump tweeted before 9 a.m., Dec. 12. “Billions of dollars can and will be saved on military (and other) purchases after January 20th.”
Lockheed stock took a nose dive after Trump thumbed the message, which was a rehash of comments he made in rallies and on news programs over the weekend. The company’s stock value plummeted more than 3 percent before markets opened and continued its slide to a nearly five percent loss, or $4 billion decline before noon.
Monday’s tweet was the second time in less than a week that Trump targeted a major defense program on social media. He caused a similar but less severe dip in Boeing [BA] stock recently by tweeting that the Air Force One recapitalization program should be canceled.
Both companies’ stock prices followed the same trajectory – Lockheed’s decline was more severe and precipitous – of sharp early losses then a slow return to slightly up by the closing bell. Lockheed ended the day with a share price of $253.11 after opening at $251.78.
Lockheed F-35 program manager Jeff Babione quickly issued a statement in defense of the program. Babione is in Israel, where the first two of that nation’s F-35s arrived Dec. 12.
“We welcome the opportunity to address any questions the president-elect has about the program. It’s an amazing program. Lockheed Martin and its industry partners understand the importance of affordability for the F-35 program,” Babione said in a statement.
“Since the beginning, we’ve invested hundreds of millions of dollars to reduce the price of the airplane more than 60 percent,” Babione added. “We project the price of the aircraft will be $85 million in the 2019 -2020 timeframe. When we get to that price, the F-35 will be less expensive than any fourth-generation fighter in the world. And it will be the premiere fifth-generation fighter. That’s an incredible value for anyone operating the airplane.”
Boeing CEO Dennis Muilenburg eventually spoke with Trump about the Air Force One program last week. Boeing spokesman Todd Blecher said Muilenburg congratulated Trump on his election win and committed to working with the new administration to control costs as they establish requirements for the new aircraft to keep the program as affordable as possible.
Defense industry analysts were quick to point out that tweeting criticism of a program does not equate to a cancellation. Unlike with the Air Force One tweet, Trump did not suggest scrapping the F-35 program, which is much larger and supports jobs in 45 states. Lockheed’s F-35 website states the fifth-generation jet is responsible for 146,000 direct and indirect jobs in the United States.
During the Trump transition team’s Dec. 6 daily phone conference with reporters, spokesman Jason Miller said the Boeing incident was indicative of how the president-elect will deal with high-profile acquisition programs he deems too expensive.
“I think this really speaks to the President-elect’s focus on keeping costs down across-the- board,” Miller said. “People are really frustrated with some big price tags that are coming out from some programs. … So we’re looking for areas where we can keep costs down.”
Byron Callan of Capital Alpha Partners said it is doubtful Trump is aware of the scope of the F-35 program or its strategic implications. Trump’s criticism of the program is “more bark than bite” and investors should not panic over a message posted to social media, he said.
“We strongly doubt that Trump has been fully informed of the F-35 program or alternatives to modernize U.S. tactical aircraft inventories,” Callan said in a quick-hit report on the controversy published Monday morning. “As well, we strongly doubt that he has been informed of the unique international nature of the program.”
The F-35 program has taken a lot of flak for being the most expensive weapon development effort in history. The $1 trillion price tag that is often used includes the up-front cost of purchasing the jets and sustainment over their 30-40 year service lives.
Total program cost was estimated at $340 billion in the fiscal year 2017 Selected Acquisition Report (SAR) that collects information on major procurement programs. The total program acquisition cost including development cost is $138 million in 2017 dollars, according to the report. Average procurement cost now sits at $111 million. The U.S. military plans to buy 2,457 F-35s in three variants.
It will be up to the Trump administration whether to pursue a program of record at that level or purchase fewer of the jets than currently expected. The fewer aircraft purchased the more each jet costs.
Following the Boeing dustup, defense industry consultant Jim McAleese warned that other high-profile programs could become targets of Trump’s Twitter feed. Besides the F-35, he listed the Navy’s CVN-78 Ford-class aircraft carrier, the Air Force Ground Based Strategic Deterrent (GBSD) ICBM replacement and the Marine Corps CH-53K heavy lift helicopter as other potential lightning rods.
“Trump’s public targeting of Boeing as USAF sole-source prime contractor for PAR program is clearly the new precedent, requiring contractors to take immediate corrective-actions to squeeze maximum-value from every dollar of funding,” McAleese said in an email to Defense Daily.
Callan pointed out that while the cost may have been out of control in the past, Trump’s characterization is no longer accurate.
“Stating that costs are “out of control” is wrong,” Callan said. “Yes, there are affordability issues on the F-35 and there may be alternative ways to deliver capabilities offered by the F-35 through other platforms or weapons. However, unit prices have been declining, and the program has stabilized in recent years. We have seen little analysis exploring alternatives to the F-35, though some could exist.”
Babione explained that the seemingly gargantuan estimated program cost does not include acquisition price alone. While the per-jet cost of a n F-35A is still above $100 million, the unit cost has steadily declined with every successive procurement contract and promises to continue that decline as production ramps up and more international operators begin to buy jets.
“Lockheed Martin and its industry partners are also investing in reducing the sustainment costs of the aircraft recognizing that much of the cost of owning and operating an aircraft is after it’s delivered,” Babione said. “We’re investing hundreds of millions of dollars to reduce the cost of sustaining the airplane over its 30-40 year lifespan. We understand the importance of affordability and that’s what the F-35 has been about.”
“But more importantly, it’s amazing technology,” he added. “Whoever has it will have the most advanced air force in the world, and that’s why we’re building the F-35. It’s important that the U.S. and our partners have this aircraft. It’s a great value and we look forward to any questions the president-elect may have.”