National Defence Committee on Dec. 2nd, 2010

[Laurie Hawn, Conservative, Edmonton Centre, AB]

We're miles ahead of dollar-for-dollar.

[Tom Burbage]

Yes, sir.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

As to the concern about the $12 billion making other people sort of jealous, this is close to a $400-billion program, so I don't think $12 billion is an inordinate share for Canada. And as you've said, it's liable to be more.

I have one other thing on in-service support while I'm at it. To do in-service support in Canada, we need access to the intellectual property that is only available as a partner in the MOU. Is that correct?

[Tom Burbage]

That's correct. All of these agreements are done government to government. When other countries come in through another channel, there'll be agreements made, government to government, at that time. The partners have access to the information today. It's the intent of the U.S. government that the Canadian military would be able to operate the airplane just like the U.S. military would.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Unless we're buying under the MOU, within that partnership, we would potentially not have access to the intellectual property we would need to do in-service support in Canada. Is that a true statement as well?

[Tom Burbage]

I'd have to defer that to the crown and the government, because we're not directly involved in it. It's up to the governments.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Fair enough.

There's a lot of confusion here about MOUs and what they mean, what they allow and what they don't allow and so on. Can you talk about the difference between the MOU we signed in 2002 and the one we signed in 2006?

[Tom Burbage]

Yes, sir. In 2002 the program was just beginning to go under contract. In October 2001, the contract was awarded. The U.S. opened the door for any nations that wanted to participate in the development of the airplane. There was no commitment at that time to buy the airplane; it was just participate in the development.

Canada was the first to join in February of 2002 and Australia was the last to join in October of 2002. There were nine countries altogether. That set the framework for all the benefits of being a partner: participation in the joint program office, the recoupment fee, and the waiver of FMS. All those requirements I described earlier were set out in that MOU.

In 2006 the program was moving to the next phase. The first production lots were beginning to be executed and we needed to know, as a prime contractor, who was going to buy airplanes and on what timeline so we could plan the infrastructure for the industry to respond to that. All of our partner countries were involved in that, because the expansion of that capacity is very critical to the industrial benefits coming online.

So in 2006, a second MOU was signed. This one was multilateral; all nine nations signed the same MOU. At that point, all the nations became equal in that partnership, whereas before it was a series of bilateral agreements. That new MOU superseded or dissolved the first one. At that time, production profiles were provided to us, and we used those production profiles to plan the capacity expansion of industry, and that forms the backbone of our industrial plans with all the partners.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

So the MOU that was signed by Mr. Allan Williams in 2002 is no longer in existence.

[Tom Burbage]

That's correct.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

The MOU that was signed, that we're operating under, came after his tenure.

[Tom Burbage]

Yes. The current agreement between the partner nations is the second MOU, not the first.

[Laurie Hawn, Conservative, Edmonton Centre, AB]

Thank you.

On the cost figures we talked about--and again, this has been a critical issue for a bunch of people--your confidence in projecting.... We're talking about $70 million to $75 million per aircraft. Can you talk about the cost curve, where the aircraft is performing now on the cost curve, and where we're at? Are we above the line or below the line? Just where are we at?

[Tom Burbage]

The cost curve for a sophisticated product like this, any defence product, comes down with time as volume increases and learning occurs, but primarily because volume increases. We're building the airplanes at small production rates. Initially, we only had two airplanes in our first production lot. So we absorbed all the fixed costs of the infrastructure on those two airplanes. As we get to 200 airplanes a year, the incremental cost element of that infrastructure is shortened by that much.

So the cost comes down on a fairly steep curve. In the first three production lots, our price came down 50%, and primarily because the number of units going through was increasing.

We now have four production lots under contract, with the last one fixed price. Our cost curve is fairly well defined. Assuming the quantities stay about the same as they're planned to now, we'll continue down that cost curve, and we can project out in time the point at which Canada buys their airplanes. We know within a band...there's still a confidence band that we have to establish, but that confidence band is getting tighter. We do know that we are in the vicinity of what we're saying the airplane is going to cost and I think you've budgeted very adequately for the airplane.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

I will give the floor to Monsieur LeBlanc.

[Dominic LeBlanc, Liberal, Beauséjour, NB]

Merci beaucoup, monsieur le président.

Mr. Burbage, thank you for being here. I'll save you the earpiece: my mother was an anglophone and my father was a francophone, so I'll ask the questions in English for you.

Thank you for your answers. They've been very thorough, frankly, and rather detailed and I appreciate that very much.

My colleague had a number of questions, and I think other colleagues have asked questions that perhaps we were thinking of asking as well. Let me try a few other areas of concern that we had.

I am by no means an expert in different fighter aircraft or the sustainment mechanisms, but one of the things we've heard is that the F-35 that Canada is looking at buying doesn't have a refuelling system that is compatible with Canada's current air-to-air refuelling tankers. So either Canada would have to buy new air-to-air refuelling tankers, presumably...or can modifications be made to the F-35 we're looking at purchasing that would in fact limit or reduce the cost of that kind of compatibility issue?

[Tom Burbage]

That's another very excellent question. That's the beauty of having a family of three airplanes: the three airplanes are the same in the fuselage area. The main difference is that the wing on the navy airplane is bigger. The navy airplane and the Marine Corps airplane both use Canadian refuelling systems--probe and drogue. The air force version of the airplane, because the U.S. Air Force dominates that requirement, is an air force boom tanker requirement.

We're actually doing a study right now for Canada and a number of the other partners who fly C-130 tankers primarily to see whether.... I mean, there's no problem: the space is in the airplane. The other two airplanes have that system in them and we've reserved the space to put that system in the air force airplane. The question is, do you want to have both systems or do you want to do the engineering to take the air force system out?

There is some very interesting flexibility advantages to having both systems in the airplane, because now you can use any tanker in the world anywhere. We are looking at that as a study right now. It is not a big deal for the airplane. The space is there. The system is in the other two airplanes and it's operating today. The other two are both fully qualified for inflight refuelling today.

[Dominic LeBlanc, Liberal, Beauséjour, NB]

That's an interesting answer. On the surface of it, then, there wouldn't necessarily be a cost to Canada of having to change its air-to-air tankers.

[Tom Burbage]

No.

[Dominic LeBlanc, Liberal, Beauséjour, NB]

That would be a separate decision the government may make, but it wouldn't have to make it in anticipation of the delivery of the F-35.

[Tom Burbage]

That's correct.

[Dominic LeBlanc, Liberal, Beauséjour, NB]

Thank you.

I have another question I thought I'd ask. Again, we're going on a lot of media reports, and we've learned something today that is perhaps shocking to us as elected people: that the media don't always get it right. But some media reports have talked about some rather dramatic increases in terms of the maintenance costs per flight or per flight-hour for the navy version, the F-35 sea variant.

Can you explain why this should or shouldn't concern Canada, which is acquiring a different variant of that airplane? Are you confident that the maintenance costs will in fact be much more reliable than they may have been or have reportedly been with respect to that navy aircraft?

[Tom Burbage]

That's another excellent question.

This program was founded in the very beginning as...half of our contractual requirements are written around sustainment of the airplane and that has never happened before in any acquisition program in the U.S. on the airplane side of the house. Sustainment is something we figured out later, after we built the airplane.

In this case, we have designed in reliability and maintainability features in this airplane that we've never had on airplanes before, because the maintainers wanted a bigger role and because everybody was complaining about the cost of operating these sophisticated airplanes. So we have the features built into the airplane. We actually have a contractual requirement that they be twice as reliable as the airplanes they're replacing and take half the time to fix. That calculates out to fewer maintenance man-hours, fewer personnel required, and all those kinds of things.

We also calculate the cost of the F-35 annually with a large group of people that includes representatives from Canada. They come down to our facility in Fort Worth for a week or so and we lay out every potential cost you could ever possibly incur on the program, including what it's going to cost to upgrade your information computers 20 years from now. We rack all those costs up so that everybody has wide-open eyes: “this is what it's going to cost to maintain the airplane”. There is no legacy airplane today that can collect any of those costs. They don't track them. They don't collect them in those categories. So there's no direct comparison, but this is what it's going to take to fly and operate this airplane.

We also have very powerful economies of commonality and scale. We're going to be maintaining the airplane around the globe in nine nations. We're going to have common spare parts. If you operate in a coalition operation, the airplanes will be maintained by a common logistics stream.

There are many other features that will feed into the cost of ownership and operation in the future. We're highly confident that the airplane is going to turn out to be a reliable, maintainable, and reasonable airplane to operate in terms of the cost of ownership.

The analysis that's going on right now, way in advance of the airplane actually getting into operational service, uses legacy cost models. Legacy cost models, when you compare them to legacy airplanes, don't include many of the cost elements we're talking about.

If you asked our government, I think they would tell you that there is more known about what this airplane is going to cost to own and operate than has been known about any airplane at this point in its development--and it will unfold as it goes. A large part of that ultimate cost to Canada is what Canada wants to do in Canada in terms of training centres, overhaul systems, and all that kind of stuff.

[Dominic LeBlanc, Liberal, Beauséjour, NB]

Thank you.

[The Chair, Conservative, Maxime Bernier]

Thank you very much.

Now I will give the floor to Ms. Gallant.