Die Feu benmator, {36D.j) 0.8. BFOWS ERPRISE — ARE THE CURRENT TRENDS IN DEFENCE UNIT COSTS 5 L I Kirkpatrick and P G Pugh Directorate of Project Time and Cost Analysis, MOD(PE) 1. Introduction It is widely appreciated’ that the real unit cost (ie the unit cost corrected for the effects of inflation) of successive generations of combat aircraft procured for UK air forces has been rising steadily in recent years. Fig 1 shows how the real unit production cost of UK aircraft, averaged for consistency over the first hundred units of the production run, has increased during the years since World War II at an average rate of about 8 per cent per year. It is perhaps less widely appreciated that this is not a new phenomenon: Fig 2 denonstrates that the upward trend in unit cost has continued since the beginning of military aviation. Nor is such a trend particular to military aircraft nor particular to the UK: the table below, which is based on a US analysis? shows that the real cost of many weapon systems has been rising rapidly since the end of World War IZ. US weapon type Annual real growth of unit cost Infantry AT weapon 13% ‘Tanke 11% Destroyer om Aircraft 8% Aircraft Carrier ox Although many different types of weapon system are experiencing rising unit costs, this paper concentrates its attention on the rise in the unit cost of combat aircraft and on the implications of this rise for the UK. These are the topics with which the authors are most familiar and which they hope will be of most interest to the Royal Aeronautical Society. However the discussion of future combat aircraft procurement in the UK illuminates broader questions which arise in the procurement of other items of defence equipment and in other countries. Causes of Unit Cost Escalation The trend to higher unit costs is caused primarily by the need for rival nations to improve progressively the performance of their weapon systems. Each nation must avoid its own forces falling into a position of inferiority relative toon \ those of its rival, and thus offering that rival the opprotunity to obtain advantages (territorial, commercial, etc) by the use or the threat of force. Each nation therefore undertakes improvement of its own forces whenever it knows or believes that its rival is making improvements. The two nations thus establish a vicious circle in which, for example, more effective aircraft procured by one nation increase the threat to a rival nation, stimulating it to advance its technology to produce, or to procure, more effective aircraft to counter the threat. (see Fig 3). A good example of this cycle of technical leapfrogging appeared before the First World War when the navies of rival nations successively invested in nickel steel armour to protect their battleships against shellfire, chrome steel shells which would pierce that armour, high-carbon armour plate to resist the new shells and “capped shot" projectiles which would penetrate the improved armour? In modern times each succeeding generation of combat aircraft is designed to out- do its predecessors in terms of speed, agility and altitude, of the range and lethality of its armament, and of its electronic warfare capabilities. However, linked to and dependent on the vicious circle of rising unit costs associated with the technical arms race, there are nowadays no less than four more vicious circles which together accelerate the trend towards higher unit costs. More effective aircraft tend to have both higher development costs and higher unit production costs; the increases in these costs are partially counter- balanced by the use of improved methods and equipment in the development and production processes, but the experience of recent years shows that there is generally a net increase in both costs. The increase in development costs of aircraft projects means that a government tends to fund new projects less frequently, but in that case the progress in technology and the development of the threat since the last project together make it appropriate for a new project to incorporate greater advances in technological sophistication; and this in turn leads to a more protracted and extensive development progranme and back to even higher development costs. As development costs increse, a government tends to find it more difficult to take a decision which will shape its defence capability and absorb a large fraction of its equipment budget for many years to come. To clarify the situation and to make the decision easier, there may be a long period of studies, assessments and protracted discussions between the government, Services and industry of the nation involved. These in turn lead to a more prolonged development progranne(perhaps also increased in scope) with a higher total development cost. Since a nation's defence budget is limited, an increase in the unit production cost means that fewer aircraft can be purchased. But a decrease in the number of aircraft manufactured reduces the scope for learning in production and thus tends to increase the average unit cost. ‘Similarly a decrease in the number to be manufactured leads to a relative reduction in’ the appropriate level of production investment (tooling), and hence to a further increase in the unit cost of production, These four vicious circles all exhibit what control engineers call positive feedback, and together they produce a faster rate of increase in the unit cost of procurement than that which would result directly from the increased performance and effectiveness of the aircraft. All four of the dependent vicious circles have significant effects on the growth of the unit cost of conbat aircraft, but they do not all have an appreciable effect on the cost growth of other itens of defence equipment. 3. Aircraft Technology and Unit Cost Section 2 outlined how a technological arms race tends to drive up unit costs. Section 3 now illustrates the process in more detail, using as examples aspects of aircraft technology. It is frequently observed that when a branch of technology is born the discovery and application of new principles and techniques come thick and fast, leading to rapid increase in performance. But later, as the technology matures and its boundaries (or limits) are explored and delineated, this process inevitably slows, notwithstanding sustained effort in research and development. In aeronautics, Fig 4 shows that the absolute world records of Mach number, equivalent air speed (EAS) and altitude all exhibit this pattern of rapid growth followed in recent years by a marked decline in the growth rate, indicative of aircraft technology as a whole approaching maturity. In this period when some aspects of aircraft technology appear to be approaching their limits, there exists a danger (see Fig 5) that expectation of continuing technical advances ~ fed upon past achievements -— might lead to ill-considered demands for high performance which is close to (or even beyond) the capabilities of current technology. Attempts to meet these demands would involve squeezing the last drops of performance out of the diminishing potential at the margins of the possible, and such attempts are often very difficultand always very costly. An example of the effects of closely approaching a technical limit may be found in recent developments in airframe design. Fig 4 suggests that the world record for equivalent air speed is nearing a limit, which is probably associated with the capability of structural technology (constrained by the geometries needed for efficient flight) and with the characteristics of the materials available. However, because of the military importance of a combat aircraft's ability to penetrate enemy defences at high speed and low altitude, the maximum equivalent air speed of combat aircraft has continued to increase, but at a decreasing rate as the limit is approached. Fig 6 shows that the approach to the limit is associated with a rapid escalation in the cost of airframes (per unit of empty weight), despite the increased structural efficiency possible from integrally- machined spars and similar improvements in manufacturing. This association is made more convincing by the much-smallerrise, shown in Fig 7, in the cost of- those contemporary airframes whose design requirement have not caused their maximun equivalent air speed to approach the limit so closely. The potential of carbon fibre composite (CFC) construction to raise the limit on equivalent air speed is obviously of interest, as is the consequent effect on unit cost. Limits are not necessarily set by engineering technology; some are imposed by the fundamental physics of the system. An example of this situation is the influence on the gas turbine cycle of the turbine entry temperature (TET), which is ultimately limited by the stochiometric temperature. Initial increases in TET were made possible by advances in metallurgy (and, later, by cooled blades) and were handsomely repaid by improvement in the specific fuel consumption (sfc) and the thrust/weight ratio (1/M) of military aeroengines (see Fig 8). Production costs rose rapidly because of additional manufacturing complexities, both directly due to increased TET and also due to the increased pressure ratio needed to retain the power/weight ratio at a maximum for each TET. ‘The change from centrifugal ‘to axial compressors is an example of the need for increased pressure ratio leading to extra complexity. Further increases in TET have yielded thermodynamic benefits at a decreasing rate, as shown by the present diminished rate of improvement in sfc. These increases in TET have been used primarily to.sustain the rate of increase in 1/W and, as this has not involved a corresponding increase in complexity the growth rate of unit cost has moderated. In the future TET, since its current level is well below the stochionetric limit and since there is yet no obvious sign of abatement in its rise, may reach higher values yielding higher ‘T/W: these higher values will probably not involve any major increases in manufacturing comlexity and so the associated rise in unit cost will be moderate.i Cost escalation can also occur when the exploitation of a technological breakthrough in one part of an engineering system strains the capabilities of other parts of the system towards their technical limits and/or introduces interface problems between different parts of the system. An example of this process can be found in modern avionic systems where revolutionary advances have been made in the cheapness and power of airborne computers, initiated by the change from analogue to digital computing and sustained by the microchip. However, since a brain is useless without sensors to supply it with information and muscles to implement its objectives, the attempts to utilise the apparently boundless possibilities of modern electronics have placed great demands on the sensors and actuators which depend largely on electrical and mechanical, rather than electronic, technology. To exploit the potential of electronics, the airborne electrical and mechanical systems have been pushed closer to their technical limits and have had to be made compatible with digital computing either by interfacing or redesign. In addition, the full application of computing potential requires a considerable and sustained (and therefore costly) effort of programming to produce software. Hence, despite a rapid fall in the cost of computing itself, the cost of the total avionic systems on all-weather aircraft has grown explosively (see Fig 9), as the electronic revolution has been exploited to achieve vast increases in their capability. Airframes, aercengines and avionics thus provide examples of the differences between the factors influencing the development of different systems, and of the ways in which such developments affect unit cost. For airframes, increased EAS requires greater structural refinement and, hence, complexity. As requirements press upon the limit of current structural techniques and materials, it becomes mandatory to incorporate every possible refinement however complex or demanding. Manufacturing difficulties are escalated and cost spiral upwards. Escape to lower costs is possible only via reduced requirements or from some revolutionary change in available materials and techniques - comparable to the adoption of all-metal stressed skin structures. For aeroengines the laws of thermodynamics set an upper limit on TET, which seems to be approachable without further major increases in manufacturing complexity; in this case, the increase in unit cost as the limit is approached is relatively modest. For avionics the virtually Limitless potential of electronics has stimulated developments which have placed great demands on the other (electrical and mechanical) parts of avionic systems, and which have vastly increased the complexity of these systems and of the software needed to operate them. In aircraft, as in for example ships and tanks, these electronic developments have led to large increases in unit cost.In this section we have argued that for combat aircraft the unit cost is very sensitive to the specified performance, particularly when the specification pushes, some parts of the aircraft design towards their technological limits. It is therefore important to clarify how the right level of performance for a new combat aircraft may be identified, and this problem is considered in section 4 below. 4, The Variation of Unit Cost with Effectiveness ‘At any time, with the level of technology then available, it is possible to identity a variety of aircraft designs to meet a stated military requirement. The unit costs of each of these designs and their unit effectiveness in the chosen scenario can be estimated, however approximately, and the results plotted on a cost~effectiveness chart, as in Fig 10. Comparison of the points representing different designs shows that there is a particular group of designs which has the greatest unit effectiveness (then available) at a given unit cost. This group of designs therefore lies on a cost- effectiveness boundary: the designs which lie above and to the left of this boundary need not be considered further. It is from the group on the boundary that a design should be selected for procurement. The shape of the cost effectiveness boundary must depend on the type of combat aircraft and on the period considered, but in most cases it will conform to the shape presented in Fig 10. This shape is based on the idea that very cheap and, hence, low performance aircraft are virtually ineffective, but that once they have sufficient performance to survice in combat and inflict appreciable damage on the enemy their effectiveness increases more rapidly than their cost up to the point at which unit effectiveness/unit cost is a maximum: beyond that point further increases in effectiveness are associated with rapidly increasing unit costs as the design approaches the limit of available technology. ‘The lower part of Fig 11 shows the variation in the military effectiveness of a force of combat aircraft, comprising the number of aircraft which can be procured by a given budget, with the unit effectiveness of the alternative aircraft designs. It can be demonstrated that the maximum force effectiveness for a particular military task can be attained within a given budget by selecting an aircraft whose design lies (of course) on the cost effectiveness boundary and has a unit effectiveness slightly below the point at which unit effectiveness/unit cost is @ maximum. This aircraft is the "best buy" and its design will henceforth be referred to as the best. If a less effective aircraft is bought in greater numbers or if a more effective aircraft is bought in smaller numbers, the resulting force effectiveness is less than that which can be attained by procuring the best design. The difference between this best design and the design givin rexinum unit effectiveness/unit cost exists due to the effect of the numbers procured on the unit cost (ie to economies of scale) and to the advantage of superior numbers in combatThis discussion of the selection of the best design for a new combat aircraft is based entirely on military and financial considerations, and ignores the many other factors ar constraints which must be taken into account in such a decision. Nevertheless it demon— strates that the best design is likely to have levels of performance and of unit effect- iveness which are neither at the bottom nor at the top of the available range. In particular it shows that either the specification of excessively high levels of performance or the imposition of an arbitary upper limit on unit cost could lead to an aircraft design for which the force effectiveness is significantly less than could be attained by a more rational approach. 5. Policies and Problems In the years since World War II the unit cost of production of the aircraft design having the appropriate best level of unit effectiveness has increased, due to changes in the quality of the threat and the level of available technology. ‘The increase in the unit production cost has been reflected by a corresponding rise in the development cost of a new aircraft project, since development cost is dominated by the cost of prototypes and engineering work related to unit production cost. During this period there has been a significant difference between the rates of growth of the unit costs of combat aircraft (currently around 8 per cent per annum in real terms) and of defence budgets (within NATO, nations are trying to achieve real growth of 3 per cent). In this situation, the rational strategy for the RAF has been to offset the rise in unit production cost by buying fewer aircraft and to offset the rise in development cost by funding development programmes less frequently (by reducing the number of different types of aircraft being procured for the UK airforce and by lengthening the Life-cycles of aircraft by extending the period in service). The result of the latter policy is illustrated by the table below, which shows the nunber of new combat aircraft types introduced into UK service in four decades, covering 1951-1990. Period 1951-60 1961-70 1971-80 1981-90 New Combat Aircraft Types Introduced 20 5 4 37 The nunber introduced in 1951-60 is inflated by the Korean War and by the untypical purchase of three similar types of V bomber, but even so it is clear that the rate at which new aircraft types are procured has dropped significantly in recent years. Similarly the reduction in the number of each type procured is illustrated below by a comparison of the numbers of different types of fighter aircraft procured for the RAF,In service date 1954 1956 1960 1969 1983 Fighter Hunter Javelin Lightning Phantom Tornado F2 Number procured 1000 400 250 165 165 As a result of adopting this strategy, the RAF and other national air forces have maintained their overall capability while the composition of their fleets has changed: they now deploy smaller numbers of aircraft with greater individual combat effectiveness. Thus far there is no cause for concern. But if past cost trends continue unabated and if the same procurement strategy is maintained, problems will arise first for the small nations, then for medium-sized nations like the UK, and lastly for super-powers like the US. These.problems are presented in Fig 12 and are discussed below. The reduction in the number of aircraft types in service tends to make each airforce less balanced and flexible, and hence less capable of independent actions; already the smaller NATO nations have acepted that their air forces cannot include AEW aircraft. A reduction in the nunber of each type of aircraft leads to smaller forces which are more vulnerable to unserviceability, sabotage and accidents of war: these factors will play a larger role in the assessment of effectiveness as force size reduces. ‘The lengthening of the aircraft life cycle means an increase in the gap between successive aircraft development projects with the consequent danger that design expertise will deteriorate in the interim, that the cost of maintaining old aircraft in service will be high, and that such old aircraft will have a potentially- dangerous lack of effectiveness against more modern eneny systems. Ultimately this strategy would lead to the defence of the UK being entrusted to the Starship Enterprise in synchronous orbit for a century or more. In addition to these military problems, there is the future prospect of avkward peaks and troughs in the level of defence expenditure. As long as the equipment progranme is composed of many relatively small projects, it is possible by careful scheduling to ensure that the total real annual expenditure on defence equipment changes only slowly from one year to the next. This smooth variation has made it possible for the defence equipment budget to fit comfortably anongst other itens of government expenditure (eg on health and education) which also alter slo#ly in real terms. However the growing size of the expenditure on individual projects relative to the defence equipment budget (at its peak, Tornado alone absorbed 18 per cent of the UK defence equipment budget) makes it increasingly difficult to avoid significant fluctuations.in the level of the defence equipment budget.6. Countermeasures After reviewing past pclicies and the problems which will arise if past trends in unit costs continue, it is now appropriate to consider some of the alternative countermeasures which have been suggested and to try to quantify their effects. Collaboration on aircraft projects between two or more European nations is already connon. In principle there are substantial benefits to be gained from sharing the development costs and from the reduction of the average production cost nade possible by longer production runs. In practice these benefits are partially offset by duplication, transportation and the reconciliation of different national methods. So the net cost saving on procurement is typically reduced to around 8 per cent and 10 per cent for two nation and three nation collaboration. Even these modest but useful cost savings can readily be lost if the nations have different operational requirements, require different suites of aircraft equipment, or adopt an uneconomic organisation of the work, Thus the potential cost savings from collaboration are Limited and cannot be significantly increased by the involvenent of additional partners in future projects. Furthermore most of the benefits of collaboration have already been exploited if recent major aircraft progrannes, such as Jaguar and Tornado. It sens unlikely therefore that collaboration can yield much additional cost saving or appreciably reduce the future growth of aircraft unit cost. Exports offer the prospect of reduced costs via longer production runs and the hope of export levies to help cover the cost of development. However the potential market is smaller than might be inferred from the undoubted export successes (for example, with Canberra, Hunter and Harrier) of UK industry in the past. Allowing for possible co-production, some 80 per cent of the world's total defence budget is spent by nations which are capable of satisfying their own demand for aircraft. Furthermore the favourable effects of the export successes are already included in the cost growth trends, so achieving similar successes in the future would not alter the rate of growth of aircraft unit cost. To reduce the growth rate it would be necessary to increase exports substantially, at a time when there is an increasing tendency for a foreign nation's demand for aircraft to stimulate an indigenous industry capable of meeting local requirments, either entirely or partially via co-production, Even if a substantial increase in exports could be achieved, the income which MOD would obtain from export levies at their customary levels would probably be insufficient to offset more than a small fraction of MOD expenditure on aircraft procurement.Hence, while an increase in the level of aircraft exports would of course benefit seraft manufacturers and the UK economy, it would be unlikely to reduce significantly the unit cost of aircraft procured by MOD. More substantial savings have been forecast from the increasing use of computer- based technology in many aspects of development and production. Computer-aided design (CAD), numerically-controlled (NC) machining and automatic test equipment are all producing considerable benefits in their own areas, but because other areas, such as assembly and equipping, are less amenable to such technology the overall saving on a complete aircraft project is bound to be less dramatic than for individual areas of work. In addition, the benefits from the incomplete use of new technology may be partially offset by the costly interfaces created by using disparate levels of technology on the same project, while shorter production runs discourage investment in the extra capital equipment needed to implement and take full advantage of automated methods. Moreover, it is important to appreciate that these improvements in productivity are but the latest developments in a continuous improvement of methods and techniques which have not in the past halted the upward trend of aircraft unit cost. However, it might be plausible to argue that current progress is particularly rapid and will therefore cause an applicable reduction, perhaps only for a limited period, in the growth rate of aircraft unit cost. Another fruitful source of cost savings is value engineering, in which engineers devote a considerable proportion of their attention throughout the design process to ensuring that their design can be made cheaply aswell as meeting the performance requirements. Although good designers have always taken some account of likely production costs, the introduction and systematic application of value engineering techniques has in recent years produced sone very substantial savings. The successful engineers now face the challenge of achieving further repeated reductions in unit cost. Similar savings have been achieved by multi-disciplinary groups (eg quality circles) improving the efficiency of many different aspects of the design and production processes. These groups, having correctly begun by eliminating those problems which were most costly and most easily solved, now also face the challenge of continuing to solve less-tractable problems with smaller payoffs. It seems likely therefore that, while value engineering, etc, can achieve significant cost reductions in the short term, the reductions obtained thereafter will be smaller and harder to win,The preceding discussion suggests that the effects of collaboration and of exports willbe small, but that the use of advanced technology and value engineering should yield appreciable reductions in unit cost. Our own best estimate is that the combined saving, relative to the historic trend, may be about 30 per cent between this generation of combat aircraft and the next. No-one can be sure whether such savings can be achieved, but there is certainly no hope of doing so without the unanimous and sustained effort of all the groups - Services, industry, politicians and bureaucrats - involved in aircraft procurement. Cost savings of this magnitude, while clearly very valuable, are unlikely in themselves to halt the growth of unit cost, but they may reduce the average growth rate by around 1% per cent per year. Apart from the effect of these countermeasures, it is possible that the under- lying growth rate of the unit cost of the best aircraft design (ie the design yielding the greatest force effectiveness form a given budget) may at last be spontaneously abating. The basis for this speculation is in arguments which suggest that it is no longer so attractive to pursue some of the traditional lines of combat aircraft development, and that sone other traditional lines of development are reaching their natural limits. Inevitably, there are contrary arguments that new technological capabilities will ensure that past trends in unit cost are maintained, or even increased. It is difficult to forecast in this area where technology, politics and military judgement merge, so it is only reasonable and prudent to plan for a continuation of the historical growth rate of about 8 per cent per year, while remaining aware that this trend could change. 7. Concluding Remarks ‘The primary purpose of this paper has been to present the issues, but it is appropriate in conclusion to outline the implications of the arguments presented. For many years the unit cost of combat aircraft, as of other items of defence equipment, has increased steadily, and the number of aircraft deployed by the RAF has declined? While it is difficult to forecast the future with any confidence, it must be expected that the growth of the unit cost of conbat aircraft will be maintained at or around its current rate, and significantly above the growth rate of the defence budget. Consequently the combat aircraft now in service will be replaced by higher-performance aircraft in smaller numbers, perhaps at about % of current levels. Some of the countermeasures which have been,advocated should have a significant - n