Stopgap Super Hornet purchase could have $5B to $7B price tag

by Murray Brewster (feat. David Perry)

CBC News
January 31, 2017

The Trudeau government has begun talks with Washington about the sole-source purchase of up to 18 Super Hornet jet fighters.

The measure, intended as a stopgap solution to ease pressure on the air force's aging fleet of CF-18s, could cost taxpayers between $5 billion and $7 billion over the lifetime of the aircraft, according to data circulating within the Department of National Defence and shared with CBC News by sources who insisted upon anonymity.

The figures are only preliminary, but they are backed up by U.S. congressional budget information.

CBC News was granted rare, extraordinary access to officials and facilities belonging to Boeing, the U.S. manufacturer of the Super Hornet, and to the U.S. navy's principal air base where the fighters operate and train. During that visit, Boeing officials confirmed Canada has begun talks with the Pentagon to buy the planes.

The decision to buy 18 warplanes in a sole-source deal, originally announced last fall, is meant to address what the Liberal government describes as an urgent "capability gap."

But it also lands Canada squarely in the middle of the Trump administration's showdown over the future of the Super Hornet's rival, the oft-maligned F-35.

1st delivery by 2019?

There are questions about what kind of deal Canada will get on the Super Hornets, especially with the new U.S. administration.

A final agreement, which requires congressional approval, will take about a year to negotiate, but CBC News has learned the Liberal government has already signalled it would like to see the first aircraft arrive in 2019, which would coincide with the next election.

A Boeing official, when asked, confirmed both the timeline and anticipated delivery date, and said the company is currently waiting for formal, written notice — known as a letter of request — from the Canadian government, which will be submitted to the U.S. Pentagon within the next few weeks.

Dan Gillian, Boeing's vice-president of the F-18 programs, said the company is looking at how production of Canadian jets can be slotted alongside existing orders from the U.S. navy and Kuwait. Boeing currently produces two Super Hornets a month.

"We think we can build all of those airplanes in time to meet the customer demands," said Gillan. "We may have to increase production rate, but that is very doable."

U.S. navy costs a benchmark

Prime Minister Justin Trudeau's government promised in the last election not to buy Lockheed Martin's F-35 when it came time to replace Canada's entire 1980s-vintage CF-18 fleet.

The Liberals said they would buy a cheaper alternative and plow the savings back into rebuilding the navy, but Trudeau has since said the F-35 stealth fighter will not be excluded from an open competition for replacement jets.

Federal officials, including the head of the Royal Canadian Air Force, have taken pains to describe the process with Boeing as tentative and exploratory.

But Canadian military planners visited the company's St. Louis, Mo., engineering facility two weeks ago to scope out the customized features they want in the fighter.

That, along with a series of other factors, will determine how much Canada pays for what the Liberals insist is an "interim" solution to the problem of not having enough jet fighters to meet all of the country's military commitments.

A cost breakdown of the Super Hornets is provided in U.S. Department of Defence estimates:

• The base price for a Super Hornet, according to U.S. Department of Defence 2015 budget estimates, was $85 million ($65 million US) per aircraft.
• On top of that, there is what's known as government-furnished equipment, which can be anything from engines to radar and other electronics, depending on what the air force says it needs. That could add $26.2 million ($20 million US) per fighter — although those fees can sometimes be negotiated.
• Washington also levies what is known as a foreign military sales charge of about 3.5 per cent, but other costs for research and development could boost U.S. service charges to as high 11 per cent, according to Pentagon records.

"What an airplane costs depends upon configuration, timing of deliveries and quantities. The U.S. government documents are a good reflection," said Boeing's Gillian.

That all means the final cost of each individual Super Hornet could range from $115 million ($88 million US) to $123 million ($94 million US), bringing a total purchase price of between $1.9 billion ($1.5 billion US) and $2.1 billion ($1.6 billion US) for 18 jets.

But the Liberal government would also have to negotiate an in-service support contract and consider buying training simulators, which can add billions.

When those costs are added in, the total price tag for the "interim" Super Hornet solution could run between $5 billion and $7 billion over the life of the planes.

Defence Minister Harjit Sajjan said the government has not yet added up the costs.

"Once we have gone through the right process, have all the necessary information, then we'll have an actual price tag," he said Tuesday. "We'll make sure that once we — at the appropriate time, we can have all the necessary information and the price tag will be explained to Canadians."

That means the price won't be revealed until after the deal is done, much to the frustration of the opposition.

"Just go straight to a competition and make sure we get the best plane for the taxpayers and for the RCAF," said Conservative defence critic James Bezan.

Economic benefits

If the Liberal government buys the planes entirely through a foreign military sales deal, it means Boeing will not automatically be required to provide what are called industrial offsets — essentially, guaranteed work for Canadian companies.

"It gets tricky," said Dave Perry, an analyst with the Canadian Global Affairs Institute. The Liberals would have to negotiate benefits separately under such a deal, he said.

"It doesn't mean you can't get an economic offset, it just a little murkier."

But late Monday, Boeing officials said the company was prepared to deliver an offset equal to the purchase price the U.S. navy pays, roughly $85 million ($65 million US) per aircraft.

The Trump factor

U.S. President Donald Trump has also added an unexpected wrinkle to the Liberal government's plan.

Prior to taking office, Trump tweeted that he'd asked Boeing to "price out a comparable F-18 Super Hornet" to the F-35 in response to rising costs in the stealth fighter program.

Lockheed Martin said last week it was confident it would soon get the price of an F-35 down to $111 million ($85 million US) per plane. Canada would not have to pay the foreign military sales charge because it has already contributed toward the development of the project.

Much of the public debate in Canada has revolved around the enormous cost of the F-35. In fact, the Liberal government's distaste for the stealth fighter was formed partly by the former Conservative government's refusal to be more transparent about the price tag.

Perry said it would be ironic if Trump succeeded in quickly driving down the cost to the point where both fighters were competitively priced.

"If Trump is able to gets some extra savings out of Lockheed … my guess is you're looking at a 10 per cent cost difference [between the Super Hornet and the F-35]," he said.