From Many, One? Or Maybe Two?

Feb. 1, 2010

As matters stand today, the US aerospace industry will, by the end of this decade, be producing one fighter—the F-35. Airlifter assembly could be down to one line—the C-130 tactical transport. Production of a long-range bomber? Maybe, but probably not. USAF’s new tanker aircraft should be coming off an assembly line, but, in the twisted world of the KC-X, that is no sure thing.

Such will be the diminished state of a once-mighty arsenal that churned out numerous manned aircraft models in large numbers for decades.

The Pentagon must decide what, if anything, to do about this withering of the aircraft industrial base. The approach thus far has been to let the number of defense contractors shrink as programs declined, even though at some point, this will seriously limit competition.

Competition keeps everybody doing their best.

In many areas, the Pentagon appears content to have a single prime contractor for an entire category of aircraft, such as manned tactical fighters.

Note, for example, that fighter lines currently producing Air Force F-15, F-16, and F-22 as well as Navy F/A-18 aircraft are almost certain to close down within the next five years. Today’s plans call for the F-35, in future decades, to comprise some 95 percent of the combined Air Force, Navy, and Marine Corps fighter force. If the Pentagon gets its way, moreover, the thousands of engines used to power these fighters would be manufactured and supplied by a single engine house.

This free-market approach may make short-term economic sense, but the long-term consequences are difficult to determine.

For example, if the F-35 or its engine develops major problems, what is Washington’s fallback option? Where will the US turn for alternative capabilities? On a more fundamental level, will the nation still be able to call on several competitors to design and develop a state-of-the-art aircraft the next time one of the military services determines it needs a new system

The problem is that industrial competition isn’t a free good; typically, keeping several competitors alive and struggling for a piece of the action entails greater up-front expense. This becomes especially difficult during periods of austerity. Such is the case today, with DOD warning that acquisition budgets will fall in coming years. Asserted DOD’s 2009 industrial base report to Congress: “Over the next five to 10 years, most current military aircraft production programs will end, precipitating the need for a new round of consolidation in order to reduce infrastructure costs.”

DOD freely admits that this could restrict future options. Brett B. Lambert, Pentagon director of industrial policy, told the trade magazine National Defense that defense contractors should expect to have to shut down some of their industrial capacity. DOD is “not in the business of propping up individual sectors or industries just because we used them in the past,” he said.

Where do all of these developments come out? For the contractors, it appears there can be two outcomes.

One was exemplified by Missouri’s now-defunct McDonnell Douglas, proud designer and builder of the F-15 and F/A-18 fighters. McDonnell Douglas was driven into a 1997 merger with Boeing after the St. Louis company lost out in an early round of the F-35 competition. Too much of this, and DOD’s prospects for future competitions become dim.

Second is Boeing’s example. Boeing, despite losing some high-profile competitions such as its struggle with Lockheed Martin for the F-35 contract, nevertheless has survived (some would say flourished) as a military contractor in airlifters, fighters, space systems, and more.

Realizing the stakes, lawmakers in several states are advocating a “dual-source” approach to upcoming programs, but support for dual-sourcing is typically determined not by manufacturing rationality but by politics, local economics, and parochial self-interest.

Note the debate over the wisdom of supporting separate Pratt & Whitney and General Electric production of F-35 engines—a fight in which state interests play a major role. Also controversial: The notion of awarding two contracts for the KC-X tanker, so that Boeing and Northrop Grumman-led teams could build rival tankers at the same time.

Detractors say dual-source arrangements ensure the best team does not win. Rather, they claim, these situations reduce economies of scale, increase support costs, and lead to far more expensive training and logistical support operations.

Claimed benefits are faster production, greater responsiveness to military needs, higher quality, and insurance against a devastating “single point failure.”

Uniformed military officials speak out frequently in favor of preserving competition—in the abstract. “In all cases, competition is a very good thing, and competition tends to make sure everybody works better,” said Air Force Gen. Duncan J. McNabb, head of US Transportation Command. Competition, he went on, “keeps everybody doing their best.”

Affordability and security must be carefully balanced because there can be no competitions without competitors. Following the rapid and sometimes chaotic industrial consolidation of the 1990s, the then-Secretary of the Air Force, James G. Roche, got it right: “The most direct way to drain innovation and cost savings out of programs is to deaden competitive pressures,” he said. “Excessive consolidation, unfortunately, contributes to that problem.”

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