Sustainment Becoming Most Profitable Part of F-35 for Lockheed Martin

As F-35 managers and auditors prepare to testify on the stealth fighter’s sustainment costs, Lockheed Martin’s Chief Financial Officer said sustainment is soon to be the most profitable part of the program.

“Sustainment is going to be the fastest-growing part of the portfolio” as U.S. military services, foreign partners, and foreign military sales customers “stand up bases” and need steadily increasing numbers of F-35 spare parts, Lockheed CFO Kenneth R. Possenriede said on an April 20 first quarter results call with stock analysts and reporters. Sustainment will eclipse both F-35 production and development profitability, though he said that development of advanced versions of the fighter is proving a “pleasant surprise for us,” along with the need to retrofit earlier versions of the aircraft.

The House Armed Services Committee is holding an F-35 hearing on April 22, with testimony to be offered by Gregory M. Ulmer, Lockheed aeronautics vice president and former F-35 program manager; Pratt & Whitney President of Military Engines Matthew F. Bromberg; Diana Maurer of the Government Accountability Office; F-35 Joint Program Office Director Lt. Gen. Eric T. Fick, and Air Force F-35 Integration Office Director Brig. Gen. David W. Abba.

Despite increased profitability, Possenriede said the sustainment model for the F-35 is “inefficient,” and he touted the company’s offer of a performance-based logistics contract as the best way to get sustainment costs down.

The PBL pitch includes Lockheed and its vendors investing some of their own money in economic order quantities of parts and materials to reduce costs, and going to five-year contracts rather than annual ones.

“We believe there’s a better way to procure [sustainment], and that’s why we offered that performance-based logistics concept, and we’ll see where that goes,” Possenriede said. “If that morphs into something, and if industry is prepared, as we are, to take on the investment and take on the risk and sign up to a service-level agreement, and we perform, there should be some profit opportunities there.”

James D. Taiclet, Lockheed president and CEO, acknowledged that the F-35 is “an expensive machine, and it’s expensive to maintain, in large part because of the stealth technology that’s more advanced than anywhere else.” But, he said, “this airplane is the most capable fighter plane ever developed … It’s got a lot of leading edge technology, … just the propulsion system integrated with stealth technology is pretty ground-breaking.” As a “mobile computer node for the battlefield,” and with advanced sensors, processing power, and communication links, the F-35’s “much more than just a single-purpose fighter,” he said.

Production of the jet is “in good shape, … the company has already achieved the goal of $80 million [per] F-35A and we’re a million or two below that these days … We’re going to keep working on it.”

The fighter needs continuing modernization “because of the evolving threat, and the speed at which that’s happening,” Taiclet said. Lockheed is looking to employ “some of these commercial technology practices into our own modernization program,” to make it more efficient.

As for sustainment, he said a “joint strategy” is needed with the program office and the services; “those who will actually have to fix this aircraft and maintain it in the field.” They need to seek “the right level of funding for spare parts, etc., and really, clearly define responsibilities for the depot system, for frontline maintenance, and for the OEM and our supply chain.”

All this is, “I think, a very doable thing,” Taiclet said, “And we’re embarking on that, led by the Joint Program Office and the service Chiefs.” The program goal of getting operating costs down to $25,000 per flying hour in 2012 dollars—versus $35,000 now—“if we work with them, is achievable.”

Possenriede said the “Skunk Works” advanced development unit is the fastest-growing of Lockheed’s divisions, but most of its work is classified and he did not discuss it. Skunk Works is known to be working on several hypersonics projects and the Air Force’s Next-Generation Air Dominance program.

Taiclet said Lockheed is developing its own architecture for getting its various platforms to talk to each other. The company will work with the government “to make sure that they’re comfortable using the standards we come up with, and some of the software-defined network protocols that we use,” he said. “Eventually we’re going to enable all of our major platform programs—in aerospace, land, and maritime domains—to seamlessly integrate into this architecture.”

He also said the government will have to change the “sequential design/test paradigm” it’s used to using.

The system now in place “is too perfectionist and too slow … We want to work with our customers to use a more rapid process,” Taiclet said. On hypersonics projects, he said, “We’re already using it. We look for 80/20 percent kind of splits on success in test points and metrics, and [then] we move on to the next test. We don’t strive for 99 percent to 100 because that would be too slow to get this done. So, there’s a sequential design/test paradigm change … that we have to work with our customers to achieve.”

It will provide “greater deterrence capability and operational capabilities” for customers and “our shareholders will benefit … because we’re going to be a stronger, more resilient growth machine,” he added.

Assessing the climate for Lockheed’s business, Taiclet said, “We’re all in the era of this resurgent great power competition, and regional disruptive powers … like Iran and North Korea. That’s a world that’s not going to get any more peaceful anytime soon, most likely.” A strong national defense “is a priority of the [Biden] administration … based on their own statements.” The administration’s stated priority for maintaining alliances and building new ones bodes well for “cooperation” and foreign military sales, he said, especially if there is “process alignment” between the White House, Pentagon, State Department, and Congress.

Taiclet characterized the administration as “a very experienced and capable foreign policy/national security cadre of leaders, lifetime professionals. Many of them … know exactly what they’re dealing with and how to make it work.”