Miscalculation: The Need For a New US Fighter Export Strategy in the Global Fighter Market - Part I

Image 1: F-16D, Image Credit: Code One Magazine

The United States dominates the global arms industry; weapon sales by US firms comprise 39% of all global arms exports. In comparison, Russia, the world's second largest arms exporter, only constitutes 14% of all global arms exports (Hargreaves, 2013). In recent years, the value of sales relating to combat aircraft has grown relative to other widely exported weapon systems. Between 2005 and 2009, sales of combat aircraft accounted for 27% of global arms sales (Wezeman, 2010). Over the course of the last half century, US aerospace firms have outperformed and outsold their competitors by large margins due to two factors. One, arms sales openly serve as a means to solidify national security and diplomatic ties. This factor inherently works to the benefit of the United States as its synergies with the US' foreign policy strategy of cultivating strategic alliances around the world. Furthermore, due to the superpower status of the United States, many nations have a large incentive to improve national security and diplomatic ties with the United States. For example, in the recent FX-III fighter competition in South Korea, the Eurofighter consortium's bid was widely believed to be irrelevant as the South Korea Government would not seriously consider a non-American firm due to its potentially harmful effects on the South Korean-US relationship (Scanlan, 2013). The second factor that has historically served to the benefit of US firms is US aerospace firms have had a intimate understanding of global fighter market. The global fighter market can be divided into two categories, the low-end fighter aircraft market in which customers buy aircraft between $30 to $50 million dollars and the high-end fighter aircraft market which countries typically buy aircraft upwards of $50 million dollars (Aboulafia, 2013). The judgement of what is considered low and high-end purely reflects pricing and not performance.

The following is a list fighter aircraft deliveries between the years 2005 to 2009 at both the low-end and high-end fighter market. While it is unlikely that this is a comprehensive list of the global fighter market, it remains a suitable sample size to make credible evaluations of the global fighter market. Countries producing aircraft for their own use, such as the United States, were omitted from the list as the primary purpose of the list is to detail the fighter export market. The primary sources for the following data is the Stockholm International Peace Research Institute (SIPRI), Defense Industry Daily, and F-16.net. Please refer to the notes section at the end of the article for more details.

Of the roughly 596 fighter aircraft that were exported between 2005 and 2009, 80% of fighter aircraft were $50 million dollars or less*. Sales of aircraft delivered exceeding a $50 million dollar unit price, are in bold. The data is in agreement with Richard Aboulafia's assessment from the Teal Group:

"the export market follows a different pattern than the producer countries. Only six export customers have ever purchased high end fighters (in the $65-80 million recurring flyway class)"

Over the course of the last three decades, US firms have successfully marketed aircraft to both the high-end and low-end fighter aircraft markets with the F-16 and F-15 (Center for Strategic and International Studies, 2009). After the end of the Cold War, US firms continued to solidify and expand their market share by offering a host of upgrades and co-production agreements. However, in recent years the US has begun to loose its dominant hold on the low-end fighter export market to European firms, particularly to Saab, the producer of the JAS-39 Gripen.

The Emerging Competitor - JAS-39 Gripen 

Image 2: Jas-39 Gripen

Saab aggressively markets the Jas-39 as a practical low cost solution to air-superiority in an aircraft market where high priced designs such as the Eurofighter Typhoon, F-15E, and F-35 have become the norm. The following is from a Saab marketing brochure on the JAS-39 E:

"Cost-effectiveness underpins development and  production as well as purchase price, operating cost and maintenance – in other words, the product’s entire life cycle. A 2012 study published by IHS Jane’s ranked the world’s combat aircraft by operating cost. The study confirmed that the Gripen system is one of the   most cost-effective systems in comparison with relevant alternatives from other countries such as F-35, Eurofighter, Rafale, F-18 and F-16. Gripen’s operating costs are half the size of the F-18’s and only one-third – or less – the size of the Eurofighter and Rafale, both of which are competitors on the export market. Corresponding costs for the F-35 are estimated to be at least five times larger than Gripen’s."

Despite its limited international influence, Sweden has limited defense ties and diplomatic clout when compared to the United States, Saab understands its role in the global fighter market with relation to the second variable and has subsequently specialized in providing aircraft for the low-end fighter market. In certain circumstances, Sweden's status in diplomatic relations grants Saab an advantage as seen in the recent Brazil fighter competition after Edward Snowden's leaks damaged the international reputation of the United States. The low-end fighter market remains a stable niche where Saab is able to find customers: Switzerland, Hungary, Thailand, the Czech Republic, South Africa, and Brazil are all in the process of ordering or operate the Jas-39 aircraft. While the JAS-39 C/D or even the upgraded JAS-39 NG cannot match high-end fighter aircraft in many performance based evaluations, the Gripen's airframe is largely more advanced than the three decade base F-16 airframe and provides enough in terms of avionics to make it competitive with the F-16 and its Russian counterparts. Overall, the Gripen package offers stiff competition to the F-16 and Lockheed Martin cannot afford to underestimate its competitor if it seeks to maintain its portion in the low-end fighter market.

The F-35 

Image 3: F-35A

Lockheed Martin has the unique distinction of producing both the most widely exported fighter aircraft in recent years, the "low-end" F-16 with more than 4,500 aircraft sold, and arguably the most sought fighter aircraft at the "high-end", the  F-35. Lockheed Martin believes the F-35 will succeed the F-16 as the next widely exported American fighter aircraft with an expected 3,100 aircraft ordered over its production cycle (JSF PSFD MOU, 2009). I do not dispute Lockheed's claim on its face value. The following countries have either signed agreements or expressed strong interest in the F-35 program: Denmark, Netherlands, Norway, Israel, Japan, Italy, Turkey, Australia, Canada, Singapore, South Korea and the United Kingdom (Lockheed Martin, 2013). However, these developed nations largely compose the existing high-end fighter market and Lockheed Martin is capitalizing on Boeing's lack of a 5th generation design. Thus, Lockheed Martin is set to take Boeing's historical role of producing the US' main high-end fighter export, the F-15 and its derivative strike eagle. Lockheed Martin has won every fighter competition its entered the F-35 into which speaks to the demand of fifth generation capabilities among traditional high-end fighter market customers.

“...recent market trends signal that the plane that offers the highest capability will win, Aboulafia said.'Look at South Korea. The market has decided that the F-35 wins the countries it is entered in, which means you have to look at the last of the contests where F-35 does not play a role.'” -Andrew Chuter,  AaronMehta,  and Pierre Tran, 2014

Although interest in the F-35 among countries within the high-end fighter market is significant, it is clear that interest in the F-35 among countries that traditionally acquire low-end fighter aircraft is comparatively less mature. From a purely price oriented assessment based on the data above and the cost figures provided by Lockheed Martin, the F-35 is unlikely to be able to fully match the export success of the F-16. Two in  factors will hinder the F-35 success in the low-end fighter market.

The first factor is price. Despite steady cost reductions within the F-35 program, the aircraft is not projected to reach a unit price near of $50 million dollars, even by the most optimistic estimates. By 2019, Lockheed Martin estimates the unit cost of an F-35 will be $85 million dollars in 2019 or $75 million dollars in current 2013 dollars (figures were adjusted for expected inflation by Lockheed Martin). This would make the F-35 cheaper than currently sold F-15E strike eagles or Eurofighter Typhoon Tranche 3A's, which are the two most popular high-end exported fighter aircraft. The Selected Acquisition Report (SAR), provided by the Department of Defense, projects the F-35 flyaway or unit cost will not drop below $70 million dollars even into the 2030s near the projected end of F-35 production. Its worth noting that from a capabilities perspective, the F-35 is worth every penny of the $75 million price for a nation that can afford it as it simply outclasses both the 4th generation F-16 and 4.5 generation JAS-39. However, from a marketing perspective, there are still portions of the global fighter market where its relatively high unit price makes it less competitive even with its substantial capabilities factored in.

The second factor is many nations do not maintain the necessary diplomatic ties with Washington to receive sensitive fifth generation technology. The F-35 was designed from the onset for export, unlike the F-22A which is currently banned for export to keep its advanced features "safe" even from the most stalwart US allies, such as Australia. Even with this in mind, its likely the F-35 will not be able to be sold as broadly as the less technologically mature F-16. Under the 1976 Arms Export Control Act (AECA), technology deemed to be "sensitive" by the discretion of the President is banned for export in select countries. The United States routinely withholds sensitive technology from countries it deems to be not "deserving". For example, if Pakistan expressed an interest in the F-35 to replace its current F-16s, many in the United States would agree that it is not in the national security interest of the United States to supply the F-35 to Pakistan due to allegations that Pakistan allowed Chinese engineers to examine its fleet of F-16s among other ongoing defense issues between the United States and Pakistan. Concerns over sensitive technology transfers largely do not apply to the older F-16 or are less acute when compared to the F-35. For example, the most advanced variant of the F-16 is not operated by the US but by the United Arab Emirates (F-16E/F Block 60).

Image 4: UAE F-16E Block 60

Current F-16 orders from Iraq, Oman, and the United Arab Emirates will keep the F-16 production line open until the third quarter of 2017. After F-16 production shuts down in 2017, the United States will not have a readily available fighter aircraft in the low-end fighter export market for at least another twenty years into the 2030s. As capable as the F-35 is, and despite steady cost reductions in recent years, the F-35 is unlikely to fully fill the gap left by the F-16 in the low-end fighter export market. The advanced avionics incorporated in to the latest models of the F-16 serve as piecemeal and incremental improvements at best and do not provide enough new capabilities to grant the F-16 a competitive edge against the new supermanuverable Jas-39NG and Mig-35 which will also be equipped with AESAs. Historically, US aerospace firms will not mass produce a new fighter aircraft without an endorsement from the US military, which would guarantee some orders, even if demand for a low-end fighter from the US exists elsewhere e.g. the failed F-20 Tigershark.

In order to keep the F-16 production line open past 2017, Lockheed Martin cannot continue to offer only incremental F-16 upgrades such as the F-16V "Viper". The Viper does not make any major changes to the base airframe. The only differences between the new F-16V variant and the older F-16C Block 50/52+ is the F-16V includes an AESA radar, improved cockpit displays, and an improved mission computer architecture (Dorr, 2012). While the improvements to the internal avionics will provide a noticeable enhancement to situational awareness, the base F-16 airframe remains unable to evenly compete with more mature 4.5 generation air frames such as the JAS-39 or Mig-29M2. For example, combat exercises at Red Flag 2012 showed the Gripen was able successfully dogfight F-16s flown by veteran aggressor pilots.

With the F-35 program, Lockheed Martin is poised to secure a large market share of the global high-end fighter export market. However, in order to retain its current position as the leading supplier of the low-end fighter market, more than incremental changes to the base F-16 airframe are required to make the F-16 more competitive against increasingly capable opponents. By aggressively marking a heavily upgraded F-16 in the low-end fighter export market, where the F-35 is comparatively less relevant than the F-16, Lockheed Martin can secure contracts from both markets without serious concern of diminished interest in the F-35 or loosing its position as the largest supplier in the low-end fighter market.

Author's Note: Part II will be released Monday January 13th and it will include a list of upgrade recommendations for the F-16, ways to exploit Saab's weaknesses in the international low-end market, and the limits of this paper's analysis will be discussed. As always, feel free to ask any questions in the comments or message me on the F-16.net forums.

Sources

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Notes 

* Data is from Stockholm International Peace Research Institute (SIPRI), Defense Industry Daily (DID), and F-16.net. Please note that this data does not compose the global amount of aircraft delivered between 2005-2009 but does serve as an adequate sample size to make assessments of the global fighter market. Data provided by SIRPRI indicated combat aircraft, which includes fighter aircraft, thus DID and F-16.net provided clarification as to how many units were delivered that were actually fighter aircraft vs. other types of combat aircraft. Approximately 20% of all fighters sold can be considered high-end fighter aircraft if all 25 F-15E's ordered by Israel were delivered during this period. However, this is not the case. Deliveries of  some F-15E units to Israel occurred prior to 2005 but the author was unable to find an exact delivery schedule of F-15Es to Israel. Thus, the percentage of high-end fighter aircraft delivered between 2005 and 2009 is actually less than 20% of total fighter aircraft deliveries. The majority of aircraft delivered to Israel during this period are a result of the Peace Marble V F-16 sale. Please also note that the data provided shows aircraft deliveries which is not necessarily equal to the size of the entire aircraft order. For example, the four Eurofighter Typhoon aircraft delivered to Saudi Arabia are part of a 72 aircraft order but only four of these aircraft were delivered in 2009. The data also includes second-hand deliveries of used aircraft.