April 2012 Letter

Dear Fighter Market Price Negotiators,

Bad corporate slogan concept: “Greatness through Mediocrity.” Some companies embody mediocrity, but who wants to advertise it? Yet sometimes, great companies and great people produce great things with mediocrity. Example? Murray Lender, who died in March. Lender’s frozen bagels, while unappealing to New Yorkers, found a strong market bringing bagels to places that didn’t have bakeries (see Matthew Yglesias’ Lender’s Bagels and the Power of Mediocrity on Slate.com (http://tinyurl.com/775eecf) for an interesting assessment). Lender’s Bagels ain’t great, but they’re better than no bagels.

The problem with the world combat aircraft market today is that too many people aspire to the best bagel. After decades of selling hundreds of single-engine mid-sized fighters, France’s Dassault turned its back on the mass export market and moved up to the Rafale, a heavier and pricier twinjet. The other Europeans are pushing the Eurofighter, which costs even more than the pricey Tornado. Most of all, Lockheed Martin is pushing F-35s for almost everyone, despite the big price leap over the mass market F-16. The Russkies have gone from the Su-27 to the pricier and more capable Su-30, and are planning to move on to the “fifth generation” T-50 PAK FA. Even the Chinese are trying to move upmarket, going from a long line of MiG and Sukhoi rip-offs to the larger (but dubious) J-20 “stealth” fighter.

For producer countries, the upward migration to high end fighters is understandable. The proliferation of triple digit SAMs, better radars, and of course everybody else’s high end fighters means that big powers need more capable planes (it’s the same dynamic we saw in the Cold War, but now in a multilateral threat and market environment). But the export market follows a different pattern than the producer countries. Only six export customers have ever purchased high end fighters (in the $65-80 million recurring flyway class). If the F-35 works out as planned, it will be at the high end of that range. If it doesn’t work out as planned, it stays at today’s price, well above $100 million and near an F-22. Expensive, sophisticated planes are impressive and fun to watch at air shows. But few export customers are inclined to buy them.

This problem has been highlighted by two recent events. First, earlier this month, Canada’s Parliament staged a revolt over F-35 costs (Canadian revolts probably begin with “Pardon me, but would now be a convenient time for a revolt?”). After an auditor found that Department of National Defence (DND) officials withheld F-35 cost information, the government created a new F-35 secretariat with power over the proposed buy. The government also agreed to commission an independent report of the F-35 acquisition and costs before any purchase, and to cap total funding for 65 F-35s at $9 billion (Canadian $; US too), including weapons, infrastructure, spares and simulators.

Second, also this month, France’s La Tribune reported that the Indian Air Force (IAF) Rafale contract has been delayed until March 2013. This too is related to costs, and performance concerns as well. While they’ll likely still sign, the disagreement highlights a possible disconnect between the IAF and the government money people. For the MMRCA competition, the IAF downselected the two most expensive planes. They opted for maximum offsets, maximum systems improvements, and maximum technology transfer, all of which are tremendously expensive. Then they went with the lowest cost of the two planes. There’s no way to know, but I’ll bet one discussion went like this:

First IAF procurement person: “So, Ferrari or Lamborghini?”
Second IAF procurement person: “Which is the lower cost option?”
First IAF procurement person: “Ferrari.”
Second IAF procurement person: “Right, we’ll go with the Ferrari.”
Government money person: “You guys picked a Ferrari? How the hell can we pay for that?”
IAF people: “Hey, we picked the lower cost option.”

In short, India and Canada, the two countries that look set to become the seventh and eighth export customers for high end fighters, seem to be suffering from sticker shock. Even Japan, which has been in the top fighter market tier since the 1970s, has expressed reservations about the F-35’s price tag.

Mediocrity is too strong a word for what the fighter market really needs, but it does need something less expensive, something that demonstrates the art of the possible, like a frozen bagel. Something that revives the term “Cost as an Independent Variable (CAIV),” a concept that lasted five minutes before DoD’s weapons buying process crushed it like a bug. The export fighter market badly needs what DoD leaders now term “80% solutions.”

Which producer will fill this void? Saab’s Gripen is a neat mid-sized plane, but it’s undermined by a high price due to low production rates, and by its weak home market (although it’s worth noting that Switzerland chose it last year over the high end Rafale). Chinese planes are cheap, but suffer from low readiness, dubious quality, and high lifecycle costs. The F/A-18E/F is too expensive for most customers, although the US Navy keeps extending procurement, largely because the price tag is known.

There’s one terrific plane that meets the needs of just about every export customer. In March, LockMart delivered its 4,500th F-16, a neat achievement (for comparison, look at the previous mass market fighter production runs – 5,195 F-4s and 3,806 F-5/T-38s). But there’s a complication. LockMart has been very discrete with marketing and upgrading this plane, because aggressively selling a very capable fourth generation fighter at $45 million could easily annoy the Air Force and jeopardize international F-35 sales too. It even moved the F-16 production line to a much smaller and less prominent building. The worst enemy of The Best is The Good Enough.

LockMart may be changing its attitude. In February the company unveiled the F-16V, a new version with an electronically scanned radar. Developing a new model could be a welcome realization that the fighter market doesn’t change its behavior just because manufacturers expect it to spend more. Just because the US thinks the F-35 is a low-mix fighter (with the F-22 as the high-mix) doesn’t mean the rest of the world thinks of it that way. Getting dozens of customers to buy a frozen bagel might be just as important to sales as getting a small group to buy the perfect bagel.

Teal aircraft updates this month include the F-15 (another great value, but also in that top price tier), Mirage 2000 (good price point, but dead), Eurofighter, CN-235/295, EA-6B, EC135, and our annual Business Aircraft Overview. Have a great month.

Yours, ‘Til China Perfects The FB-1 Flying Bagel,
Richard Aboulafia