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Aircraft Acquisition: Affordability of DOD's Investment Strategy (Letter Report, 09/08/97, GAO/NSIAD-97-88).

GAO reviewed the Department of Defense's (DOD) aircraft acquisition
investment strategy, focusing on: (1) DOD's and the Congressional Budget
Office's estimates of the annual funding needed for aircraft programs,
as a percentage of the overall DOD budget, and a comparison of that
percentage to a long-term historical average percentage of the defense
budget; (2) the potential long-term availability of funding for DOD's
planned aircraft procurements; and (3) DOD's traditional approach to
resolving funding shortfalls.

GAO noted that: (1) to meet its future aircraft inventory and
modernization needs, DOD's current aircraft investment strategy involves
the purchase or significant modification of at least 8,499 aircraft in
17 aircraft programs, at a total procurement cost of $334.8 billion
(fiscal year 1997 dollars) through their planned completions; (2) DOD
has maintained that its investment plans for aircraft modernization are
affordable within expected future defense budgets; (3) DOD had stated
earlier that sufficient funds would be available for its aircraft
programs based on its assumptions that: (a) overall defense funding
would begin to increase in real terms after fiscal year (FY) 2002; and
(b) large savings would be generated from initiatives to downsize
defense infrastructure and reform the acquisition process; (4) DOD's
aircraft investment strategy may be unrealistic in view of current and
projected budget constraints; (5) recent statements by DOD officials, as
well as congressional projections, suggest that overall defense funding
will be stable, at best, for the foreseeable future; (6) DOD's planned
funding for the 17 aircraft programs in all but one year between FY 2000
and 2015 exceeds the long-term historical average percentage of the
budget devoted to aircraft purchases and, for several of those years,
approaches the percentages of the defense budget reached during the peak
Cold War spending era of the early-to-mid-1980s; (7) the amount and
availability of savings from infrastructure reductions and acquisition
reform, two main claimed sources for increasing procurement funding, are
not clearly evident today; (8) GAO's recent reviews of these initiatives
indicate there are unlikely to be sufficient savings available to offset
projected procurement increases; (9) to deal with a potential imbalance
between procurement funding requirements and the available resources,
DOD may need to: (a) reduce planned aircraft funding and procurement
rates; (b) reduce funding for other procurement programs; (c) implement
changes in force structure, operations, or other areas; or (d) increase
total defense funding; (10) DOD has historically made long-term
commitments to acquire weapon systems based on optimistic procurement
profiles and then significantly altered those profiles because of
insufficient funding; and (11) to avoid or minimize affordability
problems, DOD needs to bring its aircraft investment strategy into line
with more realistic, long-term projections of overall defense funding,
as well as the amount of procurement funding expected to be available
for aircraft purchases.

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

 REPORTNUM:  NSIAD-97-88
     TITLE:  Aircraft Acquisition: Affordability of DOD's Investment 
             Strategy
      DATE:  09/08/97
   SUBJECT:  Future budget projections
             Defense budgets
             Defense cost control
             Fighter aircraft
             Military procurement
             Procurement appropriations
             Advanced weapons systems
             Cost analysis
             Air warfare
IDENTIFIER:  F/A-18E/F Aircraft
             F-22 Aircraft
             Joint Strike Fighter
             AV-8B Aircraft
             Longbow Apache Helicopter
             KC-135 Aircraft
             C-5A Aircraft
             F-15E Aircraft
             F-117 Aircraft
             EA-6B Aircraft
             S-3B Aircraft
             DOD Quadrennial Defense Review
             Prowler Aircraft
             V-22 Aircraft
             
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Cover
================================================================ COVER


Report to Congressional Requesters

September 1997

AIRCRAFT ACQUISITION -
AFFORDABILITY OF DOD'S INVESTMENT
STRATEGY

GAO/NSIAD-97-88

Defense Aircraft Investments

(707240)


Abbreviations
=============================================================== ABBREV

  CBO - Congressional Budget Office
  DOD - Department of Defense
  FYDP - future years defense plan
  JSF - Joint Strike Fighter

Letter
=============================================================== LETTER


B-272636

September 8, 1997

The Honorable Duncan Hunter
Chairman, Subcommittee on Military Procurement
Committee on National Security
House of Representatives

The Honorable Curt Weldon
Chairman, Subcommittee on Military Research and Development
Committee on National Security
House of Representatives

The affordability of the Department of Defense's (DOD) aircraft
modernization programs has been the subject of much recent debate and
was the primary subject of hearings held by your Committee in June
1996 and March 1997.  At those hearings, we testified that DOD's
planned investments in aircraft were not achievable within likely
future budgets and appeared to be inconsistent with the existing
security environment.\1 The Congressional Budget Office (CBO)
expressed similar concerns.  However, DOD continues to believe that
its aircraft investment strategy will be affordable.  Since the March
1997 hearing, we have updated our analysis of DOD's aircraft
investment strategy to reflect the December 1996 Selected Acquisition
Reports.  As you subsequently requested, we are issuing this report
to assist you in your work on the fiscal year 1998 defense
authorization bill and continuing review of the Quadrennial Defense
Review. 

The Congress will be faced with a number of critical decisions on
DOD's aircraft investment strategy as the Nation proceeds in an
environment of constrained budgets for the foreseeable future.  The
purpose of this report is to inform the Congress about the long-term
implications and affordability of DOD's aircraft strategy.  To gain a
broad understanding of the affordability of DOD's aircraft investment
strategy, we evaluated (1) DOD's and CBO's estimates of the annual
funding needed for aircraft programs, as a percentage of the overall
DOD budget, and compared that percentage to a long-term historical
average percentage of the defense budget; (2) the potential long-term
availability of funding for DOD's planned aircraft procurements; and
(3) DOD's traditional approach to resolving funding shortfalls. 

The National Defense Authorization Act for Fiscal Year 1997 required
DOD to conduct a Quadrennial Defense Review.  As part of the review,
DOD assessed a wide range of issues, including the defense strategy
of the United States and the force structure required.  As a result,
DOD may reduce the quantities procured of some weapons programs.  The
details of how DOD plans to implement the recommendations of the
Quadrennial Defense Review will not be available until the fiscal
year 1999 budget is submitted to the Congress.  Our analysis,
therefore, does not take into account the potential effect of
implementing the recommendations of the Quadrennial Defense Review. 


--------------------
\1 Combat Air Power:  Joint Mission Assessments Needed Before Making
Program and Budget Decisions (GAO/T-NSIAD-96-196, June 27, 1996) and
Defense Aircraft Investments:  Major Program Commitments Based on
Optimistic Budget Projections (GAO/T-NSIAD-97-103, Mar.  5, 1997). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

To meet its future aircraft inventory and modernization needs, DOD's
current aircraft investment strategy involves the purchase or
significant modification of at least 8,499 aircraft in 17 aircraft
programs at a total procurement\2 cost of $334.8 billion (fiscal year
1997 dollars) through their planned completions.  DOD has maintained
that its investment plans for aircraft modernization are affordable
within expected future defense budgets.  DOD had stated earlier that
sufficient funds would be available for its aircraft programs based
on its assumptions that (1) overall defense funding would begin to
increase in real terms after fiscal year 2002 and (2) large savings
would be generated from initiatives to downsize defense
infrastructure and reform the acquisition process. 

DOD's aircraft investment strategy may be unrealistic in view of
current and projected budget constraints.  Recent statements by DOD
officials, as well as congressional projections, suggest that overall
defense funding will be stable, at best, for the foreseeable future. 
The long-term impact of this change on DOD's aircraft program is not
yet clear.  Moreover, DOD's planned funding for the 17 aircraft
programs in all but 1 year, between fiscal year 2000 and 2015,
exceeds the long-term historical average percentage of the budget
devoted to aircraft purchases and, for several of those years,
approaches the percentages of the defense budget reached during the
peak Cold War spending era of the early to mid-1980s.  Compounding
these funding difficulties is the fact that these projections are
very conservative.  They do not allow for real program cost growth,
which historically has averaged at least 20 percent, nor do they
allow for the procurement of additional systems, although DOD is
considering replacing KC-135, C-5A, F-15E, F-117, EA-6B, and S-3B
aircraft. 

Further, the amount and availability of savings from infrastructure
reductions and acquisition reform--two main claimed sources for
increasing procurement funding--are not clearly evident today.  Our
recent reviews\3 of these initiatives indicate there are unlikely to
be sufficient savings available to offset projected procurement
increases.  If the additional funding and the projected savings do
not materialize as planned, DOD will face a significant imbalance
between the aircraft programs' procurement funding requirements and
the resources available for those purposes.  To deal with such an
imbalance, DOD may need to (1) reduce planned aircraft funding and
procurement rates; (2) reduce funding for other procurement programs;
(3) implement changes in force structure, operations, or other areas;
or (4) increase total defense funding. 

DOD's aircraft investment strategy is a "business-as-usual"
approach--adding billions of dollars to defense acquisition costs and
delaying delivery of weapon systems to the operational forces.  DOD
has historically made long-term commitments to acquire weapon systems
based on optimistic procurement profiles and then significantly
altered those profiles because of insufficient funding.  Our recent
report\4 on weapon system production rates showed that DOD's weapon
system acquisition strategies were often optimistic and rarely
achieved.  As a result, a significant number of weapon systems were
not procured at planned rates, leading to schedule stretchouts and
billions of dollars of increased program costs.  In other words, DOD
often buys less than expected at a much higher cost than expected. 

To avoid or minimize affordability problems, DOD needs to bring its
aircraft investment strategy into line with more realistic, long-term
projections of overall defense funding, as well as the amount of
procurement funding expected to be available for aircraft purchases. 
Rather than continue its practice of starting aircraft procurement
programs that cannot be executed as planned because of funding
limitations, DOD needs to realistically project the long-term
availability of procurement funding and then establish and adhere to
an aircraft investment strategy that is militarily justified and can
be executed within that amount.  Bringing stability and realism to
DOD's acquisition plans is crucial but 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/or terminating some programs. 


--------------------
\2 This report focuses on the procurement costs, in constant fiscal
year 1997 dollars, that are involved in the purchase of new or
significantly modified aircraft.  It does not address development or
operation and maintenance costs or the procurement costs of other
aircraft modifications or spare parts. 

\3 Defense Infrastructure:  Budget Estimates for 1996-2001 Offer
Little Savings for Modernization (GAO/NSIAD-96-131, Apr.  4, 1996)
and Defense Aircraft Investments:  Major Program Commitments Based on
Optimistic Budget Projections (GAO/T-NSIAD-97-103, Mar.  5, 1997). 

\4 Weapons Acquisition:  Better Use of Limited DOD Acquisition
Funding Would Reduce Costs (GAO/NSIAD-97-23, Feb.  13, 1997). 


   BACKGROUND
------------------------------------------------------------ Letter :2

Most of the funding in DOD's fiscal year 1997 aircraft investment
strategy is for the procurement of new aircraft such as the
F/A-18E/F, F-22, and Joint Strike Fighter (JSF), while some is for
the retrofit or remanufacture of existing aircraft, such as the AV-8B
and the Longbow Apache.  Table 1 describes the 17 aircraft programs
and their estimated procurement funding requirements and appendix I
provides details on these programs.\5



                                Table 1
                
                 DOD's Aircraft Procurement Plans (1997
                              and beyond)

                                                             Estimated
                                                    Quanti  procuremen
Aircraft                  Mission/procurement type      ty   t funding
========================  ------------------------  ------  ----------
1. Joint Strike Fighter   Strike fighter/new         2,978      $144.8
2. F/A-18E/F              Multimission tactical/     1,000        56.4
                           new
3. F-22                   Air superiority fighter/     438        37.7
                           new
4. V-22                   Vertical assault/new         523        28.4
5. Comanche               Reconnaissance and         1,292        25.2
                           attack helicopter/new
6. C-17                   Airlift and cargo/new         80        17.6
7. Longbow Apache         Attack helicopter/           734         5.6
                           modification
8. SH-60R                 Antisubmarine and            184         3.8
                           antisurface warfare
                           helicopter/upgrade
9. Joint Surveillance     Surveillance and              11         3.1
 Target Attack Radar       targeting/new
 System
10. Joint Primary         Primary trainer/new          702         2.5
 Aircraft Training
 System
11. H-1                   Attack and utility           280         2.3
                           helicopter/upgrade
12. E-2C Hawkeye          Combat information/new        29         2.2
13. T-45 Training System  Strike pilot trainer/         91         2.1
                           new
14. AV-8B                 Light attack/                 56         1.6
                           remanufacture
15. UH-60L Black Hawk     Air assault/cavalry/          64         0.7
                           medical evacuation
                           helicopter/
                           modification
16. C-130J                Airlift and cargo/new          6         0.4
17. E-3 AWACS \a          Airborne warning and          31         0.4
                           control/modification
======================================================================
Total                                                8,499      $334.8
----------------------------------------------------------------------
\a Airborne Warning and Control System. 

Source:  Our analysis of (1) DOD's program cost estimates, except the
JSF program and (2) CBO's JSF cost estimates based on DOD's unit cost
goals and unadjusted for cost growth. 

DOD is pursuing these aircraft programs at a time when the federal
government is likely to be faced with significant budgetary pressure
for the foreseeable future.  This pressure comes from efforts to
balance the budget, coupled with funding demands for such programs as
Social Security, Medicare, and Medicaid.  Consequently, there is
likely to be limitations on all discretionary spending, including
defense spending, for the long term. 

This report addresses the availability of funding to support DOD's
aircraft investment strategy as planned prior to the Quadrennial
Defense Review, but does not address specific aircraft requirements. 
Our previous reports have questioned the need for and timing of a
number of DOD's aircraft procurements.  (A listing of prior reports
is provided at the end of this report.)


--------------------
\5 Funding estimates are the total procurement funding required for
the programs from fiscal year 1997 through production completion. 
The estimates do not include any development or operation and
maintenance costs. 


   FUNDING NEEDED FOR AIRCRAFT
   PROCUREMENT PROGRAMS WILL
   EXCEED HISTORICAL NORMS
------------------------------------------------------------ Letter :3

DOD asserts that its aircraft modernization programs are affordable
as planned.  On June 27, 1996, DOD officials testified before House
Subcommittees\6 that its overall aircraft investment plans were
within historical norms and affordable within other service
priorities.  The officials further explained that the historical
norms referred to were based on the aircraft funding experience of
the early 1980s. 

Our review indicated that using the early to mid-1980s, the peak Cold
War defense spending years, as a historical norm for future aircraft
investments is not realistic in today's budgetary and force structure
environment.  As shown in figure 1, DOD's overall appropriations,
expressed in fiscal year 1997 dollars, have decreased significantly
from their high point in fiscal year 1985, and the amounts
appropriated in recent years are at, or near, the lowest point over
the past 24 years. 

   Figure 1:  Overall DOD Budget
   and Funding for Aircraft
   Purchases (as a percentage of
   the overall DOD budget)

   (See figure in printed
   edition.)

Source:  Our analysis of DOD and CBO data. 

As shown in figure 1, our review of aircraft procurement funding data
from fiscal years 1973 through 1996, showed that funding for DOD's
aircraft purchases as a percentage of DOD's overall budget fluctuated
in relation to the changes in DOD's overall budget.  Funding for
aircraft purchases increased significantly as DOD's overall funding
increased in the early 1980s and decreased sharply as the defense
budget decreased in the late 1980s and early 1990s.  In contrast,
DOD's planned aircraft investment strategy does not follow this
pattern and calls for significantly increased funding for aircraft
purchases during a period when DOD's overall funding is expected to
remain stable in real terms. 

   Figure 2:  Funding History for
   DOD's Aircraft Purchases as a
   Percentage of DOD's Overall
   Budget

   (See figure in printed
   edition.)

Source:  Our analysis of DOD data. 

Funding for DOD's aircraft purchases was at its highest point, both
in dollar terms and as a percentage of the overall DOD budget, during
the early to mid-1980s.  Figure 2 shows the 24-year funding history
for DOD's aircraft purchases from fiscal years 1973 through 1996. 
During that period, DOD spending on aircraft purchases fluctuated
somewhat but averaged about 4.8 percent of the overall DOD budget. 
From fiscal years 1982 through 1986, DOD used from 6.0 percent to 7.7
percent of its overall annual funding on aircraft purchases.  In
contrast, since fiscal year 1973, the next highest level of annual
aircraft funding was 5.5 percent in fiscal year 1989 and, in 12 other
years, the funding was less than 4.5 percent of the overall DOD
funding.  Therefore, a long-term average would be more appropriate
than early 1980's historical norms as a benchmark for an analysis of
funding patterns, and its use would even out the high aircraft
procurement funding of the early 1980s and the lower funding of the
post-Vietnam and post-Cold War eras.  However, such a benchmark
should not be used as a threshold for spending on aircraft purchases
because it may not reflect the changed nature of the defense
requirements and U.S.  strategy that occurred with the end of the
Cold War. 

If DOD's aircraft investment strategy is implemented as planned and
the defense budget stabilizes at DOD's currently projected fiscal
year 2003 level (about $247 billion in constant fiscal year 1997
dollars), DOD's projected funding for aircraft purchases will exceed
the historical average percentage of the defense budget for aircraft
purchases in all but 1 year between fiscal year 2000 and 2015.  For
several years, it will approach the highest historical percentages of
the defense budget for aircraft purchases.  Those high percentages
were attained during the peak Cold War spending of the early to
mid-1980s. 

   Figure 3:  Historical Funding
   and Projected Funding
   Requirements for Aircraft
   Purchases as a Percentage of
   DOD's Overall Budget

   (See figure in printed
   edition.)

Source:  Our analysis of DOD and CBO data. 

In fiscal year 1996, DOD spent $6.8 billion, or 2.6 percent of its
overall budget, on aircraft purchases.  To implement its aircraft
investment strategy, DOD expects to increase its annual spending on
aircraft purchases significantly from current levels and to sustain
those higher levels for the indefinite future.  For example, as shown
in figure 4, DOD's annual spending on aircraft purchases is projected
to increase about 94 percent from the fiscal year 1996 level to $13.2
billion by fiscal year 2002.  Also, for 15 of the next 20 fiscal
years beginning in fiscal year 1997, DOD's projected spending for
aircraft purchases is expected to equal or exceed $11.9 billion
annually.\7 For 3 years during this period, DOD's projected annual
spending on aircraft purchases will exceed $16 billion (6.5 percent
of the budget) and for 1 of those years, it will exceed $18 billion
(7.3 percent of the budget). 

   Figure 4:  Projected Funding
   Requirements for DOD's 17
   Aircraft Programs (fiscal year
   1997 dollars)

   (See figure in printed
   edition.)

Note:  Funding for aircraft purchases seems to drop off after fiscal
year 2010 because DOD has not yet approved additional programs for
procurement.  Several aircraft requirements are under consideration
but have not yet been approved for procurement. 

Source:Our analysis of (1) DOD's program cost estimates, except the
JSF program and (2) CBO's JSF cost estimates based on DOD's unit cost
goals and unadjusted for cost growth. 

In the current security and force structure environment, the need for
that level of additional funding has not been made clear by DOD. 
Furthermore, other than stating that overall procurement funding in
general will be increased, DOD has not identified specific reductions
elsewhere within the procurement account or within the other major
accounts to offset the significant proposed increases in aircraft
procurement funding.  Because the overall level of defense funding is
expected to be stable, at best, any proposed increase in spending for
a particular account or for a project will have to be offset
elsewhere within the budget. 

Historically, acquisition programs almost always cost more than
originally projected.  Figure 4 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 aircraft
programs.  For at least one current program, it appears the
historical patterns will be repeated.  In January 1997, DOD reported
that the procurement cost of the F-22 was expected to increase by
over 20 percent and devised significant initiatives to offset that
growth.  We reported about this potential cost growth in June 1997
and concluded that the initiatives to offset the cost growth were
optimistic.\8

In addition, the projected funding requirements shown in figures 3
and 4 may be understated because they do not include any projected
funding for other aircraft programs that have not been approved for
procurement.  For example, potential requirements exist to replace
the KC-135, C-5A, F-15E, F-117, EA-6B, S-3B, and other aircraft. 
Adding any of these requirements to DOD's aircraft investment
strategy would further complicate the funding problems. 


--------------------
\6 Joint Statement of the Under Secretary of Defense for Acquisition
and Technology and the Vice Chairman of the Joint Chiefs of Staff
before the Subcommittee on Military Research and Development and the
Subcommittee on Procurement of the House Committee on National
Security--June 27, 1996. 

\7 Applying the historical average spending level for aircraft--4.8
percent--to DOD's fiscal year 2003 overall budget of $247 billion
equates to about $11.9 billion. 

\8 Tactical Aircraft:  Restructuring of the Air Force F-22 Fighter
Program (GAO/NSIAD-97-156, June 4, 1997). 


   FUNDING FOR INCREASED
   PROCUREMENT IS UNCERTAIN
------------------------------------------------------------ Letter :4

The amount of funding likely to be available for national defense\9
in the near term has been projected by both the President and the
Congress.  Both have essentially agreed that the total national
defense budget will not increase measurably in real terms through
fiscal year 2002. 

While the Congress has not expressed its sentiments regarding the
defense budget beyond fiscal year 2002, last year DOD's long-term
planning for its aircraft investment strategy assumed a real annual
growth factor of 1 percent.  Accordingly, procurement funding to
accomplish the aircraft modernization programs was partially
dependent on some level of real growth in the defense budget. 
However, because of commitments to balance the federal budget by both
the President and the Congress, it appears likely that the defense
budget will stabilize at current levels or decrease further, rather
than increase as DOD's aircraft investment plans have assumed. 
According to DOD officials, the long-term planning now assumes no
real growth in the defense budget.  The impact of this change on
DOD's aircraft programs is not yet clear. 


--------------------
\9 The national defense budget includes the military activities of
DOD, the atomic energy defense activities of the Department of
Energy, and the defense-related activities of other agencies. 


      UNCERTAIN SAVINGS AVAILABLE
      FOR ADDITIONAL PROCUREMENT
---------------------------------------------------------- Letter :4.1

DOD plans to increase overall funding for procurement programs over
the next few years, and the aircraft programs are expected to be a
prime beneficiary of that increased funding.  DOD expects to increase
procurement spending to a level of approximately $61.2 billion per
year, from the current level of about $44.3 billion per year, while
keeping overall defense spending at current levels, at least through
fiscal year 2002.  Of the $39.0 billion cumulative increase in
procurement spending that is expected through fiscal year 2002, about
$17.7 billion is projected to be used for DOD's aircraft investment
strategy. 

To increase procurement funding while keeping overall defense
spending at current levels, DOD anticipates major savings will be
generated from infrastructure reductions and acquisition reform
initiatives, as well as increased purchasing power through
significantly lower inflation projections.  We found, however, that
there are unlikely to be sufficient savings available to offset DOD's
projected procurement increases. 

DOD's planned procurement funding increase was partially predicated
on base closure savings of $17.8 billion (then-year dollars) through
fiscal
year 2001, a component of infrastructure, and shifting this money to
pay for additional procurement.  In 1996, however, we found no
significant net infrastructure savings between fiscal year 1996 and
2001 because the proportion of infrastructure in the DOD budgets was
projected to remain relatively constant through fiscal year 2001. 
Therefore, through fiscal
year 2001, DOD will have less funds available than expected for
procurement from its infrastructure reform initiatives. 

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.  Our
work shows that the savings from acquisition reform have been used by
the very programs generating the savings to fund other needs.  This
raises concern as to whether the latest acquisition reform
initiatives will provide savings to realize modernization objectives
for other weapons systems within the time frames envisioned.  Without
the level of savings expected from infrastructure reductions and
acquisition reform, DOD will face difficult choices in funding its
modernization plans. 

Finally, based on changes in future inflation factors, DOD calculated
in its 1997 future years defense plan (FYDP) that its purchases of
goods and services from fiscal years 1997 through 2002 would cost
about $34.7 billion (then-year dollars) less than it had planned in
its 1996 FYDP.\10 The "inflation dividend" allowed DOD to include
about $19.5 billion in additional programs in fiscal years 1997-2001
and permitted the executive branch to reduce DOD's projected funding
by $15.2 billion over the same time period.  However, using different
inflation estimates, CBO calculated the cost reduction at only $10.3
billion, or $24.4 billion less than DOD's estimate.  Because DOD's
projected funding was reduced by $15.2 billion, CBO's estimate
indicates that DOD's real purchasing power, rather than increasing,
may be reduced by about $5 billion.  If true, then DOD may have to
make adjustments in its programs. 

We recently raised an issue on the Air Force's F-22 air superiority
fighter that further complicates the situation.\11 In estimating the
cost to produce the F-22, the Air Force used an inflation rate of
about 2.2 percent per year for all years after 1996.  However, in
agreeing to restructure the F-22 program to address the recently
acknowledged $15 billion (then-year dollars) program cost increase,
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 needed and further jeopardize DOD's ability
to fund its modernization plans. 


--------------------
\10 Future Years Defense Program:  Lower Inflation Outlook Was Most
Significant Change From 1996 to 1997 Program (GAO/NSIAD-97-36, Dec. 
12, 1996). 

\11 F-22 Restructuring (GAO/NSIAD-97-100R, Feb.  28, 1997). 


   PROGRAM INSTABILITY CAUSES
   SCHEDULE STRETCHOUTS AND HIGHER
   UNIT COSTS
------------------------------------------------------------ Letter :5

The basis for DOD's projections of total annual procurement funding
is the cumulative annual funding needs of multiple weapons programs,
each of which has typically been based on optimistic assumptions
about procurement quantities and rates.  Accordingly, DOD's
projections of total annual procurement funding have been
consistently optimistic.  DOD's traditional approach to managing
affordability problems is to reduce procurement quantities and extend
production schedules without eliminating programs.  Such actions
normally result in significantly increased system procurement costs
and delayed deliveries to operational units. 

We recently reported that the costs for 17 of 22 full-rate production
systems we reviewed increased by $10 billion (fiscal year 1996
dollars) beyond original estimates through fiscal year 1996 due to
stretching out the completion of the weapons' production.\12 We found
that DOD had inappropriately placed a high priority on buying large
numbers of untested weapons during low-rate initial production to
ensure commitment to new programs and thus had to cut by more than
half its planned full-rate production for many weapons that had
already been tested.  We also found that actual production rates
were, on average, less than half of originally planned rates. 
Primarily because of funding limitations, DOD has reduced the annual
full-rate production for 17 of the 22 proven weapons reviewed,
stretching out the completion of the weapons' production an average
of
8 years (or 170 percent) longer than planned.  Our work showed that
DOD develops weapon system acquisition strategies that are based on
optimistic projections of funding that are rarely achieved.  As a
result, a significant number of DOD's weapon systems are not being
procured at planned production rates, leading to program stretchouts
and billions of dollars of increased costs.  If DOD bought 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. 

If DOD's assumptions regarding future spending for its aircraft
programs do not materialize, DOD may need to (1) reduce funding for
some or all of the aircraft programs; (2) reduce funding for other
procurement programs; (3) implement changes in infrastructure,
operations, or other areas; or (4) increase overall defense funding. 
In other words, the likelihood of program stretchouts and
significantly increased costs is very real. 


--------------------
\12 Weapons Acquisition:  Better Use of Limited DOD Acquisition
Funding Would Reduce Costs (GAO/NSIAD-97-23, Feb.  13, 1997). 


   CONCLUSIONS AND RECOMMENDATIONS
------------------------------------------------------------ Letter :6

As the Nation proceeds into the 21st century faced with the prospect
of a constrained budget, we believe DOD needs to take action now to
address looming affordability problems with its aircraft investment
strategy.  Action needs to be taken now because, if major commitments
are made to the initial procurement of all the planned aircraft
programs (such as the F/A-18E/F, F-22, JSF, and the V-22) over the
next several years, a significant imbalance is likely to result
between funding requirements and available funding.  Such imbalances
have historically led to program stretchouts, higher unit costs, and
delayed deliveries to operational units.  Further, this imbalance may
be long-term in nature, restricting DOD's ability to respond to other
funding requirements. 

DOD needs to reorient its aircraft investment strategy to recognize
the reality of a constrained overall defense budget for the
foreseeable future.  Accordingly, instead of continuing to start
aircraft procurement programs that are based on optimistic
assumptions about available funds, DOD should determine how much
procurement funding can realistically be expected and structure its
aircraft investment strategy within those levels.  DOD also needs to
provide more concrete and lasting assurance that its aircraft
procurement programs are not only militarily justified in the current
security environment but clearly affordable as planned throughout
their entire 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 involved may agree that there are too many
programs chasing too few dollars, and could probably agree on the
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 weapon system acquisition process. 

Therefore, we recommend that the Secretary of Defense, in close
consultation with the defense and budget committees of the Congress,
define realistic, long-term projections of overall defense funding
and, within those amounts, the portion of the annual procurement
funding that can be expected to be made available to purchase new or
significantly improved aircraft.  In developing the projections, the
Secretary should consider whether the historical average percentage
of the total budget for aircraft purchases is appropriate in today's
security and budgetary environment. 

We also recommend that the Secretary reassess and report to the
Congress on the overall affordability of DOD's aircraft investment
strategy in light of the funding that is expected to be available. 
The Secretary should clearly identify the amount of funding required
by source, including (1) any projected savings from infrastructure
and acquisition reform initiatives and (2) any reductions elsewhere
within the procurement account or within the other major accounts. 

We further recommend that the Secretary fully consider the
availability of long-term funding for any aircraft program before
approving the procurement planned for that system. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In commenting on a draft of this report, DOD partially concurred with
our recommendations and stated that it is fully aware of the
investment challenge highlighted in this report.  DOD stated that its
recent Quadrennial Defense Review addressed the affordability of the
modernization programs that it believes are needed to meet the
requirements of the defense strategy.  The Quadrennial Defense Review
recommended reductions in aircraft procurement plans.  However, even
to modernize the slightly smaller force that will result from the
Quadrennial Defense Review, DOD believes that procurement funding
must also rise to about $60 billion annually by fiscal year 2001,
from about $44 billion in fiscal year 1997.  Recognizing that overall
defense budgets are not likely to increase substantially for the
foreseeable future, DOD indicated that the additional procurement
funds would be created by continuing efforts to reduce the costs of
defense infrastructure and to fundamentally reengineer its business
practices. 

Our recent reviews of DOD's previous initiatives to reduce the costs
of defense infrastructure and reengineer business practices indicate
that the amount and availability of savings from such initiatives may
be substantially less than DOD has estimated.  If the projected
savings do not materialize as planned, or if estimates of the
procurement costs of weapon systems prove to be too optimistic, DOD
will need to rebalance the procurement plans to match the available
resources.  This action would likely result in further program
adjustments and extensions. 

Concerning aircraft procurement projections, we continue to believe
that a clearer understanding of DOD's long-term budgetary
assumptions--including specific, realistic projections of funding
availability and planned aircraft procurement spending--is necessary
to determine the overall affordability of DOD's aircraft investment
strategy.  Without this information, neither DOD nor the Congress
will have reasonable assurances that the long-term affordability of
near-term procurement decisions has been adequately considered. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

We gathered, assembled, and analyzed historical data on the overall
defense budget, the services' budget shares, the procurement budgets,
and the aircraft procurement budgets.  Much of this data was derived
from DOD's historical FYDP databases.  We did not establish the
reliability of this data because the FYDP is the most comprehensive
and continuous source of current and historical defense resource
data.  The FYDP is used extensively for analytical purposes and for
making programming and budgeting decisions at all DOD management
levels.  In addition, we reviewed historical information and
studies--ours, CBO, and others--on program financing and
affordability.  We also gathered, assembled, and analyzed
DOD-generated data on its aircraft programs and supplemented that,
where necessary, with data from CBO.  We reviewed DOD's detailed
positions on the affordability of its aircraft modernization
programs, as presented to the Congress in a June 1996 hearing.  We
followed up with DOD and service officials on key aspects of that
position. 

Our analysis included tactical aircraft, bombers, transports,
helicopters, other aircraft purchases and major aircraft modification
programs.  This approach removes any cyclical effects on the
investment in aircraft by allowing us to view the overall amount
invested, as well as the major subcomponents of that investment.  We
focused on procurement figures and excluded research and development
costs because we could not forecast what development programs DOD
will undertake over the course of the next 20 to 30 years.  We used
DOD's projections for the costs of these aircraft programs (except
for the JSF costs, which are CBO projections based on DOD unit cost
goals) and did not project cost increases, even though cost increases
have occurred in almost all previous aircraft procurement programs. 
All dollar figures are in constant 1997 dollars, unless otherwise
noted. 

The National Defense Authorization Act for Fiscal Year 1997 required
DOD to conduct a Quadrennial Defense Review.  As part of the review,
DOD assessed a wide range of issues, including the defense strategy
of the United States and the force structure required.  As a result,
DOD may reduce the quantities procured of some weapons programs.  The
details of how DOD plans to implement the recommendations of the
Quadrennial Defense Review will not be available until the fiscal
year 1999 budget is submitted to the Congress.  Our analysis,
therefore, does not take into account the potential effect of
implementing the recommendations of the Quadrennial Defense Review. 

We performed our work from March 1996 to July 1997 in accordance with
generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

As agreed with your offices, we plan no further distribution of this
report until 30 days from its issue date unless you publicly announce
its contents earlier.  At that time, we will send copies to other
congressional committees; the Secretaries of Defense, the Army, the
Navy, and the Air Force; the Commandant of the Marine Corps; the
Director, Office of Management and Budget; and other interested
parties.  We will also make copies available to others upon request. 

Please contact me at (202) 512-4841 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix III. 

Louis J.  Rodrigues
Director, Defense Acquisitions Issues


DESCRIPTIONS OF PLANNED AIRCRAFT
ACQUISITIONS
=========================================================== Appendix I

Aircraft                   Description
-------------------------  -----------------------------------------------------
AV-8B                      Marine Corps aircraft. A single-piloted, light-
                           attack, vertical/short take-off and landing aircraft
                           used primarily for responsive close air support. This
                           is a remanufacture program that converts older
                           versions to the most recent production version and
                           provides night fighting capability.

C-17                       Air Force aircraft. A new production aircraft that
                           modernizes the airlift fleet. It will augment the C-
                           5, C-141, and C-130 aircraft; carry outsize cargo
                           into austere airfields; and introduce a direct
                           deployment capability.

Comanche                   Army helicopter. A new production, 24-hour, all-
                           weather, survivable aerial reconnaissance helicopter
                           to replace the AH-1, OH-6, and OH-58A/C helicopters
                           and complement the AH-64 Apache. A little more than
                           one-third of the total production aircraft will be
                           equipped with Longbow capability.

C-130J                     Air Force aircraft. A new production, medium-range,
                           tactical airlift aircraft designed primarily for
                           transport of cargo and personnel within a theater of
                           operations. This model uses latest technology to
                           reduce life-cycle costs and has more modern displays,
                           digital avionics, computerized aircraft functions,
                           fewer crew members, and improved cargo handling and
                           delivery systems.

E-2C Hawkeye               Navy aircraft. A new production, all-weather,
                           carrier-based airborne Combat Information Center
                           providing tactical early warning, surveillance,
                           intercept, search and rescue, communications relay,
                           and strike and air traffic control.

E-3 AWACS Radar System     Air Force aircraft. A major modification to provide
Improvement Program        the Air Combat Command with new and improved
                           capabilities for the AWACS radar. It involves both
                           hardware and software changes to the AWACS.

F-22                       Air Force aircraft. A new production, next-
                           generation stealthy air superiority fighter with
                           first-look, first-kill capability against multiple
                           targets. It will replace the F-15C aircraft in the
                           air superiority role.

F/A-18E/F                  Navy aircraft. A new-production, major model upgrade
                           to the F/A-18C/D multimission tactical aircraft for
                           Navy fighter escort, interdiction, fleet air defense,
                           and close-air support mission requirements. Planned
                           enhancements over the F/A-18C/D include increased
                           range, improved survivability, and improved carrier
                           suitability. It will replace F/A-18C/D models, A-6,
                           and F-14 aircraft.

H-1                        Marine Corps helicopter. An upgrade to the Marine
                           Corps AH-1W attack and UH-1N utility versions of this
                           helicopter to convert both versions from 2-bladed to
                           4-bladed rotor systems and provide the attack version
                           with fully integrated cockpits. The attack version
                           provides close air support, anti-armor, armed escort,
                           armed/visual reconnaissance and fire support
                           coordination under day/night and adverse weather
                           conditions. The utility version provides day/night
                           and adverse weather command and control, combat
                           assault support, and aeromedical evacuation.

Joint STARS                Air Force and Army aircraft. (Joint Surveillance
                           Target Attack Radar System) A new production joint
                           surveillance, battle management and targeting radar
                           system on a modified E-8 aircraft that performs real
                           time detection and tracking of enemy ground targets.

Joint Strike Fighter       Air Force and Navy aircraft. A new production, next-
                           generation, multimission strike fighter. It will
                           replace the Air Force's F-16 and A-10, the Marine
                           Corps' AV-8B and F-18A/C/Ds, and be a "first-day
                           survivable complement" to the Navy's F-18 C/D and E/
                           F aircraft.

JPATS                      Air Force and Navy aircraft. (Joint Primary Aircraft
                           Training System) A new production joint training
                           aircraft and ground based training system, including
                           simulators, that replaces the Air Force T-37B trainer
                           aircraft, Navy T-34C trainer aircraft, and their
                           associated ground systems.

Longbow Apache             Army helicopter. A modification program to develop
                           and provide weapons enhancements to the AH-64 Apache
                           attack helicopter. The Longbow program will provide a
                           fire-and-forget Hellfire missile capability to the
                           AH-64 Apache helicopter that can operate in night,
                           all-weather, and countermeasures environments.

SH-60R                     Navy helicopter. A Block II weapon systems upgrade of
                           the Navy version of the Army Black Hawk to enhance
                           mission areas performance. It is a twin-engine medium
                           lift, utility or assault helicopter performing anti-
                           submarine warfare, search and rescue, anti-ship
                           warfare, cargo lift, and special operations.

T-45 Training System       Navy aircraft. A strike pilot training system to
                           replace the T-2C and TA-4J for strike and E2 and C2
                           pilots. It includes the T-45A aircraft, simulators,
                           and training equipment and materials.

UH-60L Black Hawk          Army helicopter. A new production, twin-engine air
                           assault, air cavalry, and aeromedical evacuation
                           helicopter that transports up to 14 troops and
                           equipment into battle. It continues to replace the
                           UH-1H Iroquois helicopter.

V-22                       Navy, Marine Corps, and Air Force aircraft. A new
                           production, tilt-rotor, vertical take-off, and
                           landing aircraft designed to provide amphibious and
                           vertical assault capability to the Marine Corps and
                           replace or supplement troop carrier and cargo
                           helicopters in the Marines, the Air Force, and the
                           Navy.
--------------------------------------------------------------------------------
Source:  DOD Selected Acquisition Reports. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


GAO COMMENTS

The following are our comments on the Department of Defense's (DOD)
letter dated June 8, 1997. 

1.  Although the Quadrennial Defense Review report recommended that
adjustments be made to the number of aircraft to be procured and the
rates at which they are to be procured, the report projected that
additional procurement funding would be made available through base
closures and other initiatives to reduce defense infrastructure and
reengineer business practices.  The details of these initiatives are
not expected to be available until the fiscal year 1999 budget is
submitted to the Congress.  At this time, the availability of savings
from planned initiatives is not clearly evident. 

2.  The Quadrennial Defense Review does not provide sufficiently
detailed projections to judge the affordability of DOD's new aircraft
procurement plans by comparing the long-term funding expected to be
available with the funding needed to fully implement those plans.  We
continue to believe that this type of long-term projection is needed
by both DOD and the Congress to ensure that DOD's aircraft
procurement programs are clearly affordable as planned through the
span of procurement. 

3.  We continue to believe that the $17 billion increased cost of
procuring F/18-E/F aircraft compared to F/A-18C/Ds is not warranted
by the limited increases in performance that would be obtained.  We
recognize that, while the F/A-18E/F will provide some improvements
over the F/A-18C/D, most notably in range, the F/A-18C/D's current
capabilities are adequate to accomplish its assigned missions.  Our
rebuttals to DOD's specific comment are contained in our report,
Naval Aviation:  F/A-18E/F Will Provide Marginal Operational
Improvement at High Cost (GAO/NSIAD-96-98, June 18, 1996). 

4.  Although procurement rates for F-22s during the planned low-rate
initial production period were to be lowered in accordance with the
Quadrennial Defense Review report, we continue to believe that the
degree of overlap between development and production of the F-22 is
high and that procurement of F-22s should be minimized until the
aircraft demonstrates that it can successfully meet the established
performance requirements during operational testing and evaluation. 
There has also been congressional concern about the cost and progress
of the F-22 program.  The Senate has initiated legislation to require
us to review the F-22 development program annually. 

5.  We clarified the language in the report to more explicitly
recommend that long-term projections of the availability of funds
should be used as a guide to assess the likely availability of funds
to carry out a program at the time of the procurement approval
decision.  The Quadrennial Defense Review recognized that more
procurement dollars were being planned to be spent than were likely
to be available over the long term.  Our intent in making this
recommendation is to recognize the difficulty DOD and the Congress
face and to suggest some solid analysis that would aid in evaluating
the long-term commitments that are inherent in nearer term decisions
to procure weapon systems.  A better understanding of the long-term
budgetary assumptions underlying near-term decisions would clearly
aid both DOD and the Congress in ensuring that needed weapon systems
are affordable in both the near and long term. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

David E.  Cooper, Associate Director
Robert D.  Murphy, Assistant Director
William R.  Graveline, Evaluator-in-Charge
David B.  Best, Senior Evaluator
Charles R.  Climpson, Senior Evaluator





RELATED GAO PRODUCTS
============================================================ Chapter 0

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). 

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). 


*** End of document. ***





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