F-20 Northrop Jet in Shoot-Out With Dynamics’ F-16
Tough talk and intensive lobbying has set an acrimonious tone for what is likely to be the climax of a 5-year-old sales battle between competing jet fighters built by Northrop and General Dynamics.
At foreign airfields from Pakistan to Venezuela and from Saudi Arabia to Thailand, arms salesmen for the two contractors have been taking potshots for years at each other’s aircraft--the Northrop F-20 and the General Dynamics F-16.
But now the battle between the F-16 and F-20 has come to home ground, where Northrop believes that it has an opportunity to break General Dynamic’s lock on the U.S. Air Force, the largest and most important market for fighter planes in the world.
The two contractors submitted bids Friday to sell the Air Force 270 air defense fighters, a competition mandated by Congress in legislation last year. The selection of a winner, which is expected to be made by Air Force Secretary Russell Rourke after Pentagon experts study several tons of documents detailing the cost and capabilities of the two planes, will be worth more than $4 billion--and that could be just the beginning.
Hasn’t Sold Any
So far, Northrop has yet to sell any F-20s--at home or abroad--but the Century City firm has tenaciously pursued its program. The F-20’s cost to Northrop shareholders just recently passed the $1-billion mark; it is the largest non-government product investment in defense industry history.
Meanwhile, General Dynamics’ F-16 program has grown into the most lucrative aircraft program in the Western World. The company has sold about 3,000 of the single-engine planes to the Air Force and another 1,300 to foreign governments for an astounding total of $75 billion in sales.
Executives of the firms say they are anxious to “square off” in a contest to settle the long-running debate over who has the hotter and more cost-effective warplane. The argument is notable for more than just an occasional outburst of anger.
“I am tired of what I consider to be a hollow debate over these aircraft,” said Herbert Rogers, a General Dynamics vice president and chief of its aircraft division. “I am delighted to have a head-to-head competition with the F-20, because we are going to win and put this whole thing to rest.”
But Northrop Chairman Thomas V. Jones said he believes that General Dynamics has maneuvered itself into a legally constrained position that provides Northrop at least one advantage in the competition. And he expects to win.
“We are the more modern airplane,” Jones said. “We are competitive on performance. We believe we have them beat on (overall) cost. When we win, we can see the doors opening wide to many other customers.”
Many F-20 proponents, such as Sen. Pete Wilson (R-Calif.), believe that General Dynamics, headquartered in St. Louis, has exercised predatory pricing to lock Northrop out of a market in which General Dynamics holds a monopoly.
Intense Lobbying
The track record of General Dynamics’ bidding on the F-16, Wilson said in an interview, has created the impression that the aerospace firm is “sticking the Air Force for an unconscionable profit.”
Indeed, one F-16 critic fumed, “Why do you think they’re called General Indictment,” alluding to a number of General Dynamics executives who are under federal indictment on charges of fraud.
Speaking of the intense political maneuvering, one congressional staffer recently observed: “The whole debate is very emotional. It is very difficult to determine where the truth is. There’s a lot of marketing smoke.”
Despite the lopsided record of success enjoyed by the F-16 so far, the two aircraft are similar in many ways. They are both lightweight, single-engine fighters that carry a lone pilot. They bear air-to-air missiles, bombs and guns, and they fly at a maximum speed of about 1,500 m.p.h., or twice the speed of sound.
The Air Force is providing no development funds for the competitors, and the subsequent contract will be of the fixed-price type. Brig. Gen. David Teal, head of tactical fighter development for the Air Force, termed the approach “innovative and highly efficient.”
Quotes Cheaper Price
General Dynamics sells its F-16 for about $18 million, including training and support equipment. Northrop says it would sell a similarly equipped F-20 for $15 million. Northrop claims that the F-20 requires half the manpower to support it than the F-16, a claim that General Dynamics disputes.
The mere existence of an officially sponsored competition and the potential for the Air Force buying the F-20 is a significant measure of the political support built up by Northrop’s Jones.
“People say we have lost to the F-16, but we haven’t lost any competitions, because there haven’t been any,” Jones said in an interview last week. “We have been in the on-deck circle, but this is the first time we have been in the batter’s box.”
Analysts believe that it may also be the last time that Northrop will be at bat, because if the firm fails to win the current Air Force competition, its chances of a major sale, enabling it to launch production, are almost nil.
“There is very little question at this point that the market for the F-20 is dependent on an acquisition of the aircraft by the Pentagon,” said Paul Nisbet, analyst for Prudential-Bache Securities. “No foreign country is willing to step up to the risk of placing a huge order to initiate production.”
The F-20 was developed as a fighter strictly for the foreign market, but Northrop was unable to obtain orders for a sufficient number of aircraft to justify the cost of starting production. Jones made an unsolicited offer last year to sell the plane to the Air Force, which eventually led to the current competition.
Symbol of Style
Jones has never given any hint that he is willing to quash the F-20 program, which he holds up as the symbol of Northrop’s sometimes-maverick approach to doing business with the Pentagon. “We feel the F-20 is a centerpiece of the way we like to operate,” Jones said. “I wouldn’t say this is our last chance, but it is very important that we win.”
Indeed, it is so important that the entire structure of the current competition has been carefully crafted and orchestrated in a long political battle in Congress and the Pentagon, in which both Northrop and General Dynamics can claim some significant victories.
Northrop portrays itself as the adversary of a monopoly position held by General Dynamics, a monopoly that has driven up the cost of the F-16 to the Pentagon. A Congressional Budget Office report last year found that the unit price of the F-16 has been increasing at 11% annually in each of the last five years.
“We have a purely private commercial program against a government-sponsored and funded monopoly,” Jones said. “We are responsible for all of our costs. Ours is a market price. The General Dynamics product is a negotiated price.”
Northrop and many of its supporters have felt that General Dynamics has been playing with a stacked deck for years.
In the interview, Jones said General Dynamics had “low-balled” the Pentagon in a bid to sell its F-16 to the Navy and maintain its monopoly position as supplier of single-engine jet fighters.
‘Stole the Award’
“Sen. Wilson was instrumental in getting money for the Navy squadron, which we thought was going to go to the F-20,” an aide to Wilson said. “General Dynamics just stole that award by taking the profit out of the F-16, and they blocked Northrop from getting into the Navy market.”
Verne Orr, former Air Force secretary, said General Dynamics’ aggressive bidding on the Navy purchase backfired on the company, even though it won the award.
“They bid so low that it raised the eyebrows of Congress. It suggested (that) they could afford to sell the F-16 for substantially less than the Air Force was paying. I think General Dynamics learned their lesson,” Orr said.
In the current competition, Northrop believes it has ground rules that will provide for a fair competition. One of the firm’s significant lobbying victories was the inclusion of unusually specific language in the 1986 House Appropriations bill that set the rules for the competition.
The bill states: “The Committee expects the Air Force to establish the competition in a manner to ensure that the cost base of the aircraft being competed shall be consistent with the cost base of all variants of such aircraft procured by the Air Force.”
A House committee aide said the language resulted in large part from intensive lobbying efforts by Northrop to prevent another rout in the current competition.
Directed at F-16
The language is directed precisely at the F-16, and it means that General Dynamics’ bid to supply F-16s in the current competition to will have to be made on the same cost basis as the rest of the F-16s that it sells to the Air Force.
“What restraint does General Dynamics have?” Jones asked. “(It is) the integrity of the system to not let them use the government investment in the F-16 to muscle us out of the competition and preserve their monopoly.
“The classic example of predatory pricing is if you have a monopoly and you have a lot of money to take a loss on one part of your business that is being competed,” Jones said. “If the procurement system works the way it legally should, then they should be held to their cost.”
But Rogers, the General Dynamics vice president, said that he does not feel under any new constraints because of the law and that he has never engaged in predatory pricing.
“At no time have we done anything to tamper with the costs on that airplane (the F-16),” Rogers said. “There is no way I can tamper with the costs. What I am permitted to tamper with is the amount of profit I put on the airplane and the profit I put on the support package for that airplane.”
Indeed, Rogers said it will be Jones who will be “low-balling” the current bid.
“Northrop will be pricing their airplane well below their cost, and if they win, their stockholders are going to suffer for the sheer joy of Tom Jones selling aircraft to the Air Force,” Rogers said. “They have to sell at below their cost. There is no question.”
Claims Higher Costs
Rogers said a decision by the Air Force to buy the F-20 will drive up costs because the Air Force will be forced to set up an entirely new logistics and support system for the F-20, such as engine depots, training simulators, training documents and supply lines, among much else.
“Somebody has to pay for that, and that somebody is the Air Force and U.S. taxpayer,” Rogers said.
Rogers also pointedly referred to the fact that Northrop has lost two F-20s in crashes, which he says would also drive up Air Force costs.
“The F-16 has 1 million hours of flight experience out there in the field, and we have the lowest accident rate of any single-engine fighter,” he said. “I won’t belabor the point that Tom Jones has lost two out of his three airplanes.
“Even if they have the same accident rate as we did when we started out, the F-20 would lose 40 to 50 more aircraft in crashes than we will if the Air Force buys 270,” Rogers said. “They have to figure the cost of that.
“I think Tom Jones has a fine little aircraft, but so what?” Rogers went on. “His 1,500 hours of test flight is almost laughable if he thinks that has accomplished anything. All it has accomplished is losing two out of three airplanes.”
Of course, General Dynamics’ tough selling tactics have enabled it to score a number of significant political victories against Northrop.
Winner Takes All
The current competition is a one-time event, with the winner taking the entire lot of 270 aircraft. Ideally, supporters of competition had envisioned an annual competition that would put continual pressure on both firms.
At one time, Orr, the former Air Force secretary, said he had proposed to buy 30 F-20s a year and purchase an additional 40 aircraft based on the results of competition between Northrop and General Dynamics.
“I was extremely anxious to see that we got competition,” Orr said. “I thought the Air Force would be better off if it had one more manufacturer.”
But Northrop balked at the idea of launching production at a cost of hundreds of millions of dollars without the guarantee of a multiyear contract. Northrop wanted the same type of multiyear contract as the F-16 had, but General Dynamics fought that off successfully.
Indeed, General Dynamics has proven to be a tough opponent for Northrop and its F-20. Former General Dynamics Chairman David Lewis once said that he would do everything possible to ensure that the F-20 never entered production. The assertion was widely noticed, especially at Northrop.
“This is not just a competition between airplanes,” Northrop spokesman Les Daly said. “It is a competition between ways of life. It is competition versus monopoly.”
Congress has given the Air Force until July 1 to select a winner in the current competition. One indication of the complexity of the competition is the size of the bid packages by the contractors.
The formal proposal from Northrop alone measured 5 feet by 5 feet by 16 feet and had to be ferried to Washington in two airplane loads. Air Force officials have referred to the competition as a “streamlined procurement.”
