Index

Defense Acquisitions: Air Force Operating and Support Cost Reductions
Need Higher Priority (Letter Report, 08/29/2000, GAO/NSIAD-00-165).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) efforts to reduce the Air Force's operating and support
costs, focusing on: (1) operating and support cost trends; (2) cost
reduction initiatives; and (3) factors influencing the success of cost
reduction efforts.

GAO noted that: (1) Air Force operating and support costs are growing at
about 4 percent per year, even though the total number of aircraft, the
number of hours these aircraft are flown, and the number of personnel
who fly and maintain them have been declining for years; (2) from fiscal
year (FY) 1997 to FY 1999, operating and support costs for aircraft
increased from about $15.3 billion to $16.6 billion; (3) higher costs
for repair parts were the principal cause of these increasing costs, and
about 25 fault-prone parts on each system GAO examined were the biggest
cost drivers; (4) to help reduce the operating and support costs of
fielded systems, the Air Force has established several initiatives,
including the Reduction in Total Ownership Cost program; (5) under this
program, the Air Force developed a standardized methodology for
assessing operating and support costs, identifying likely areas for cost
reduction, proposing cost reduction projects, and tracking associated
savings; (6) initially applied to several pilot programs in 1999,
including the F-16 and B-1B, the program is now being expanded to other
systems, as experience with the pilots increases; (7) however, the
projected cost reductions from these efforts average only about $343
million each year, well short of the $2.6 billion to $7 billion needed
to achieve DOD's goals; (8) several factors hinder greater operating and
support cost reductions; (9) the Air Force does not give operating and
support cost management the same high priority it assigns to other
program concerns such as weapon performance during system development or
improved combat capability after fielding; (10) instead of establishing
an operating and support cost requirement and managing to meet it, new
programs focus on initiatives to improve reliability, supportability,
and maintainability; (11) although these initiatives do help lower
operating costs, their impact on a system's operating and support costs
is not tracked; (12) projects that could lower these costs in fielded
systems cannot complete effectively for funding against projects that
enhance safety, readiness, or combat capability; (13) because they are
not given the same management priority, operating and support costs are
not emphasized; (14) poor visibility of operating and support costs has
been a key factor inhibiting management of operating costs, but the
establishment of the new Air Force Total Ownership Cost data system
appears to be overcoming this barrier; and (15) despite program
managers' limited authority and low incentives, some programs, such as
the B-1B, continue to champion cost reduction projects.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-165
     TITLE:  Defense Acquisitions: Air Force Operating and Support Cost
	     Reductions Need Higher Priority
      DATE:  08/29/2000
   SUBJECT:  Weapons systems
	     Defense procurement
	     Military cost control
	     Military aircraft
	     Defense capabilities
IDENTIFIER:  B-1B Aircraft
	     C-17 Aircraft
	     C-5 Aircraft
	     F-16 Aircraft
	     Joint Strike Fighter
	     F-22 Aircraft
	     DOD Joint Primary Aircraft Training System
	     Air Force Reduction in Total Ownership Cost Program
	     B-52 Aircraft
	     KC-135 Aircraft
	     F-15 Aircraft
	     A-10 Aircraft
	     T-37B Aircraft

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GAO/NSIAD-00-165

Appendix I: Scope and Methodology

28

Appendix II: Comments From the Department of Defense

29

Appendix III: GAO Contacts and Acknowledgments

33

Table 1: Comparison of Projected Aircraft Operating and Support
Costs and DOD's Goals 11

Table 2: Annual Operating and Support Costs of Predecessor
Aircraft Compared With Those Estimated for New Systems 16

Table 3: Comparison of F-15 and Estimated F-22 Operating and
Support Costs 17

Figure 1: Nominal Life-Cycle Cost of Typical 1980 DOD Acquisition Program
With a 30-Year Service Life 6

Figure 2: Major Components of Air Force Aircraft Operating and
Support Costs (constant year dollars in billions) 8

Figure 3: Air Force Aircraft Operating and Support Costs
(constant year dollars in billions) 10

Figure 4: Aircraft Operating and Support Costs, Out-Year Cost
Trends, and DOD Goals (constant year dollars in billions) 14

DOD Department of Defense

National Security and
International Affairs Division

B-278932

August 29, 2000

The Honorable James M. Inhofe, Chairman
The Honorable Charles S. Robb, Ranking Minority Member
Subcommittee on Readiness and Management Support
Committee on Armed Services
United States Senate

The increasing cost of operating and supporting weapon systems is a growing
concern because these escalating costs reduce funds available to develop and
acquire new weapon systems and modify existing ones. A top Defense official
has characterized this problem as a potential "death spiral." Operating and
support costs include those for fuel, repair parts, maintenance, and
contract services, as well as the costs of all civilian and military
personnel associated with a weapon system. History indicates that these
costs can account for about 70 percent of a system's total life-cycle
costs.1 In 1999, the Air Force spent more than $16 billion2 to operate and
support its aircraft. To help control operating and support costs, the
Department of Defense (DOD) has set cost reduction goals for each military
service, both for fielded weapon systems and for those being developed.

This is the first in a series of reports we plan to issue in response to
your request that we evaluate DOD's efforts to reduce operating and support
costs. For this report, we focused on the Air Force's aircraft and assessed
(1) operating and support cost trends, (2) cost reduction initiatives, and
(3) factors influencing the success of cost reduction efforts.

We reviewed the operating and support costs of fielded aircraft, focusing on
some of the larger programs, including the B-1B bomber, the C-17 and
C-5 transports, and the F-16 fighter, which together account for most of the
Air Force's operating costs. We also examined new programs under development
such as the Joint Strike Fighter, the F-22 fighter, the Global Hawk unmanned
reconnaissance aircraft, and the Joint Primary Aircraft Training System
aircraft. Our objectives, scope, and methodology are described in appendix
I.

Air Force operating and support costs are growing at about 4 percent per
year, even though the total number of aircraft, the number of hours these
aircraft are flown, and the number of personnel who fly and maintain them
have been declining for years. From fiscal year 1997 to fiscal year 1999,
operating and support costs for aircraft increased from about $15.3 billion
to $16.6 billion. Higher costs for repair parts were the principal cause of
these increasing costs, and about 25 fault-prone parts on each system we
examined were the biggest cost "drivers." If they continue to grow at recent
rates, operating and support costs of aircraft will exceed $20 billion by
fiscal year 2005. To achieve DOD's cost reduction goals for 2005 that range
from 7 to 20 percent, the Air Force would have to reduce these costs by $2.6
billion to as much as $7 billion.

To help reduce the operating and support costs of fielded systems, the Air
Force has established several initiatives, including the Reduction in Total
Ownership Cost program. Under this program, the Air Force developed a
standardized methodology for assessing operating and support costs,
identifying likely areas for cost reduction, proposing cost reduction
projects, and tracking associated savings. Initially applied to several
pilot programs in 1999, including the F-16 and B-1B, the program is now
being expanded to other systems, as experience with the pilots increases.
However, the projected cost reductions from these efforts average only about
$343 million each year, well short of the $2.6 billion to $7 billion needed
to achieve DOD's goals. Also, while the estimated operating and support
costs of the Joint Primary Aircraft Training System are much lower than the
aircraft it is to replace, the costs of the F-22 and the Joint Strike
Fighter could be higher than the aircraft they are expected to replace.
Since these two developmental aircraft could account for over one-quarter of
all the Air Force's future operating and support costs of its aircraft,
their higher costs could jeopardize attempts to control operating and
support costs well into the future.

Several factors hinder greater operating and support cost reductions. The
Air Force does not give operating and support cost management the same high
priority it assigns to other program concerns such as weapon performance
during system development or improved combat capability after fielding.
Instead of establishing an operating and support cost requirement and
managing to meet it, new programs focus on initiatives to improve
reliability, supportability, and maintainability. Although these initiatives
do help lower operating costs, their impact on a system's operating and
support costs is not tracked. Projects that could lower these costs in
fielded systems cannot compete effectively for funding against projects that
enhance safety, readiness, or combat capability. Because they are not given
the same management priority, operating and support costs are not
emphasized. Poor visibility of operating and support costs has been a key
factor inhibiting management of operating costs, but the establishment of
the new Air Force Total Ownership Cost data system appears to be overcoming
this barrier. Despite program managers' limited authority and low
incentives, some programs, such as the B-1B, continue to champion cost
reduction projects.

We are recommending that the Air Force establish operating and support cost
requirements for developmental and fielded aircraft and periodically measure
their progress toward meeting them. In addition, we have included a matter
for congressional consideration that would require the Secretary of the Air
Force to annually report its progress in achieving these requirements. While
agreeing that significant steps remain to be taken to reduce operating and
support costs, the Department believes that it is premature to establish
operating and support requirements for aircraft systems. In addition, the
Department disagreed with the need to provide the Congress with an annual
operating and support cost report. As discussed in the agency comments
section of this report, we believe these are essential steps to take to
reduce operating and support costs.

Operating and support costs reflect the purchases of fuel, lubricants, and
repair parts and their associated maintenance and contract services, as well
as modification kit procurement and installation. These costs typically
account for about 70 percent or more of life-cycle costs, depending on how
long a system remains in the inventory. Figure 1 depicts the typical
life-cycle cost distribution of many weapon systems.

Source: Defense Systems Management College Acquisition Guide.

For some systems (such as the B-52 bomber and KC-135 refueling aircraft)
that continue to be used many years beyond their expected service life,
operating and support costs can amount to a higher percentage of life-cycle
costs.

The Under Secretary of Defense for Acquisition, Technology, and Logistics
has expressed concern that rising operating costs threaten the Department's
modernization efforts. In 1998, he observed:

"Unfortunately, we are trapped in a `death spiral.' The requirement to
maintain our aging equipment is costing us much more each year: in repair
costs, down time, and maintenance tempo. But we must keep this equipment in
repair to maintain readiness. It drains our resources--resources we should
be applying to modernization of the traditional systems and development and
deployment of the new systems. So, we stretch out our replacement schedules
to ridiculous lengths and reduce the quantities of the new equipment we
purchase−raising their costs and still further delaying
modernization."

The Congress also identified a need to reduce operating and support costs.
Section 816 of the Strom Thurmond National Defense Authorization Act for
Fiscal Year 1999 directed the Secretary of Defense to designate 10 pilot
programs to test increased program manager oversight of product support. In
a February 1999 report, DOD designated the 10 pilot programs to experiment
with several broad cost management initiatives over the coming years. DOD
has also set broad goals for each service to lower the operating and support
costs of its weapon systems. Systems under development are expected to have
projected life-cycle costs 20 to
50 percent lower than the actual costs of the systems they are replacing.3
The actual operating and support costs for fielded systems are expected to
be reduced 20 percent by fiscal year 2005.

The Air Force spent more than $16 billion to operate and support its
aircraft in fiscal year 1999, an increase of $1.3 billion over fiscal year
1997. Operating and support costs are growing at about 4 percent per year,
even though the total number of aircraft, the number of hours these aircraft
are flown, and the number of personnel who fly and maintain them have been
declining for years. Higher costs for repair parts are the principal cause
of these increasing costs, and a small number of parts on each system are
the biggest cost drivers. If operating and support costs of the Air Force's
aircraft continue to grow at recent rates, they could exceed $20 billion by
fiscal year 2005.

Declined

Air Force operating and support costs for 36 aircraft systems increased by
$1.4 billion from fiscal year 1997 to fiscal year 1999. Most of the increase
occurred in the major aircraft programs, including the F-15 and the F-16.
While aircraft operating and support costs are increasing, the total number
of aircraft, the number of hours these aircraft are flown each year, and the
number of personnel who operate and maintain them are decreasing. Air Force
statistics show that the number of operational aircraft has decreased
steadily, from 9,519 in fiscal year 1986 to 6,228 in fiscal year 1998.
During this period, the number of hours these aircraft were flown each year
also decreased by 39 percent. Similarly, the number of Air Force military
personnel declined from 608,199 in 1986 to 375,512 in 1998--a drop of
38 percent.4 More recently, from 1996 to 1998, aircraft, flying hours, and
personnel decreased 2 to 3 percent.

We analyzed aircraft operating and support costs in fiscal years 1997
through 1999 to identify the principal costs and those most responsible for
the cost growth. The largest components of aircraft operating and support
costs are personnel, fuel, repair parts, depot maintenance, contractor
services, and installation support. The costs of personnel and fuel both
decreased in fiscal years 1997-99, while the costs of repair parts,
associated maintenance, contractor services, and installation support
increased. Figure 2 shows the change in the major components of the
operating and support costs of Air Force aircraft in fiscal years 1997-99.

Source: Our analysis of Air Force data.

Together, repair parts and depot maintenance costs increased about
31 percent during the period and were responsible for nearly all the
increase in aircraft operating and support costs. Most of these costs were
for replaceable repair parts such as transistors, gaskets, and fluids--and
those that can be refurbished and reused such as engine subcomponents.
According to program managers, repair parts are the top candidates for cost
reductions because new and more reliable parts and processes can be designed
and manufactured to replace parts that fail often or are difficult to
obtain. More reliable parts fail less often and require less maintenance.
For example, replacing the F-16 main aircraft battery with a
maintenance-free battery is expected to cost $3.4 million fleet wide and
save $3.8 million over the next 9 years and $6.9 million over the next 25
years.

About 25 parts on each system, especially parts associated with engines and
electronic subsystems dominate the maintenance and repair costs of the
aircraft we examined. For example, the F-16 fighter has nearly
7,000 repairable parts. Of these, the 25 most fault-prone parts cost
$224 million to repair in fiscal year 1998 and accounted for about
44 percent of the system's total repair parts cost. Sixteen of these 25
parts were for the aircraft engine, while another 4 were for the radar
system. F-16 personnel told us these parts break often and are expensive to
replace.

If aircraft operating and support costs continue to grow at recent rates,
our projections indicate they could exceed $20 billion by fiscal year 2005.
This would be more than $5 billion higher than in fiscal year 1997. To
determine the impact of continued growth in aircraft operating and support
costs, we projected recent cost increases for Air Force aircraft from fiscal
year 2000 to 2005. Our projection is shown in figure 3.

Source: Our analysis of Air Force operating and support cost data.

Our projection of Air Force operating and support costs reflects a recent
growth rate of over 4 percent per year in fiscal years 1997-99. As figure
3 shows, if aircraft operating and support costs continue to grow at the
recent 4-percent rate, they would exceed $20 billion by fiscal year 2005.
Our projection is based upon the actual costs from fiscal years 1997 through
1999 for personnel, fuel and lubricants, repair parts, maintenance,
contractor services, and other support costs associated with Air Force
aircraft. After converting these costs to base year 2000 dollars, we used a
cost projection model to project these cost trends through fiscal year 2005.

Concerned that growing operating and support costs threaten planned force
modernization, DOD has set cost reduction goals for both fielded and new
weapon systems. The multibillion dollar cost reductions to aircraft
operating and support costs needed to meet DOD's goals, however, are
unlikely to be achieved in the near term and are uncertain in the long term.
Although the Air Force has established several programs to reduce operating
costs, currently projected savings fall far short of DOD's goals.

To help control and reduce growing operating and support costs, DOD has set
goals for each military service to reduce these costs over the next
5 years. For fielded systems--those already operating by fiscal year
2000--DOD wants to reduce operating costs by 7 percent compared with fiscal
year 1997 costs (excluding fuel and personnel costs). The reduction goal
increases to 10 percent in fiscal year 2001. A `stretch' goal of 20 percent
in operating and support cost reductions is set for fiscal year 2005.

We applied DOD's goals to fielded aircraft and determined that in fiscal
year 2000, aircraft operating and support costs should not exceed
$14.7 billion. DOD's goals, and our projections of aircraft operating and
support costs for fiscal years 2000-05, are shown in table 1.

 Constant year 2000 dollars in billions
 Fiscal     Projected operating and             Difference between
 year       support costs             DOD goal  projection and goal
 2000       $17.3                     $14.8     $2.6
 2001       18.0                      14.5      3.5
 2002       18.7                      14.3      4.4
 2003       19.3                      14.1      5.2
 2004       20.0                      13.9      6.1
 2005       $20.7                     $13.7     $7.0

Source: Our analysis of Air Force operating and support cost data.

The Air Force needs to reach an operating and support funding level below
$14 billion in fiscal year 2004 to meet DOD's cost reduction goal. If these
costs for aircraft continue to grow at recent rates, however, our projection
shows that in fiscal year 2005 they will exceed $20 billion. Thus, for the
Air Force to meet the 2005 goal, operating and support costs would need to
be reduced by about $7 billion.

DOD has also set a goal to reduce the projected life-cycle costs of new
systems by 20 to 50 percent below the historical experience of at least half
its programs. The higher cost reduction goals for new systems recognize the
higher potential for savings if appropriate decisions are made early in the
life of a new system. In fact, according to DOD, design decisions with the
most impact on operating and support costs are usually made soon after
program initiation. As system designs are finalized during the development
process, the opportunities to influence operating and support costs
diminish, and the costs of making design changes increase.

To help lower life-cycle costs, the Air Force has begun implementing both
the DOD-wide Cost as an Independent Variable initiative and its own
Reduction in Total Ownership Cost initiative. The first applies mostly to
developmental systems, the second primarily to fielded systems. Guidance for
developmental systems stresses that (1) system costs are capped, and any
additional funding obtained by one system comes at the expense of others and
(2) trade-offs between cost and performance are required if maximum cost
effectiveness is to be achieved. These reforms require setting realistic and
aggressive goals early and periodically measuring progress. Once a system is
fielded and actual operating and support cost data becomes available, the
reforms require establishing baselines identifying the cost drivers and
implementing cost reduction initiatives.

Beginning in December 1997, the Air Force established a new initiative,
Reduction in Total Ownership Cost, to lower operating and support costs.
Under this initiative, the Air Force developed a standardized methodology
for assessing operating and support costs, identifying likely areas for cost
reduction, proposing cost reduction projects, and tracking associated costs.
This methodology was initially applied to several pilot programs in 1998,
including the F-16 and B-1B. As more experience with the initial programs is
obtained, it is being expanded to other Air Force programs. Among the
objectives of the methodology are to have comprehensive, consistent business
cases; sound, executable action plans; and effective, all-inclusive
mechanisms for identifying and reporting cost savings associated with
Reduction in Total Ownership Cost initiatives.

As of February 2000, the Air Force had approved 43 cost reduction projects
that use the Reduction in Total Ownership Cost approach and are either under
way or planned for 8 fielded aircraft over the next several years. Between
fiscal year 2000 and 2009, the Air Force plans to invest $7.9 billion in
these projects. Annual average savings over the next 10 years are expected
to reach $343 million. The Reduction in Total Ownership Cost Program Manager
told us that savings for many projects are realized slowly because, once
they are approved and funded, it takes several years to design, test, and
produce the new part or process and install it in all the affected aircraft.
Once installed, however, many projects realize savings over the aircraft's
remaining useful life, which can be 20 years or more. By 2009, the Air Force
expects savings and avoided costs to exceed
$3.4 billion.

Our examination of the 43 proposed projects for fielded aircraft shows that
some of them, particularly those having the largest investments, are
intended principally to provide readiness and performance improvements.
Reduced operating and support costs are a secondary benefit. For example,
the two largest B-1B projects are to replace the bomber's main computer and
electronic defensive systems. Together, these two projects account for more
than $980 million of the $1 billion in planned investment for all B-1B
projects. These two projects have been justified for years on the basis of
mission performance shortfalls and needed combat capability improvements.
While both projects provide significant operating and support cost savings,
neither has the high near-term return on investment required to meet Air
Force criteria for approval as a project justified solely on the basis of
operating and support cost reduction.

Even if all the proposed initiatives are included, however, the projected
cost reductions of about $343 million a year, or $3.4 billion over 10 years,
fall far short of DOD's goals. In fact, projected savings are not sufficient
to reverse the current trend of rising operating and support costs. Figure 4
shows actual aircraft operating and support costs for fiscal years 1997-99,
our projection of those costs for fiscal years 2000-05, and the level of
operating and support costs needed to meet DOD's goals.

Source: Our analysis of Air Force operating and support cost data.

We estimate that the Air Force must further reduce its operating and support
costs by about $2.6 billion to $6.1 billion to reach DOD's reduction goal
for fiscal years 2000-04. Operating and support cost reductions of more than
$7 billion will be needed to meet DOD's "stretch" goal of a
20-percent operating cost reduction in fiscal year 2005.

DOD has set goals to lower life-cycle costs of new aircraft by 20 to
50 percent below the historical experience of predecessor systems. Assuming
these new systems are retained for 30 years or more and are consistent with
past programs, about 72 percent of their life-cycle costs would be for
operating and support. Therefore, in order to reduce life-cycle costs by 20
to 50 percent, operating and support costs would have to be reduced by at
least an equal percentage.

We reviewed efforts by new aircraft programs to lower operating and support
costs, including those of the Air Force variant of the Joint Strike Fighter,
which is to replace the F-16 and the A-10; the F-22, to replace the
F-15; and the variant of the Joint Primary Aircraft Training System, to
replace the T-37B. The F-15, the F-16, the A-10, and the T-37B aircraft
accounted for 31 percent of all fiscal year 1999 aircraft operating and
support costs. Were the new replacement systems to meet DOD's minimum
operating and support cost reduction goal (20 percent by fiscal year 2005),
overall operating and support costs for Air Force aircraft would be reduced
by about 6 percent. This could be sufficient to reverse the recent growth
trend in operating and support costs. Accordingly, the new aircraft being
developed could have a powerful effect on the Air Force's long-term
operating and support costs.

In fiscal year 1999, operating and support costs of the four existing
aircraft to be replaced were $5.1 billion. As shown in table 2, the Joint
Primary Aircraft Training System and, perhaps, the F-22 are expected to have
significantly lower operating costs and achieve DOD's goals.

 Constant year 2000 dollars in millions
             Fiscal year                 Projected
 Predecessor 1999 annual     New         annual       Annual    Annual
 aircraft    operating       aircraft    operating    savings   savings
             and support                 and support            (percent)
             costs                       costs

 F-16 and                    Joint
 A-10        $3,305          Strike      $4,124       ($819)    (25)
                             Fighter
 F-15        1,503           F-22

                             Contractor  1,481        22        1
                             estimate

                             Air Force   952          551       37
                             estimate
                             Joint
                             Primary
 T-37B       296             Aircraft    82           214       72
                             Training
                             System

Source: Our analysis of Air Force operating and support cost data.

The F-22 is already designed and undergoing testing, with a production
decision planned for fiscal year 2001. However, the F-22 may not achieve the
substantial cost reductions needed to reach DOD's goals. In July 1999, the
systems contractor estimated annual operating and support costs for the F-22
fleet to be about $1.5 billion. Because that estimate was considerably
higher than earlier ones, the F-22 program office and the Air Force Cost
Analysis Agency reexamined the contractor's estimate and identified several
changes that would reduce costs to about $952 million. The Air Force plans
to continue its analysis of the estimate during the summer of 2000 and
finalize it in time for the program's production decision.

Nevertheless, even if the Air Force's lower estimate for the F-22 is
affirmed, overall operating and support costs for Air Force aircraft may not
be lower. Table 3 compares the operating cost of F-15 and F-22 aircraft at
the fleet, squadron, and individual aircraft level.

                   Constant year 2000 dollars in millions
                                                 Operating and support cost

 Aircraft Number of                              Fleet     Each aircraft
          aircraft
 F-15     522                                    $1,503    $2.9

 F-22     339                  Contractor        1,481     4.4
                               estimate
          339                  Air Force estimate952       2.8

Source: Our analysis of Air Force operating and support cost data.

As table 3 shows, when both aircraft are considered at fleet level, the
$1.5-billion operating costs of the F-15 are comparable with the high
estimate of F-22 costs. The F-22's lower operating cost estimate of
$952 million per year would represent a 36-percent reduction and would meet
DOD's cost reduction goal for new systems. When the operating cost per
aircraft is considered, however, the cost of the F-22 aircraft is about the
same or higher than that of the F-15. Moreover, the Air Force does not plan
to retire the F-15s as F-22s are fielded. According to the Air Force's Force
Structure Plan for 2000, 179 F-15s will be retained until at least 2030.
These F-15s cost about $519 million to operate in 1999. Assuming the
operating costs of these 179 aircraft remain about the same and are combined
with the projected F-22 costs, the operating costs of all these aircraft are
likely to be about as high or higher, not lower, than those of the current
F-15 force.

The Joint Strike Fighter fleet will likely be the most expensive to operate
and support on an annual basis than any aircraft currently in development or
operated by the Air Force. The Joint Strike Fighter is expected to replace
the existing Air Force fleet of 1,3725 F-16s and 368 A-10s, which together
cost $3.3 billion to operate and support in fiscal year 1999. To meet DOD's
20-percent cost reduction goal, the Joint Strike Fighter would need to
reduce its operating and support costs to about $2.6 billion a year.

The Joint Strike Fighter program office has not issued an estimate of the
operation and support costs of the system. At present, the only goal or
target for the Joint Strike Fighter is the program direction to the
contractors that the aircraft not cost more to operate and support than the
aircraft it is replacing. Based on our analysis of program office data, the
cost ceiling provided to the contractors is $4.1 billion per year. This is,
however, 25 percent higher than the $3.3-billion operating and support cost
of the F-16 and A-10 aircraft fleets combined in fiscal year 1999. We
believe that unless significant cost reductions are achieved, the Joint
Strike Fighter is unlikely to meet DOD's goals. Moreover, considering that
the F-22 and the Joint Strike Fighter could account for over 25 percent of
the Air Force's future operating and support costs, these costs are likely
to be higher, not lower, in the future.

Our evaluation disclosed several factors that limit greater attention to
operating and support cost reductions. The Air Force does not give operating
and support cost management the same high priority it assigns to other
program issues such as weapon performance during system development or
improved combat capability after a system is fielded. Instead of
establishing an operating cost requirement and managing in such a way as to
meet it, new programs focus on initiatives to improve system reliability,
supportability, and maintainability. While these initiatives do help lower
operating costs, their impact on the system's operating and support costs is
not tracked. Projects that could lower operating and support costs are
unable to compete effectively for funding against projects that enhance
safety or readiness or improve combat capability.

Poor visibility of operating and support costs has been a key factor
inhibiting management of operating costs, but the establishment of the new
Air Force Total Ownership Cost data system appears to be overcoming this
barrier. Although program managers of pilot programs have been given greater
responsibility for weapon system support, they told us that limited
authority and few incentives are major obstacles to managing operating
costs. The Air Force has decided not to increase program managers' authority
over operating and support costs, but it is working to increase incentives
for major commands to invest in cost reduction initiatives.

Remain Relatively Unconstrained

DOD and Air Force guidance direct program managers to optimize system
performance and minimize the cost of ownership. Weapon systems in
development have requirements for acquisition costs, program schedule, and
system performance, but they have no similar requirement for operating and
support costs. The system requirements for performance, acquisition costs,
and schedule are usually clear, well defined, and frequently tracked to
actual performance. They are incorporated into key program baselines and
other management documents. Through these documents, the program's most
important characteristics are projected, tracked, measured, and reported
within the Air Force, to the Office of the Secretary of Defense, and to the
Congress. In other words, the system requirements are an important means of
establishing accountability and priority. They are key guides for setting
design limits, making trade-offs among requirements, and formulating
investment decisions.

As DOD recently reported to the Congress, setting performance requirements
early in an acquisition program without adequate knowledge of the total cost
can lead to very costly and unstable system designs.6 Yet the new programs
we examined do not have comparable operating and support cost requirements.
Further, they are not required to determine and justify the consequences of
design decisions that are based on the system's projected operating and
support costs. Without such a requirement, there is no accountability for
minimizing the systems' operating and support costs.

Of particular concern to us are the F-22 and the Joint Strike Fighter
programs, which together are to replace aircraft that accounted for
33 percent of all the Air Force's aircraft operating and support costs in
1999. The F-22 low-rate initial production decision is scheduled for
December 2000. The aircraft was designed without a specific top-level
operating and support cost requirement. As its low-rate initial production
decision approaches, the program office, the principal contractor, and the
Air Force Cost Analysis Agency are trying to determine how much more or less
the F-22 will cost to operate and support than the F-15 it will replace.
Because the F-22 design is mature, there are now few opportunities to
significantly reduce its operating and support costs, yet these costs will
continue for at least the next 30 years.

Like the F-22, the Joint Strike Fighter does not have a system-level
operating and support cost requirement. Its managers are also pursuing
several efforts to improve its supportability, reliability, and
maintainability. This system, however, is in the early design stage. Without
an operating and support requirement to guide design decisions that are now
being made, there is no assurance that the fighter will cost 20 percent less
to operate and support than the F-16 and A-10 aircraft that it will replace.
Cost data provided by the program office and our analysis indicate that the
fighter may cost more, perhaps considerably more, to operate.

Unknown Effects on Operating and Support Costs

The developmental programs we examined do not have operating and support
cost requirements for the total system, but they generally have efforts
underway to improve supportability, reliability, and maintainability.
Improving these characteristics can lower operating and support costs. For
example, development of a system that can diagnose and predict engine
problems in the Joint Strike Fighter before they develop is expected to
reduce significantly, engine maintenance and downtime. In essence, a system
component that is easier to access, remove, and replace costs less to
maintain. Similarly, a more reliable component requires less maintenance and
repair. Improvements to all of these characteristics increase system
readiness and can lower operating and support costs.

However, an Air Force acquisition reform official told us that focusing on
reliability-related characteristics historically has not been sufficient to
control future operating and support costs. Accordingly, we asked program
officials about the effects of their reliability improvement efforts on the
total system's operating and support costs. The program offices generally
did not know what these effects would be. For example, the Joint Strike
Fighter program has evaluated numerous methods to improve the aircraft's
reliability, but program officials could not tell us what effects these
changes would have on total operating and support costs. While these efforts
are expected to result in weapons that cost less to operate and support than
they would otherwise, the missing linkage between improvement efforts and
their effect on overall operating and support costs limits the ability of
programs to predict and manage these costs.

Against Other Priorities

Projects that could reduce operating and support costs of fielded systems
have a lower priority and are generally less able to compete for investment
funds than those offering improved safety, readiness, or combat capability.
This happens primarily for two reasons. First, most cost reduction
initiatives require up-front investments of procurement funds that take many
years to pay back the initial investments. This slow pay-back, and the many
uncertainties that accompany improvement projects, make it difficult for the
initiatives to compete against investments that provide near-term
improvements in safety, availability, or combat capability. In fact, the
largest of the 43 cost reduction initiatives approved by the Air Force are
not specifically aimed at operating and support cost reduction but at
improving readiness and combat capability.

Second, the Air Force sees improved combat capability as the most important
priority. Decisionmakers we spoke with, whether in program offices, major
commands, product centers, or air bases, told us that their principal focus
is to improve combat capability. They work continuously to enhance system
safety, increase readiness, and improve performance. While they acknowledge
the importance of managing operating and support costs and recognize that
growth of these costs may threaten the Air Force's ability to modernize,
they also told us that near-term combat capability is their top priority.

Two Air Force surveys conducted in 1999 showed that very few projects aimed
specifically at reducing operating and support costs through improvements to
fielded aircraft were carried out in 1997 and 1998. Both program managers
and major command leaders told us the reason for this was that limited funds
available were invested in improvements in combat capability and that there
is a general reluctance to forego improved combat capability in the near
term for uncertain savings in the longer term.

We visited the Air Combat Command and the Air Mobility Command and found
that both have a comprehensive and detailed process for proposing,
reviewing, and approving procurement funds for aircraft improvements, but
this process strongly favors projects that enhance combat capability. They
told us that their primary mission is to prepare for combat and ensure those
pilots and support crews have the best equipment and support possible. But,
they acknowledged that controlling operating and support costs is becoming
increasingly important. Leaders at both commands told us that they were
reassessing the process used to evaluate aircraft improvement projects so
that those providing operating and support cost reductions will compete
better in the future.

Cost Management

Accurate and complete operating and support cost data and estimates are
important for cost management because they often serve as the basis for
establishing cost requirements that guide design choices and other
trade-offs during development. Similarly, reliable cost data is necessary
for managers of fielded aircraft to guide investment and system management
decisions. Until very recently, however, tracking aircraft operating and
support costs was difficult because the cost data was either unavailable in
a usable format or of poor quality. The Air Force's Total Ownership Cost
system is making operating and support cost data more available and usable
and may, with time, enable improved management.

In 1998, the Air Force began to set up a Total Ownership Cost database,
which is expected to make it easier not only to track costs of fielded
systems over the long term, but also help establish clear cost goals for
systems in development. Accurate and reliable operating and support costs
are a fundamental starting point for setting cost goals, gauging overall
progress, identifying shortfalls, and making informed decisions on
improvements to fielded aircraft. In the past, accurate, complete, and
comparable operating and support cost data was not readily available.
Program managers and cost analysts told us that past operating and support
cost estimates were weakened by poor cost data.

According to its program manager, the new database is fully functional and
is being steadily improved. Cost data, however, will have to be accumulated
for several more years before the full benefits of the system are realized.

In 1999, the Air Force established 10 pilot programs in which program
managers were given more responsibility for and oversight of weapon system
support. Program managers, however, have limited authority and opportunity
to control or influence the operation and support costs of fielded aircraft.
Similarly, they do not control, influence, or have incentives to encourage
investments in cost reduction initiatives.

Air Force program managers have limited visibility over a system's operating
and support costs. Control over the essential resources and processes that
determine how these functions are managed, however, remain largely with the
major commands and headquarters organizations. Operating and support costs
for a system are largely determined when an aircraft is designed. Once a
system is fielded, however, a program manager of a system such as the F-16,
for example, can directly influence no more than about 14-17 percent of the
system's operating and support costs. Program managers can influence the
cost of maintenance by acquiring a more reliable part or revising a
maintenance procedure, but they cannot control when or how often a system is
used. They cannot decide the number of pilots or support personnel that are
needed, the number of hours a system is to be used, or major maintenance
schedules. Thus, significant personnel, base operations, maintenance, and
overhead costs are outside their control or influence.

Similarly, program managers do not manage or control the funds used to pay
for operations and support functions and activities or the investment funds
used to make cost reduction improvements. Authority for managing operating
and support funds, as well as aircraft improvement funds, again rests with
the major commands and Air Force headquarters. Program office personnel told
us that there are few incentives for promoting investments in cost reduction
initiatives because the Air Force's top priority is to improve readiness and
combat performance. Also, the major commands or Air Force headquarters
routinely deduct the estimated savings from programs' future budgets before
the savings are actually realized. If a cost reduction initiative does not
go as planned or does not achieve the estimated savings, the program must
make up for the insufficient investment or unrealized savings. As a result,
and in spite of the widespread belief that there are many available
opportunities to reduce operating and support costs, many worthy projects or
ideas go unfunded.

The Air Force considered giving program managers more control over operating
and support as well as investment funds, but it rejected this idea because
it believes fund management must be accomplished above the individual
program level to ensure optimum use of limited funds. To encourage greater
investment in cost reduction initiatives, the Air Force is considering
allowing the major commands to retain savings obtained from cost reduction
projects to use as investment funds for future projects.

Operating and support costs of Air Force aircraft have grown over the last
3 years, and if this growth continues at the same rate, the service could
face difficult choices over whether to cut research and development funds,
procurement funds, or readiness levels in the years ahead. We project that
operating and support costs for aircraft could exceed $20 billion by fiscal
year 2005, about $7 billion higher than DOD's goal. With planned budgets of
$13 billion for research and development and $11 billion for aircraft
procurement in fiscal year 2005, the projected $7-billion growth in
operating and support costs poses a serious problem. The Air Force's
operating and support cost reduction initiatives for fielded systems are
projected to save only a relatively small amount. Further, the projected
operating and support costs for new aircraft may be more, instead of less,
than those of currently fielded aircraft.

The absence of clear, well understood, and frequently reported operating and
support cost requirements for new systems undermines effective cost
management during the critical design phase, when most future operating and
support costs are determined. Similarly, the absence of an operating and
support cost requirement for fielded systems precludes management attention
and inhibits investments in cost reduction projects needed to meet DOD's
goals. Accordingly, it is unclear what maximum acceptable operating and
support costs the Air Force is willing to pay during a system's life;
therefore, there is no way of knowing whether incurred or projected costs
are reasonable. Ultimately, because there is no accountability for operating
and support costs of aircraft programs, oversight and management remain
difficult.

To establish accountability for reaching DOD's goals of significant
operating and support cost reductions, the Air Force needs to establish
operating and support cost requirements for aircraft it is developing and
for those that are already in service.

We recommend that the Secretary of Defense direct the Secretary of the Air
Force to

 establish an operating and support cost requirement for developmental and
fielded weapon systems to ensure full consideration of these costs among
other program priorities and

 measure and periodically assess progress toward meeting individual program
operating cost requirements.

The Congress may also wish to require the Secretary of Defense to direct the
Secretary of the Air Force to submit an annual report summarizing each
program's operating cost requirement, its actual costs, and the actions
planned to achieve the requirement.

In written comments on a draft of this report, DOD agreed that significant
steps remain to be taken to reduce operating and support costs. The
Department also stated that it shares some of our concerns about the pace,
risk, and costs associated with reducing operating costs and acknowledged
the difficulty of devising a strategy that allows meaningful cost reductions
while focusing on its highest priorities−improving safety, readiness,
and combat capability. DOD noted that pilot programs are investigating
various cost reduction approaches, but that it was too soon to determine
which approaches would yield the best results. DOD also stated that our
calculations of potential operating and support costs and needed reductions
were unclear. We modified our report to clarify these calculations.

DOD partially agreed with our recommendation to establish an operating and
support cost requirement for both developmental and fielded systems and to
periodically assess progress in meeting those requirements. As for fielded
systems, DOD stated that it is premature to establish such a requirement
because the ability to track total operating and support costs is still
evolving. While we agree that the Air Force's ability to identify and track
operating and support costs is still evolving, we believe improvements to
the Air Force Total Ownership Cost system have progressed to the point that
the system can be used effectively to track operating and support costs.
This system, for example, is being used to track the operating costs of Air
Force pilot programs, including the F-16 and B-1B, two of its largest and
most costly. As DOD noted in its comments, the Air Force and other military
services are already reporting operating and support costs of pilot programs
and their progress toward meeting DOD's cost reduction goals. Accordingly,
we believe DOD can implement our recommendation for the other fielded
systems as well.

For developmental systems, DOD only noted that the operational requirements
documents, selected acquisition reports, and pilot program baselines
establish cost goals or report costs that, in some cases, may include total
ownership costs. None of these documents, however, establishes a specific
operating and support cost requirement that would ensure full consideration
of these costs along with other program priorities or demand trade-offs
between these requirements. We believe such trade-offs are essential to
lowering the Department's operating and support costs. We also believe such
requirements should be consistently established and periodically assessed
for all major developmental programs.

DOD did not agree with our matter for congressional consideration and noted
that the Department already addresses life-cycle costs, which are similar to
total ownership costs, in a variety of documents and does not wish to have a
separate reporting system imposed on it. As noted in our report, we do not
believe the Department currently provides sufficient emphasis on operating
and support costs. In addition, existing requirement documents cited by the
Department do not include a requirement for operating and support costs, nor
do these documents report on these costs in the same way. We believe an
annual reporting requirement would provide a stronger emphasis on operating
and support costs and a more consistent reporting mechanism.

We have provided additional clarifications in our report to address other
technical comments included in DOD's letter. Appendix II contains the full
text of DOD's comments.

We are sending copies of this report to the Honorable William S. Cohen,
Secretary of Defense; the Honorable F. Whitten Peters, Secretary of the Air
Force; the Honorable Jacob J. Lew, Director, Office of Management and
Budget; and other interested congressional committees. We will also make
copies available to others upon request.

If you or your staff have any questions concerning this report, please call
me on (202) 512-4841. Key contributors to this report are listed in
appendix III.

James Wiggins
Associate Director
Defense Acquisitions Issues

Scope and Methodology

We reviewed the Air Force's Total Ownership Cost assessment methodology and
discussed its use with aircraft program office officials. We also assembled
and analyzed data on fielded weapon systems from the Air Force's Total
Ownership Cost information system. In addition, we discussed operating and
support cost data with the programs reviewed in this report.

To determine how the Air Force identifies and resolves operating and support
cost issues for fielded aircraft, we visited and obtained information from
Air Combat Command, Langley Air Force Base, Virginia, and Air Mobility
Command, Scott Air Force Base, Illinois. We obtained specific information
from the B-1B, C-17, F-16, and F-117A program offices at Wright-Patterson
Air Force Base, Ohio. We discussed F-117A support at the 49th Fighter Wing,
Holloman Air Force Base, New Mexico, and B-1B support at the Oklahoma City
Air Logistics Center, Oklahoma City, Oklahoma, and the Warner Robins Air
Logistics Center, Warner Robins, Georgia. We obtained and analyzed
information on the Air Force Reduction of Total Ownership Cost program from
Air Force Headquarters, Washington, D.C.

To determine how the Air Force is minimizing operating and support costs
during the design and development phase of new aircraft, we obtained and
analyzed information from the Joint Strike Fighter program office at Crystal
City, Virginia. We also obtained information from the F-22 System Program
Office, the Joint Primary Aircraft Trainer System Program Office, the Global
Hawk Program Office, and the C-5 Development Office at Wright-Patterson Air
Force Base, Ohio. We reviewed Department of Defense and Air Force
acquisition guidance and discussed the guidance, including cost as an
independent variable acquisition reform effort, with officials from the
Office of the Secretary of Defense, Program Analysis and Evaluation; the
Defense Systems Management College; and the Air Force acquisition reform
office.

We conducted our review from February 1999 through June 2000 in accordance
with generally accepted government auditing standards

Comments From the Department of Defense

GAO Contacts and Acknowledgments

James F. Wiggins (202) 512-4343
William Graveline (256) 650-1414

In addition to those named above, Dave Best, Matt Mongin, and Jerry Wood
made key contributions to this report.

(707384)

Table 1: Comparison of Projected Aircraft Operating and Support
Costs and DOD's Goals 11

Table 2: Annual Operating and Support Costs of Predecessor
Aircraft Compared With Those Estimated for New Systems 16

Table 3: Comparison of F-15 and Estimated F-22 Operating and
Support Costs 17

Figure 1: Nominal Life-Cycle Cost of Typical 1980 DOD Acquisition Program
With a 30-Year Service Life 6

Figure 2: Major Components of Air Force Aircraft Operating and
Support Costs (constant year dollars in billions) 8

Figure 3: Air Force Aircraft Operating and Support Costs
(constant year dollars in billions) 10

Figure 4: Aircraft Operating and Support Costs, Out-Year Cost
Trends, and DOD Goals (constant year dollars in billions) 14
  

1. In addition to operating and support, life-cycle costs include those for
development, procurement, and disposal.

2. All operating and support costs are presented in constant year 2000
dollars.

3. Life-cycle costs are the total costs of acquiring and owning a weapon
system over its full life, including development, procurement, operation,
support, and disposal.

4. The percent of reductions in personnel that operate and maintain aircraft
may differ from total Air Force military personnel reductions.

5. As of January 2000.

6. Section 912c Report: Requirements and Acquisition (June 1999).
*** End of document. ***