Defense Aircraft Investments: Major Program Commitments Based on Optimistic Budget Projections

Published by the Government Accountability Office on 1997-03-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittees on Military Research and
                          Development and Military Procurement, Committee on
                          National Security, House of Representatives

For Release on Delivery
Expected at
2:00 p.m., EDT
                          DEFENSE AIRCRAFT
March 5, 1997             INVESTMENTS

                          Major Program
                          Commitments Based on
                          Optimistic Budget
                          Statement of Louis Rodrigues, Director, Defense
                          Acquisitions, National Security and International Affairs

           Mr. Chairmen and Members of the Subcommittees:

           I am pleased to be here today to discuss the Department of Defense’s
           (DOD) aircraft modernization plans. Our review of 15 aircraft programs
           revealed that DOD plans to buy or significantly modify at least 8,315 aircraft
           at a total procurement cost of $343 billion (fiscal year 1997 dollars)
           through their planned completions in fiscal year 2030.1 Appendix I lists the
           15 aircraft programs and their estimated procurement costs.

           I would like to start with a short overview of the current situation and then
           provide more detail about (1) how much DOD has historically spent on
           aircraft purchases, (2) the availability of funding for aircraft purchases,
           and (3) how funding instabilities have led to schedule stretchouts and
           billions in increased costs. I will also discuss some of our recent reports
           where we question the need and timing of some aircraft programs.

           Last year, we testified before your Subcommittees that DOD’s planned
Overview   investments in aircraft were not achievable within likely future budgets
           and appear to be inconsistent with the current security environment. DOD,
           however, maintained that its aircraft investment strategy was realistic.

           We have continued to evaluate DOD’s aircraft procurement programs and
           remain concerned that DOD cannot achieve its plans within likely future
           budgets. Our recently completed and ongoing evaluations, and those by
           the Congressional Budget Office (CBO), continue to raise questions about
           DOD’s ability to execute its planned aircraft investment strategy. For
           example, in all but 2 years between fiscal year 2000 and 2015, the total
           funding required for the 15 programs we evaluated exceeds the funding
           historically spent on aircraft purchases, as a percentage of DOD’s overall
           budget. For several of those years, the funding required to achieve DOD’s
           planned aircraft acquisitions approaches the percentage of the budget
           reached during the peak Cold War spending years of the early to

           In addition, we doubt DOD’s ability to execute its aircraft investment plans
           because (1) overall defense funding is not expected to increase, (2) the
           amount of savings from infrastructure reductions and acquisition reforms
           is uncertain, and (3) inflation indexes used to develop aircraft budget
           estimates are understated.

            This statement discusses procurement costs, in constant 1997 dollars. It does not include research
           and development or operation and maintenance costs.

           Page 1                                                                         GAO/T-NSIAD-97-103
                     DOD continues to (1) generate and support acquisitions of new weapon
                     systems that will not satisfy the most critical requirements at minimal cost
                     and (2) plan on the availability of more procurement funds than can
                     reasonably be expected to be available in future defense budgets. In a
                     recent review of weapon system production rates, we found DOD’s
                     optimistic acquisition strategies are rarely achieved because of DOD’s
                     decisions to fund new programs in low-rate initial production and to
                     reduce funding for programs in full-rate production. Consequently,
                     weapon systems are produced at less than planned rates, causing
                     schedules to be stretched out and increasing costs by billions of dollars.

                     The absence of stability in the execution of DOD’s acquisition plans must be
                     addressed. In fact, last week, the Under Secretary of Defense (Acquisition
                     and Technology) testified that the problem of instability in defense
                     acquisition programs and the attendant cost growth and schedule slips
                     caused by the instability are the most important issues that need to be
                     addressed in reforming DOD’s acquisition process.

                     We agree that bringing stability and realism to DOD’s acquisition plans is
                     important and will not be easy. It will require fundamental changes to a
                     deeply entrenched acquisition culture. Difficult decisions will need to be
                     made about restructuring and terminating some aircraft or other weapon

                     In previous reports, we questioned the need for and timing of a number of
                     DOD’s aircraft acquisitions.2 For example, we recently issued reports on the
                     major issues related to U.S. combat air power, the Navy’s F/A-18E/F strike
                     fighter, and the Air Force’s F-22 air superiority fighter. In the latter two
                     reports, we recommended that DOD consider options that would
                     potentially reduce or postpone the costs of planned aircraft acquisitions.
                     These options would free significant procurement funds.

                     Let me provide some details on DOD’s aircraft investment strategy.

                     DOD spending for aircraft purchases reached its highest point, both in
Funding Needed for   terms of dollars and as a percentage of overall defense spending, during
Aircraft Programs    the early to mid-1980s—the peak Cold War spending era. Using those peak
Exceeds Historical   years, DOD maintains that its aircraft acquisition plans are within historical
                      A list of GAO reports dealing with DOD aircraft programs is contained in appendix II.

                     Page 2                                                                         GAO/T-NSIAD-97-103
                                         However, in light of the current budget environment, we believe it is not
                                         realistic to use the peak years as the norm. Figure 1 shows, as a
                                         percentage of the budget, a longer history for DOD aircraft spending. It also
                                         shows DOD’s plans to increase future aircraft acquisition
                                         funding—sometimes approaching Cold War-era spending levels.

Figure 1: Projected Funding for DOD’s Aircraft Purchases Approaches Cold War Levels (as a percentage of DOD’s budget)

                         1980's Cold War buildup





          73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
                                      Fiscal Year
                                         Source: GAO analysis of DOD and CBO data.

                                         Since 1973, funding for DOD’s aircraft acquisitions has fluctuated
                                         substantially. From fiscal year 1982 to 1986, DOD spent from 6.1 to
                                         7.8 percent of its budget on aircraft purchases. In contrast, DOD devoted
                                         $6.2 billion, or 2.4 percent of its fiscal year 1996 budget to buy aircraft. On

                                         Page 3                                                         GAO/T-NSIAD-97-103
                                      average, however, DOD has spent about 4.8 percent of its budget since 1973
                                      buying aircraft.

                                      To execute its aircraft investment strategy, DOD needs to significantly
                                      increase spending on aircraft and sustain the increase for several years.
                                      Figure 2 shows future spending plans for aircraft acquisitions. For 14 of
                                      the next 20 years, DOD plans to spend more than $12 billion3 annually on
                                      aircraft. For 4 years during this period, aircraft spending will exceed
                                      $15 billion, and for 2 of those years it will exceed $17 billion.

Figure 2: DOD’s Projected Funding
Requirements for Aircraft Purchases

                                               $ billions




                                                    96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
                                                                             Fiscal Year
                                               fiscal year 1997 dollars

                                      Source: GAO analysis of DOD and CBO data.

                                      Historically, acquisition programs almost always cost more than originally
                                      projected. Figure 2 is a conservative projection of DOD’s aircraft funding
                                      requirements because no cost growth beyond current estimates is
                                      considered. Research has shown that unanticipated cost growth has
                                      averaged at least 20 percent over the life of weapon programs.

                                       Applying the historical average spending level for aircraft—4.8 percent—to DOD’s current overall
                                      budget of $253 billion equates to about $12 billion.

                                      Page 4                                                                        GAO/T-NSIAD-97-103
                        In addition, the projected funding requirements in figure 2 may be
                        understated because they do not include any projected funding for other
                        aircraft programs that DOD has yet to approve for procurement. For
                        example, tentative plans exist to replace the KC-135, C-5A, F-15E, F-117,
                        EA-6B, S-3B, and other aircraft. Adding any of these potential programs to
                        DOD’s aircraft investment strategy would further complicate the funding

                        DOD expects to increase procurement spending to a level of approximately
Funding for Increased   $60 billion per year while keeping overall defense spending at current
Procurement Is          levels, at least through fiscal year 2002. Aircraft acquisitions are expected
Uncertain               to be a prime beneficiary of the procurement increases. Of the $40 billion
                        cumulative increase through fiscal year 2002, about $24 billion will be used
                        for DOD’s aircraft investment strategy.

                        To achieve the increased procurement spending, DOD expects substantial
                        savings to be generated from infrastructure reductions and acquisition
                        reforms. Our work, however, indicates that the extent to which such
                        savings will be available to fund the increase is unclear.

                        In 1996, we reported that DOD would accrue no significant net
                        infrastructure savings between fiscal year 1996 and 2001 because the
                        proportion of infrastructure costs in DOD budgets remain relatively
                        constant.4 In addition, our ongoing evaluation of acquisition reform
                        savings on major weapon systems suggests that the amount of such
                        savings that will be available to increase procurement spending is
                        uncertain. While DOD has estimated as much as $29 billion (then year
                        dollars) in acquisition reform savings, our work shows that, for various
                        reasons, the costs of some of the programs claiming the savings have
                        increased, more than offsetting any acquisition reform savings. Without
                        the savings expected from infrastructure reductions and acquisition
                        reform, DOD will face difficult choices in funding its modernization plans.

                        We recently raised an issue on the Air Force’s F-22 air superiority fighter
                        that further complicates the situation.5 That issue deals with the inflation
                        indexes that DOD is using to estimate program costs. In estimating the cost
                        to produce the F-22, for example, the Air Force used an inflation rate of
                        2.2 percent per year for all years after 1996. However, in agreeing to

                         Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little Savings for Modernization
                        (GAO/NSIAD-96-131, Apr. 4, 1996).
                         F-22 Restructuring (GAO/NSIAD-97-100R, Feb. 28, 1997).

                        Page 5                                                                        GAO/T-NSIAD-97-103
                        restructure the F-22 program to address the recently acknowledged
                        $15-billion increase (then year dollars), the Air Force and its contractors
                        used an inflation rate of 3.2 percent per year. Increasing the inflation rate
                        by 1 percent added billions of dollars to the F-22 program’s estimated cost.
                        We are concerned that the higher inflation rates could have a significant
                        budgetary impact for other DOD acquisition programs. Similar increases on
                        other major weapon programs would add billions of dollars to the
                        amounts we have been discussing today and further jeopardize DOD’s
                        ability to fund its modernization plans.

                        We recently reported that better use of limited DOD acquisition funding
Program Instabilities   could reduce costs.6 We found that DOD has inappropriately placed a high
Cause Schedule          priority on buying large numbers of untested weapons during low-rate
Stretchouts and         initial production to ensure commitment to new programs and thus has
                        had to cut by more than half its planned full-rate production for many
Higher Costs            weapons that have already been tested. This wasteful practice adds
                        unnecessary costs. For example, the costs for 17 of 22 full-rate production
                        systems we reviewed increased by $10 billion beyond original estimates
                        due to stretching out the completion of the weapons’ production. Actual
                        production rates were, on average, less than half of the originally planned
                        rates and systems were taking an average of 8 years longer to complete
                        than originally planned. For example, if the Army continues to buy the
                        Blackhawk helicopter at the current rate, full-rate production will take
                        almost 54 years to complete, about 43 years longer than originally planned.
                        Such stretchouts in production are costly. For example, rather than
                        producing 48 T-45 aircraft annually at a unit cost of $8.7 million, the Navy
                        is producing an average of 12 T-45s annually at a unit cost of $18.2 million.

                        If DOD bought untested weapons at minimum rates during low-rate initial
                        production, more funds would be available to buy proven weapons in
                        full-rate production at more efficient rates and at lower costs.

                         Weapons Acquisition: Better Use of Limited DOD Acquisition Funding Would Reduce Costs
                        (GAO/NSIAD-97-23, Feb. 13, 1997).

                        Page 6                                                                   GAO/T-NSIAD-97-103
                     Our previous reports have questioned the need for and timing of some
Need and Timing of   aircraft procurements. For example, we recently issued reports on U.S.
Some Aircraft        combat air power,7 the Navy’s F/A-18E/F strike fighter,8 and the Air
Programs Should Be   Force’s F-22 air superiority fighter.9 In the latter two reports, we
                     recommended that DOD consider options that would potentially reduce or
Reassessed           postpone the cost of planned aircraft acquisitions.

                     In the combat air power report, we point out that the United States has
                     significantly improved its combat air power capabilities in recent years
                     while reducing its total combat aircraft in the active inventory by about
                     28 percent since the end of the Persian Gulf War. It also points out that
                     other air power assets, such as long-range cruise missiles, unmanned
                     aerial vehicles, and theater air defense forces, are increasingly
                     supplementing aircraft and that today’s combat aircraft have more
                     capabilities for (1) multimission roles, (2) autonomous navigation,
                     (3) night operations, (4) target acquisition, (5) self-protection, and (6) the
                     use of advanced munitions. These capabilities are giving combatant
                     commanders greater flexibility in employing aviation assets and are
                     potentially reducing the required number of manned aircraft. Moreover,
                     although potential adversaries possess capabilities that threaten U.S. air
                     power missions, DOD considers the severity of these threats to be limited.
                     Our work showed that some aircraft modernization programs would only
                     marginally improve existing capabilities at a very high cost. Other
                     programs may no longer be needed in view of the changed security
                     environment. And for some programs, less costly alternatives could be
                     pursued to meet identified needs.

                     The F-22 program has a high degree of risk because the Air Force plans to
                     procure a significant number of aircraft before completing initial
                     operational testing and evaluation. Because neither the threat nor the need
                     to replace the current front-line air superiority fighter, the F-15, was
                     urgent, we recommended that the Air Force not rush into high-production
                     rates for the F-22 prior to completing operational testing.

                     In the case of the F/A-18E/F, we concluded that the Navy’s plans to buy
                     1,000 aircraft were overstated and the eventual annual production rate of

                      Combat Air Power: Joint Mission Assessments Needed Before Making Program and Budget Decisions
                     (GAO/NSIAD-96-177, Sept. 20, 1996).
                      Navy Aviation: F/A-18E/F Will Provide Marginal Operational Improvement at High Cost
                     (GAO/NSIAD-96-98, June 18, 1996).
                      Tactical Aircraft: Concurrency in Development and Production of F-22 Aircraft Should Be Reduced
                     (GAO/NSIAD-95-59, Apr. 19, 1995).

                     Page 7                                                                      GAO/T-NSIAD-97-103
                       72 aircraft was overly optimistic. As a result, the F/A-18E/F would be more
                       expensive than the Navy reported. We also determined that the E/F model
                       did not provide significant performance advantages over the less
                       expensive C/D model of the aircraft. We estimated the Navy could save
                       about $17 billion by continuing to buy C/D models in lieu of E/F models.

                       We understand that the milestone decision on F/A-18E/F low-rate initial
                       production is scheduled for March 28, 1997. We believe that DOD should
                       postpone the decision until it completes and fully considers two very
                       significant, congressionally mandated analyses. First, as a result of our
                       prior F/A-18E/F report, the National Defense Authorization Act for Fiscal
                       Year 1997 (P.L. 104-201) directed the Secretary of Defense to conduct a
                       comparison of the cost and benefits of the F/A-18E/F and the F/A-18C/D
                       aircraft, taking into account the operational combat effectiveness of each
                       aircraft. That report is due to the Congress by March 30, 1997. The
                       conference report supporting the fiscal year 1997 defense appropriations
                       directed an identical study and report by April 15, 1997. Second, the
                       Quadrennial Defense Review is evaluating the gamut of defense missions,
                       forces, and programs. Because of the potential for widespread and
                       significant impact, we believe that DOD should defer all but the most urgent
                       procurement decisions until the review’s conclusions and
                       recommendations are examined. This would be consistent with the
                       National Military Strategy, which cautions against making major new
                       investments unless there is a substantial payoff.

                       As you know, in 1990, we began a special effort to review and report on
Weapon System          the federal program areas our work identified as high risk because of
Acquisition Problems   vulnerabilities to waste, fraud, abuse, and mismanagement. This effort has
Persist                brought a much needed focus on problems that were costing the
                       government billions of dollars. As we recently reported in our high-risk
                       report on defense weapon systems acquisition, DOD has produced many of
                       the world’s most capable weapon systems, but its weapon system
                       acquisition processes have often proved costly and inefficient, if not
                       wasteful.10 Despite DOD’s past and current efforts to reform the acquisition
                       system, wasteful practices still add billions of dollars to defense
                       acquisition costs. Pervasive problems persist regarding (1) questionable
                       requirements and solutions that are not the most cost-effective available;
                       (2) unrealistic cost, schedule, and performance estimates; (3) questionable
                       program affordability; and (4) the use of high-risk acquisition strategies.

                         Defense Weapon Systems Acquisition (GAO/HR-97-6, Feb. 1997).

                       Page 8                                                           GAO/T-NSIAD-97-103
             As the nation proceeds into the 21st century with the prospect of a flat
Conclusion   budget, we believe that action needs to be taken to address DOD’s
             problematic aircraft investment strategy. Action needs to be taken now
             because, if major commitments are made to procure the planned aircraft
             programs—such as the F/A-18E/F, F-22, Joint Strike Fighter, and
             V-22—over the next several years, a significant imbalance is likely to result
             between program funding requirements and available funding. Such
             imbalances have historically led to program stretchouts, higher unit costs,
             and delayed deliveries to operational units. Also, this imbalance may be
             long term in nature, restricting DOD’s ability to respond to other funding

             DOD must reorient its aircraft investment strategy to recognize the reality
             of the current security and budget environment. Accordingly, instead of
             continuing to start aircraft procurement programs that are based on
             optimistic assumptions about available funds, DOD—in consultation with
             the Congress—should determine how much procurement funding will
             realistically be available and structure its investment strategy within those
             levels. DOD must also provide more concrete and lasting assurance that its
             procurement programs are militarily justified in the current security
             environment and clearly affordable through their planned periods of
             procurement. The key to ensuring the efficient production of systems is
             program stability. Understated cost estimates and overly optimistic
             funding assumptions result in too many programs chasing too few dollars.

             We believe that bringing realism to DOD’s acquisition plans will require very
             difficult decisions because programs will have to be terminated. While all
             of us may agree that there are too many programs chasing too few dollars,
             and could probably agree that we need to bring stability and executability
             to those programs that are pursued, it will be much more difficult to agree
             on which programs to cut.

             Nevertheless, the likelihood of continuing fiscal constraints and reduced
             national security threats should provide additional incentives for real
             progress in changing the structure and dominant culture of DOD’s system
             acquisition processes. We hope that today’s hearing may provide a
             stimulus for progress toward the goal we all share—efficient and effective
             processes for identifying, developing, and procuring needed defense
             weapon systems.

             Page 9                                                     GAO/T-NSIAD-97-103
Mr. Chairmen, this concludes my prepared statement. I would be happy to
address any questions you or other members of the Subcommittees may

Page 10                                                GAO/T-NSIAD-97-103
Page 11   GAO/T-NSIAD-97-103
Appendix I

DOD’s Fiscal Year 1997 Aircraft
Procurement Plans (as of December 31,

Dollars in billions (fiscal year 1997)
Aircraft                                      Mission/procurement type                                      Quantity                funding
1. Joint Strike Fighter                       Strike fighter/new                                                2,978                  $144.8
2. F/A-18E/F                                  Multimission tactical/ upgrade                                    1,000                     61.7
3. F-22                                       Air superiority fighter/new                                         438                     40.9
4. V-22                                       Vertical assault/new                                                523                     29.9
5. Comanche                                   Reconnaissance & attack helicopter/new                            1,292                     24.5
6. C-17                                       Airlift and cargo/new                                                 80                    18.8
7. Longbow Apache                             Attack helicopter/ modification                                     734                         5.7
8. SH-60R                                     Antisubmarine and antisurface warfare                               188                         4.0
9. Joint Surveillance Target Attack Radar     Surveillance and targeting/ new                                       11                        3.1
10. Joint Primary Aircraft Training System    Primary trainer/new                                                 705                         2.6
11. E-2C Hawkeye                              Combat information/new                                                29                        2.2
12. T-45 Training System                      Strike pilot trainer/new                                              78                        1.9
13. AV-8B                                     Light attack/remanufacture                                            56                        1.7
14. UH-60L Black Hawk                         Air assault/cavalry/medical evacuation                              172                         1.5
                                              helicopter/ modification
15. E-3 AWACS                                 Airborne warning and control/ modification                            31                        0.4
Total                                                                                                           8,315                  $343.7
                                             Source: DOD’s December 31, 1995, Selected Acquisition Reports, except the Joint Strike Fighter
                                             data is based on CBO estimates, and Comanche data is from the Comanche program office.

                                             Page 12                                                                     GAO/T-NSIAD-97-103
Appendix II

Related GAO Products

              Combat Air Power: Joint Assessment of Air Superiority Can Be Improved
              (GAO/NSIAD-97-77, Feb. 26, 1997).

              B-2 Bomber: Status of Efforts to Acquire 21 Operational Aircraft
              (GAO/NSIAD-97-11, Oct. 22, 1996).

              Air Force Bombers: Options to Retire or Restructure the Force Would
              Reduce Planned Spending (GAO/NSIAD-96-192, Sept. 30, 1996).

              U.S. Combat Air Power: Aging Refueling Aircraft Are Costly to Maintain
              and Operate (GAO/NSIAD-96-160, Aug. 8, 1996).

              Combat Air Power: Assessment of Joint Close Support Requirements and
              Capabilities Is Needed (GAO/NSIAD-96-45, June 28, 1996).

              U.S. Combat Air Power: Reassessing Plans to Modernize Interdiction
              Capabilities Could Save Billions (GAO/NSIAD-96-72, May 13, 1996).

              Combat Air Power: Funding Priority for Suppression of Enemy Air
              Defenses May Be Too Low (GAO/NSIAD-96-128, Apr. 10, 1996).

              Navy Aviation: AV-8B Harrier Remanufacture Strategy Is Not the Most
              Cost-Effective Option (GAO/NSIAD-96-49, Feb. 27, 1996).

              Future Years Defense Program: 1996 Program Is Considerably Different
              From the 1995 Program (GAO/NSIAD-95-213, Sept. 15, 1995).

              Aircraft Requirements: Air Force and Navy Need to Establish Realistic
              Criteria for Backup Aircraft (GAO/NSIAD-95-180, Sept. 29, 1995).

              Longbow Apache Helicopter: System Procurement Issues Need to Be
              Resolved (GAO/NSIAD-95-159, Aug. 24, 1995).

              Comanche Helicopter: Testing Needs to Be Completed Prior to Production
              Decisions (GAO/NSIAD-95-112, May 18, 1995).

              Cruise Missiles: Proven Capability Should Affect Aircraft and Force
              Structure Requirements (GAO/NSIAD-95-116, Apr. 20, 1995).

              Army Aviation: Modernization Strategy Needs to Be Reassessed
              (GAO/NSIAD-95-9, Nov. 21, 1994).

              Page 13                                                  GAO/T-NSIAD-97-103
           Appendix II
           Related GAO Products

           Future Years Defense Program: Optimistic Estimates Lead to Billions in
           Overprogramming (GAO/NSIAD-94-210, July 29, 1994).

           Continental Air Defense: A Dedicated Force Is No Longer Needed
           (GAO/NSIAD-94-76, May 3, 1994).

           Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned
           (GAO/NSIAD-94-118, Apr. 25, 1994).

(707134)   Page 14                                                 GAO/T-NSIAD-97-103
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