Soaring Navy Jet Prices Stir Budget Controversy : Congress Challenges Increased Per-Unit Costs as Number of Aircraft Purchases Is Scaled Back

A new controversy over soaring weapons costs, caused largely by the Pentagon’s purchase of too many different types of arms in inefficiently small numbers, is building in Washington even as Congress tries to slow the growth of defense spending.

As Congress begins the budget process, the cost of Navy combat aircraft in particular has surfaced as an area of sharply increasing prices. One plane has doubled in price and several have jumped more than 50% in the last year.

“We have hundreds of new programs out there and we ought to be able to pick out one or two to kill to stop this absurd situation where the cost of each item is soaring,” Sen. Carl Levin (D-Mich.), a member of the Senate Armed Services Committee, said in an interview.

Growing Frustration Told

Rep. Les Aspin (D-Wis.), chairman of the House Armed Services Committee, has also expressed growing frustration over the problem.

“Unit costs clearly have been rising and the standard explanation about inflation and increased sophistication of the weapons is not the whole story,” Aspin said. “We want to get to the bottom of rising unit costs, but we haven’t found the bottom yet.”

The Navy’s problems illustrate a broad emerging problem as the Pentagon tries to live with relatively flat budgets after years of robust spending growth.

The Navy, for example, will pay $66.8 million for each of its F-14s and their related equipment in the next fiscal year, a staggering 61% markup over the price paid this year. Other Navy planes are up even more. One example: the 117% price increase on the A-6 combat jet and its equipment.

The increases are driven by a number of factors but a common thread running through many of the cases is the fact that the Navy is buying the weapons in relatively small numbers.

In the early days of the Reagan Administration, critics contend, the Pentagon started more programs and planned to buy more weapons than Congress was likely to pay for. The Navy paid millions of dollars for aircraft tools and factory capacity that it has never used.

Now, it is being forced to cut back the quantities on order. This means that the factories are operating inefficiently as overhead--which includes the cost of the factory, tools and executive salaries--is divided among a smaller number of weapons.

The faulty assumptions about quantity created the appearance of low prices early on, and some critics wonder whether that was a deliberate effort on the Navy’s part to win early support for its plans.

It is not just the F-14 or A-6 that has experienced major price increases. Almost every jet aircraft program run by the Navy will show a big jump in overall price in fiscal 1988--increases that the Navy contends are fully justifiable.

The Navy will pay 75% more for its EA-6B aircraft in fiscal 1988 than in the current fiscal year, 28% more for AV-8Bs, 49.5% more for E-2Cs and 4.4% more for F-18s, according to the Defense Department’s 1988 procurement budget.

Exceeds Ships Budget

The Navy has a fleet of about 6,000 aircraft, which represents a large part of its budget. Indeed, in some years the Navy spends more on buying airplanes than on ships.

But the Navy, partly because it has so many different types of aircraft, is operating programs at inefficient rates of production.

In 1988, some Navy planes will be built virtually by hand--much like fine Italian sports cars, one congressional expert wryly observed. For example, the Navy is planning to buy only six radar-jamming EA-6Bs airplanes in the next fiscal year, a rate of only one every two months.

“If you run a production line at half speed, you almost double the cost of the aircraft,” said Eugene Carroll, a retired admiral who now works for the Center for Defense Information, a watchdog group composed largely of retired military officials. “The Navy knew it was going to need 5% real growth in its budgets every year to pay for the aircraft programs it was planning. They kept closing their eyes and their brains.”

A serious consequence of the Navy’s cutback in the quantity of aircraft it buys is that the average age of its planes is growing.

Will Keep Planes Longer

To keep enough aircraft on all its ships, the Navy will keep its planes longer. According to Senate Armed Services Committee reports, the average age of the Navy’s aircraft is 12.4 years and will be more than 13 years by 1989, several years older than the Air Force fleet. The “ideal” average age for Navy planes is supposed to be only seven years.

“The Navy aviation job is a tough one to do, and they do a good job of it, but do we really want all these old airplanes?” asked one Capitol Hill budget expert who asked not to be identified by name. “Adding just one year on the average age is an enormous mortgage for the future.”

Navy officials say they can explain the cost growth and age increases, but critics in Congress and some research institutions question whether they can justify it.

“The aircraft programs have experienced cost growth for a number of reasons,” said Harriet Hughes, a senior Navy official responsible for aircraft budgets. “The major reason is that we are adding increased capability in a number of our combat aircraft. In addition to that, we have a problem with the quantity.”

The F-14, she said, is getting new engines, radar and electronics that will make it a better weapon. The budget shows that the F-14 and its equipment will cost $66.8 million each in 1988, contrasted with $41.5 million in fiscal 1987. Significantly, the plane is expected to get even more expensive in 1989, when each one will cost an estimated $72.9 million.

Costs Tied to Changes

Hughes said the F-14 is going through a model changeover, which is accompanied by huge one-time costs for test equipment and ground-support gear.

But, in practice, the Navy has “one-time” costs every year, according to House Armed Services Committee staff member Tony Battista, who has testified at length on weapons prices. Each time the service makes a modification or an update to a weapon, it is accompanied by additional one-time costs.

In cases of other Navy jets, Hughes said, the large price increases are the result of either more capability, one-time charges or reductions in quantity.

The A-6 attack jet, for example, is being outfitted with a new engine and the Navy has to fix structural cracking that was plaguing earlier A-6s, Hughes said.

The EA-6B jammer planes to be built in fiscal 1988 are more capable weapons than the older ones and are also costing more because only six are on order for 1988, contrasted with 12 in 1987, she said.

Payments Deferred

The E-2C airborne radar jet is going from 10 aircraft on order in 1987 to six in 1988, Hughes said. Also, the Navy chose to skip paying some non-aircraft support costs in 1987 and transferred them to 1988.

In all of these cases, the Navy declined to disclose exactly how much in non-recurring charges it expects--costs that are listed in detailed budget documents that the Navy does not make public.

“I personally believe we have a defensible budget,” Hughes said. “It is kind of like children--everyone would like to have all the toys in the store and children can’t have everything. The reverberations of the kids’ squabbling gets loose in the public and the impression is that we don’t have the money to do the mission.”

The history of Navy budgets does appear to show that the service has sharply scaled back its planned aircraft purchases.

In its 1987 budget, the Navy said it planned to buy 278 aircraft in 1988. But in the 1988 budget, it had dropped its planned purchases for the year to 238 planes, federal documents show.

Since last year, the Navy has cut its planned purchases of fighter and attack aircraft over the next four years by 42%, largely because its buying power has been sapped by cost increases and other programs, according to congressional estimates.

The potential for this sort of problem was predicted in a March, 1985, report by the Congressional Budget Office, which pointed out that the Navy’s plan to spend $71 billion on aircraft between 1985 and 1990 would require 6% annual real growth in the Navy aircraft procurement account.

The report found that the Navy was going to buy too few of certain types of combat aircraft and too many of other types. On balance, the Navy would end up with fewer airplanes than it had wanted. The result, it said, would be an aging air fleet. It found that half of the Navy’s aircraft even then were more than 15 years old.

New Emphasis on Age

The issue of the age of Navy aircraft took on new emphasis last month when the service unveiled plans to build two new aircraft carriers. Some members of Congress are worried that the new carriers will be built for $3.5 billion each but that the Navy will not have anything but worn-out airplanes to put on them.

“Are we going to have new carriers with old planes or no planes?” asked Levin of the Senate Armed Services Committee. “Do we want inefficient production lines while we start these two new carriers? My answer is no.”

Some critics believe that the Navy has only itself to blame for its inefficient production lines. It has invested hundreds of millions of dollars, they say, to buy aircraft tools and production capacity that will never be used.

According to a Senate Armed Services Committee analysis, every one of the Navy’s major combat aircraft programs is operating far below the most efficient rate of production.

For example, the Navy paid Grumman Corp. to buy tools for a maximum rate of efficient output of 72 A-6 aircraft per year. But the service will buy only 12 of the planes in 1988. Similarly, the F-14 line is designed to produce as many as 96 aircraft per year, but the Navy is going to buy only 12 of the jets in 1988.

Grumman, which builds the F-14, EA-6B, A-6 and E-2 aircraft, blames the cost increases in large measure on Navy contracts calling for construction of too few planes.

“Some of these anomalies you see in these price increases reflect the inefficiencies of producing aircraft at low rates,” said Sandy Jones, the defense contractor’s vice president for public affairs. “The airplanes that taxpayers are buying from Grumman are costing somewhat more than they would if we were making them at optimum rates.”

Sees Program Flaws

A low production rate does not have to be inefficient, said Michael Rich, vice president at Rand Corp., the Santa Monica research consulting firm. If an aircraft program is structured from the start to operate at low rates of output, he said, it can be nearly as efficient as a high production rate program.

Some congressional critics accuse the Navy of deliberate gamesmanship in the budget. By making unrealistically high assumptions about how many aircraft it will have money to buy, the Navy can show at the beginning of a program that the planes will be produced at a low unit cost.

But when the reality of limited budgets eventually reduces quantities, the unit cost soars far above what it would have been if the production capacity had been sized more realistically.

“We are never honest about what these aircraft are really going to cost,” said a Senate Armed Services Committee staff member who asked not to be identified by name. “If the Navy wants to build the EA-6B and they told the Congress that it would cost $60 million, we would say bull.

“So, they always pump up production rates to depress unit costs. To sustain the myth, they have to buy the tools to support it,” he said.

Congress Criticized

Hughes, the Navy budget official, said that Congress has to blame itself for enforcing uneconomic production rates on the Navy.

“Do we buy at a more economic rate and then shut down lines? The answer to that is in large part an issue with Congress,” she said. “Where we try periodically, we have not had any great success with Congress.”

But some critics blame outgoing Navy Secretary John F. Lehman Jr. for having laid extravagant acquisition plans early in the Reagan Administration that would require huge funding increases far into the future, a gambit known as “front-loading” the budget.

“They have too much stuff in the pipeline that they have to pay for, and now they have to slow down the programs,” said Carroll, the retired admiral. “This has been one of the greatest unwise front-loadings of the budget ever.”