Friday, September 18, 2009

Competition is Good

Fixed Price Engine Offers Could Restart Debate On F-35. Flight International (9/17, Trimble) reported, "A General Electric/Rolls-Royce team has proposed a fixed price to deliver the fifth lot of low-rate initial production for the F136 alternate engine to power the Lockheed Martin F-35 Joint Strike Fighter." Pratt & Whitney also has a fixed price proposal if requested. "Both proposals are likely to reset debate about the alternate engine in the US Congress, which is considering the Department of Defense's request to cancel the F136."

Reminds one of Feynman's experience on the text book committee, give those suppliers a chance to compete that they didn't have before, and prices magically come down.

Here's what the GAO's report had to say:

In supporting the decision to cancel, officials focused only on the potential up-front savings in engine procurement costs. They did not, however, consider the full long-term savings that might accrue from competition for providing support for maintenance and operations over the life cycle of the engine. Both prior studies had recommended proceeding with the alternate engine program, despite the lack of significant procurement cost savings, because of a number of other benefits competition was likely to provide. Also in supporting the decision to cancel, officials cited favorable progress made by the primary JSF engine and its predecessor F-22A engine as reducing operational risks from a single source. However, the primary JSF engine has completed only a small portion of its ground tests and has not yet been flown, while the F-22A engine has completed about 10 percent of its hours needed for system maturity and is not currently meeting some reliability goals.
In response, DoD stated "data showing savings from competition do not exist." Wonder if this new data is enough to reconsider things?


  1. The F136 (alternate F-35 engine) is on the chopping block again.

    The JPO, meanwhile, has increased its estimate of total program costs because of higher than expected prices for Pratt & Whitney F135 engines. Heinz says the company is not achieving the projected learning curve on producing the engines because of tolerance and yield issues with manufacturing parts. The estimated average cost of the engine has increased 24% to $8.3 million from $6.7 million.

    The Senate stripped out $439 million in funding added to the Fiscal 2010 budget to continue development of the General Electric/Rolls-Royce F-136 alternate engine, but the House voted to add $560 million so the issue remains alive. Publicly Heinz supports the Pentagon's decision to cancel the second engine, but he is pressuring Pratt and its suppliers to cut costs.

    JSF Faces Showdown on F-35 Cost Estimates

    Guess what? The only pressure that matters is the cost of a viable alternative, when no viable alternative exists, then there is no upper bound on the cost. Basic economics fellas.

  2. Defense Secretary Robert M. Gates said Monday that he was replacing the general in charge of the Pentagon’s largest weapons program — the F-35 Joint Strike Fighter — and withholding $614 million in award fees from the contractor, Lockheed Martin.

    The surprise announcement came from a Pentagon chief who has sought to impose accountability across the department’s senior leadership and who himself had promoted plans for the new plane last year in persuading Congress to kill the more expensive F-22 fighter jet. But a special Pentagon review team has since warned of possibly billions of dollars in cost overruns on the plane, and Mr. Gates announced that he was restructuring the program and requiring the company to cover some of the extra costs.

    -- Gates Shakes Up Leadership for F-35

    Maybe Secretary Gates can force prices lower with no viable alternative (if anyone could do it he could), but I remain skeptical.

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  4. From Biography of Dayton (emphasis added):
    Nevertheless the tide was running strongly against the employing interests in their efforts to hold down wages. In 1917, on the failure of the house of Morgan to float in America the latest issue of British war bonds, the United States was drawn into the World war. The military draft quickly withdrew from American industry millions of young workingmen. That essential for holding down wages--a surplus of unemployed men and women--disappeared.
    At the same time the government was in the market for enormous war supplies it was placing huge contracts on the famous "cost-plus" plan by which the manufacturer could increase his profits in proportion to his increasing the cost to the government of what he was making.
    Under this incentive American manufacturers were eager to hire workers at high wages, not merely for their labor, but for padding the payroll; they could afford to be generous as the government was really paying the wages and the ten per cent based upon them.
    September 7, 1917, the Dayton-Wright Airplane Company was given a contract for $30,000,000; the cost-plus was so arranged, they had a fixed profit of at least $3,750,000, and a possible additional profit of $2,600,000. At that time the company had no paid-in capital, and so government extended to it a war credit of $2,500,000, of which $1,500,000 was mad immediately available.
    Under such terms any beggar with a pull might become a "captain of industry"; the government furnished the money and guaranteed the profit.

  5. The Wall Street Journal (11/30, Hodge) reports that for four years, against the wishes of the Pentagon, Congress has supported General Electric Co. and Rolls Royce PLC's development of an alternate engine for the Joint Strike Fighter. Now Defense Secretary Robert Gates has said he will recommend President Obama veto any bill continuing funding for the second engine. Pratt & Whitney, which makes the first engine for the fighter, as well as GE and Rolls Royce, are intensely lobbying and advertising in Washington to push their viewpoints. The former argues that developing the second engine would cost the government billions, while the latter argue that a second engine will save money by allowing competition between two suppliers.

    Bloomberg News (11/29, Capaccio) reports, "A bi-partisan group of US lawmakers fighting to include General Electric Co.'s Joint Strike Fighter engine" in a continuing resolution sent a letter advocating their position to Defense Secretary Robert Gates and White House budget director Jacob Lew.