Pentagon Math: Buying 15% Fewer Fighter Jets Will Cost Us 68% More
Only at the U.S. Department of Defense does this kind of math make sense.
Last weekend, Bloomberg reported that the Pentagon has rolled back plans to purchase 2,852 Lockheed Martin F-35 fighter jets, and now anticipates buying only 2,443 planes -- a 15% reduction in force. Despite getting fewer planes, however, the Pentagon expects to pay 68% more for its jet fighter fleet than Lockheed originally quoted it -- $391.2 billion.
What is the F-35?
According to former Chairman of the Joint Chiefs Admiral Mike Mullen, Lockheed Martin's F-35 is probably the last manned fighter jet model America will ever build. If all goes according to plan, we may never need to build another.
According to U.S. Marine Corps Lt. Gen. Robert Schmidle, the Mach 1.6 fighter jet will control the skies, invisible to enemy radars and able to detect and destroy even the most advanced stealth fighters being built by other nations at "considerably longer distances" than those opponents could engage the F-35. Lockheed designed the plane to replace multiple classes of combat aircraft, including Lockheed's own F-16 Fighting Falcon fighter jet, Boeing's F-15 Eagle, F/A-18 Hornet, and AV-8B Harrier jump jet, and even the tank-busting A-10 Warthog, with a single "do-it-all" weapons platform.
The planned replacement of so many U.S. Air Force, Marine Corps, and Navy jets with just one plane explains the (still) huge size of the Pentagon's planned F-35 purchases. It explains why, once the costs of maintaining and operating the plane over the next 55 years are added to the cost of merely buying the planes, the F-35 program is expected to cost U.S. taxpayers some $1.1 trillion over its 60-year lifespan.
Fighting multiple headwinds
Faced with steep and rising costs, tightened defense budgets in Washington, and a recent 60 Minutes expose that blasted production and quality-control problems with the plane, the Pentagon is throttling back on the F-35, and slowing its rate of planned purchases.
Specifically, according to Bloomberg, the Pentagon will buy only 34 units of the F-35 in fiscal 2015 -- 26 F-35A fighters for the U.S. Air Force, six F-35B short-takeoff/vertical-landing jets for the Marine Corps, and a pair of F-35C carrier-versions for the Navy.
This is five planes more than Lockheed sold the military in fiscal 2014. But it's also eight planes fewer than Lockheed had hoped the Pentagon would buy.
What it means to investors
So ... bad news?
Not necessarily. On one hand, an eight-plane deficit will mean about $800 million less in revenues for Lockheed Martin than the company had hoped to collect next year. But for Lockheed Martin, which did $45.4 billion in revenues last year, that's still less than a 2% reduction in revs.
More important for Lockheed Martin is that the military remains committed to the F-35 program. As Air Force Lt. Gen. Chris Bogdan told 60 Minutes on Sunday, there's no "scenario where we're walking back away from this program." The Pentagon will just take a little longer with its buying, giving Lockheed more time to get the bugs worked out of the software, and kinks worked out of the production line.
In the end, this should make for a higher-quality product, and a more satisfied customer when Lockheed ultimately delivers the planes the Pentagon needs. As for Lockheed Martin itself -- it's still going to get the revenues it's counting on. The Air Force is still "going to buy a lot of these airplanes" over the course of the next 60 years. Viewed from that perspective, whether the Pentagon buys eight planes more or eight planes less in 2015 really doesn't matter all that much.
Oh, and one more thing
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The article Pentagon Math: Buying 15% Fewer Fighter Jets Will Cost Us 68% More originally appeared on Fool.com.Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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