The funny business of defense contracts. Today we look at the two biggest contracts in U.S. history.
Lockheed Martin reported better than expected earnings Wednesday, if you take out new health care costs. However, one of the biggest questions facing the defense giant is the future of the F-35 Joint Strike Fighter.
It is expected to be the largest defense contract ever, worth potentially $300 billion, but the GAO and the Pentagon have accused the company of runaway costs. Congressional reports claim the F-35's original $50 million per plane pricetag has ballooned to over $100 million, and Defense Secretary Robert Gates calls that "unacceptable."
Not so fast.
"It looks like the cost of the F-35 will be roughly similar to what a modern F-16 or F-18 fighter costs," counters Loren Thompson of the Lexington Institute. Thompson says the real per unit cost is around $60 million in today's dollars, half the cost of Lockheed's F-22. How can the government be so off?
Thompson claims those higher projections are based on what has happened with other jet programs, not on what's actually happening with the F-35. "In fact, the program is doing better," he says. "As a consequence, for the next production lot, Lockheed Martin is going to try and charge the government about 20 percent below what the government has sent to Congress."
Really? An aircraft program that comes in below projections? Has that ever happened before? "I think the Wright brothers came in low," he mused.
It's a controversial assessment that has put Thompson at odds with other defense analysts. Listen to more of his explanation as to why he thinks the F-35's cost will go down, not up. (watch first video clip)
What About the Tanker?
If the F-35 is going to be the biggest defense contract in history, the second biggest will be the never-ending saga to replace the aging fleet of mid-air refueling tankers for the Air Force.
Airbus parent EADS has once again shaken things up by telling the Pentagon it plans to make a bid, even though it has been unable to get another American partner since Northrop Grumman NOC) walked away. Also, the Air Force's latest bid request appears to favor Boeing's (BA) smaller, cheaper plane.
But if we've learned anything over the last eight years, we know that anything is possible in the tanker contest. Why would EADS even attempt to bid with so much political opposition in Congress?
Is EADS willing to risk losing the tanker contest in order to make inroads with the US Defense Department, an important new growth market for the European company?
And if EADS actually wins the contract again, would Congress allow a foreign company to build an airplane for US troops, even though much of the work would take place on American soil?
EADS North America CEO Sean O'Keefe appeared on "Squawk Box" this morning (see second video).
And listen to what Loren Thompson had to say about EADS' chances of succeeding. He's not optimistic. (last video)
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