Lockheed Marine helicopter came with unpublicized cost increase

By Tony Capaccio

Bloomberg

The Pentagon’s approval for the Marine Corps to start buying Lockheed Martin’s new heavy lift helicopter came with a hidden surprise: the projected total acquisition cost for the King Stallion program has increased 6.9 percent to $31 billion.

The updated estimate was provided in an April 4 decision memo by James MacStravic, the Pentagon’s acting weapons buyer, that authorized production of the initial batch of 26 helicopters. The memo, labeled “For Official Use Only,” was obtained by Bloomberg News.

The estimate for the total acquisition cost — which includes everything from research to purchase of the aircraft, including spare parts — climbed to $31 billion from about $29 billion that the Navy reported in March 2016. No aircraft were added beyond the 200 planned.

Likewise, the “program acquisition unit cost” estimate, with everything included, increased to $138.5 million per copter from $131.2 million as of August 2016. The latest projection is a 20 percent increase from the initial goal of about $115 million established in late 2005, according to data in the memo.

It’s not unusual for cost estimates of major weapons programs to increase at a significant milestone, such as this month’s decision on the Lockheed helicopter, as Pentagon acquisition experts sharpen their pencils in order to budget for actual expenditures. But the new cost estimate may become a focus of congressional oversight when the Marine Corps’ fiscal 2018 budget is submitted to Congress.

Democratic Rep. Niki Tsongas of Massachusetts, the top Democrat on a House Armed Services subcommittee that oversees the helicopter program, already has questioned the King Stallion’s basic cost as “a heck of a lot of money.”

The aircraft, designated the CH-35K, will be capable of lifting 27,000 pounds . It will be the same size as its predecessor, the Super Stallion, but able to haul triple the cargo, according to Bruce Tanner, Lockheed’s chief financial officer. He said in an interview in March that the new aircraft’s revenue potential was the biggest reason Lockheed bought the Sikorsky helicopter unit from United Technologies Corp. in 2015.

The initial 26 helicopters will provide “a production ramp-up sufficient to lead to full-rate production upon the successful completion of operational testing,” MacStravic wrote in his memo. Full-rate production is the most lucrative phase for a defense contractor.

The decision memo calls for requesting $756 million in procurement funds in fiscal 2018, up from $528 million this year. It recommends requesting $1.2 billion for fiscal 2019 and $1.5 billion for fiscal 2020.

The Pentagon’s independent cost analysis group “identified additional schedule risk” in developmental testing for the helicopter, according to the memo.

The increase in the per-helicopter cost “is most likely due to continued development instabilities,” said Michael Sullivan, a director for the Government Accountability Office. Sullivan managed preparation of the agency’s latest annual assessment of major weapons programs, which listed the unit cost as $131.2 million based on August figures provided by the CH-53K program office.

The recent increase might be a remnant of the program’s early development difficulties, such as a finding in 2010 that the helicopter’s design was unstable, Sullivan said.

“These guys got off to a bad start, and they are still churning through it,” Sullivan said.

Air Force Lt. Col. Eric Badger, a spokesman for MacStravic, referred all requests for response to the Navy. “As you know, information in” the decision memo “is not available before we submit the report to Congress,” Badger said in an email.

“My direction is not to discuss any figures” in the memo “because the document is not publicly releasable,” the King Stallion program’s manager, Marine Col. Hank Vanderborght, said in an email.

“We reevaluate program cost every year, and our next program cost update will be included in the next SAR going to Congress in conjunction with the annual budget cycle,” Vanderborght said, referring to the Pentagon’s Selected Acquisition Reports on major weapons programs, including the CH-53K.