The suspension of test flights of Lockheed Martin’s new F-35 fighter jet early this month sounded like bad news for Canada. The federal government announced its plan last spring to buy 65 of the so-called Joint Strike Fighters, giving Ottawa a multi-billion-dollar vested interest in seeing the radar-evading airplane cruise smoothly to market. Yet the discovery of a fuel pump software problem—just the latest setback in the troubled F-35 program—apparently can’t translate into a price bump for Canada. “The Americans basically have been covering the cost overruns in the system design and development phase themselves,” Michael Slack, the Department of National Defence’s manager for the F-35 project, told Maclean’s.
The notion that Ottawa is in a position to shrug as Washington sweats over F-35 costs is arguably the most unexpected aspect of this controversial military procurement deal. The U.S. government has seen the projected cost of each F-35 it plans to buy soar from $50 million a few years ago to at least $92 million this fall, and well above $100 million by some recent estimates. U.S. Defense Secretary Robert Gates has been aggressively managing the file lately in a bid to counter negative publicity. By contrast, his Canadian counterpart, Defence Minister Peter MacKay, has been sanguine throughout it all, saying Canada will pay a comparative bargain price of about $70 million per jet.
That deal sounds almost too good to be true. Yet Slack vows that’s the way it is. The dollar figure that ultimately matters to Canada, he says, is something called the “average unit flyaway cost.” As he explains it, that’s the narrowly calculated cost of manufacturing each F-35 in the years 2016 to 2022, when Canada negotiated for its 65 jets to be delivered. The price Canada has agreed to pay won’t include any of the pre-production costs now mounting. “The system design and development phase costs have mushroomed,” Slack says. “But the only thing that’s relevant to Canada is the average unit flyaway cost.”
The most up-to-date estimate of that manufacturing cost for a single F-35 is between $70 million and $75 million, according to the U.S. government. “The U.S. does a fairly good job of estimating what the unit costs are going to be,” Slack says. “What they don’t do a good job of is estimating the cost of research and development, and testing and evaluation, which is a tricky business when you’re dealing with sophisticated military equipment.”
Critics of the F-35 purchase question how the Conservative government can really be so sure there won’t be any sticker shock. “There’s no contract, so I don’t know how they can say that’s the price we’re going to get,” says Steven Staples, president of the Rideau Institute, a Ottawa-based research group whose analysis of government programs is often used by unions such as the Canadian Auto Workers. Like the opposition parties, Staples contends the government should have put the contract for new fighter jets out for competitive bids to ensure the lowest price, rather than taking the unusual step of sole-sourcing the purchase of Lockheed Martin’s fighter.
But Slack says the F-35 arrangement is solid and offers unique advantages. In 2002, Canada signed on to the Joint Strike Fighter partnership with the U.S., Britain, Italy, the Netherlands, Turkey, Australia, Denmark and Norway. By putting up $150 million at the outset, Canada essentially bought the right not to bear the burden of any future development costs. In the fall of 2012, Canada must, along with the other partners, put in a firm order for jets to be delivered in 2016. The final price to be paid to Lockheed Martin will be negotiated by a U.S.-led project office for the partner countries. One key variable is the number of jets sold—fewer than expected would raise the cost of each airplane, more sales would lower it.
Slack says the very real possibility of some partners deciding to buy fewer F-35s than originally planned is offset by the prospect of new customers placing orders. Of course, projecting demand for high-end defence hardware years in advance is tricky. It’s a safer bet that bringing that hardware to market will cost more than promised. In the unsual case of the F-35, though, that appears not to be Canada’s worry.