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:: December 2001 Newsletter ::

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Dear Fellow Combat Aircraft Shoppers,

Last month I wrote about the impact of deflation on the airline/airliner industry. This month, I’d like to talk about a related phenomenon that affects all of us as we shop for combat aircraft at our local fighter dealership. Fighters are just too expensive.

I’ve written before about the impact of pricing on the fighter market. It has long been my belief that this is a much more price sensitive market than believed, and that it is getting more so. Esteemed Teal colleague Pravin Parmar, who worked extensively in marketing the greatest fighter never built (Northrop’s F-20), wrote a list of a dozen reasons why people choose to buy a plane. The reasons ranged from “strategic need” to “industrial offset benefit,” and included price (humbly, he also added “we don’t know” as a reason, to remind us of uncertainty). “Politics” is widely regarded as the biggest factor. But increasingly, I think price is the overriding factor.

Looking at the demand side, it’s clear that the market is a pyramid. Look at the current generation of fighters. In the last two decades, there have been 26 export customers for fighters in the $25-35 million range (F-16, Mirage 2000, Gripen, Harrier). There have been nine export customers for fighters in the $36-45 million range (F/A-18A/B/C/D, and, notionally, Sukhoi’s Su-27/30). Finally, there have been a mere three export customers for fighters in the $45 million and above range (F-15, Tornado).

So, are manufacturers meeting market needs? Doesn’t seem that way. Fighter pricing is notoriously difficult to nail down, but let’s look at a few rough flyaway cost estimates. The F/A-18E/F sells for about $50 million. Rafale is just above that. Eurofighter is a $60 million model. There are alarming rumors of F-16 Block 60 price growth. The F-22, when available, will sell for a completely unattainable $80-100 million (that’s an estimate).

Jean-Francois Barth, a gentleman intellectual at Dassault, has an intellectual response. He points out that the growing price tags for Dassault products have tracked the market. As economies grew and prices inflated, the world went from the Mirage III/V/F1 to the Mirage 2000, and it will grow to Rafale’s level, too. He also believes that the new big planes are true multirole designs that will efficiently replace numerous older types.

Still, again, look at the number of customers for each fighter price class, listed above. And the last time Dassault introduced a product aimed at the high end of the market—the tragically beautiful Mirage 4000—it was a resounding failure. Remember, too, that for some time there has been almost zero manufacturing sector inflation.

And I don’t think the market is changing. Efforts to create a fourth high-end fighter customer—South Korea—may finally bear fruit soon, but it has taken decades (it’s now looking like they’ll make a decision in March, endangering the F-15 line once more).

Also, consider: most of the current new, pricey twinjet fighters have been on the market for the past decade. How many export market orders for the Eurofighter, F/A-18E/F, and Rafale have been received? Not one. You could argue that this is because the new planes didn’t enter service until recently (or in the case of Eurofighter, until next year). But then again, the first F-16s, Mirage F1s and Mirage 2000s were sold abroad before they entered service at home.

Meanwhile, let’s see what has been sold to the export market: over 400 $25 million F-16s. Over 130 $30+ million Mirage 2000s. Twenty six $33 million AV-8B+s. Even a smortérling (that’s fake Swedish for smattering) of $30 million Gripens. In short, customers are still pulling the trigger for export-priced models, but have baulked at going for the big planes.

Not surprisingly, there has been a belated recognition of this, and cost-reduction efforts are underway. Dassault says a $45 million Rafale will soon be possible. Boeing has announced that it will strive to offer a $40 million F/A-18E/F with an AESA radar, a pretty good deal. Eurofighter and Gripen will purportedly also benefit from price reductions, but nothing definite, yet.

The only exception to this trend, ironically, is the one program that was designed from the start as a cost-driven design. JSF began at $29-34 million, offering tremendous value for money. However, DoD’s Defense Acquisition Board recently stated that JSF prices were now about $40 million for the CTOL USAF version, while the other versions would cost about $50 million. This could be the start of some serious trouble. The F-22, of course, began life in the mid 1980s as a $35 million fighter. And since the F-35 is basically a single engine F-22, there is every prospect of it hitting the $65 million mark.

Let’s face it: if the $40-50 million figure is accurate, the F-35’s cost growth represents incompetence on the part of the people involved. How did DoD, and/or industry, allow it to happen? As countries decide whether to join the program in the crucial development phase, they may conclude that the industrial benefits of participation are outweighed by the loss of price flexibility. After all, if you take an industrial stake in a $35 million fighter, aren’t you going to be deprived of any ability to bargain on price when that fighter’s price tag hits $60 million? Why should the competitors offer you any kind of deal at all when you have already thrown your hat in with JSF?

Anyway, our supplement this month includes updates of the F/A-18, A380, AH-64, Dassault’s Falcon, A.109, KT-1/A/T-50, and E-3/E-767/737 AWACS. There is also an epitaph update of BAE’s 146/RJX, the end of which signals the end of Britain as a manufacturer of civil jet aircraft. Have a terrific holiday season, and an excellent New Year. Let me know if you want any priority updates, or any interim overview spreadsheets.

See You At The Post-Christmas Fighter Aircraft Sales,

Richard Aboulafia
 

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