Editor’s Note: We recently saw a story that portrayed the DoD’s cost per flight hour of military aircraft.  So we asked our resident FighterSweep financial expert and former F/A-18 pilot Brett Odom and his team at Azimuth www.azimuth.solutions to give us the real cost breakdown. Unfortunately, he discovered some pretty sloppy DoD accounting.

By Brett Odom

The iron laws of economics dictate that any resource that is underpriced will inevitably be overutilized. In a functioning market, the price mechanism provides a signal that regulates demand and incentivizes suppliers to increase supply. In markets without a functioning price mechanism, limited resources will be exhausted to the point where shortages occur.

The Department of Defense’s recently published reimbursement rates for military aircraft provide an object lesson in how sloppy accounting and inaccurate costing assumptions are creating a crisis in the US fighter force and proving the truth of this basic economic fact.

The US Air Force fighter fleet is now the oldest and smallest since that service’s inception. Three out of four of the Navy’s F/A-18 Hornet fleet are reported unready for combat. The Chief of Naval Operations has testified to Congress that the current shortfall of 104 Navy strike fighters is projected to grow to 134 by 2020.

While the US military’s capabilities in terms of air supremacy and power projection remain unmatched, our capacity to actually deliver these capabilities is at an ebb. Air power has been a fundamental cornerstone of US national security strategy since at least World War II, but by any measure America’s fighter force is seriously undercapitalized.

Imagine you have a neighbor who sets out to launch a livery service. He purchases a fleet of cars, hires drivers and mechanics, leases facilities, and obtains the necessary licenses and permits. But he only charges his customers for his operational costs, and forgets to include the capital cost of his fleet.

Several years later, his machines at the end of their service life, your neighbor approaches you for a loan to recapitalize his fleet. Not only that – he proposes to upgrade the fleet with more expensive cars that cost several times as much to operate. His pricing has increased, but still ignores the actual cost of the machines.

It turns out that this isn’t very far off from how the DOD manages its extensive fleet of aircraft.

The government is obviously not in the business of generating a profit from its military assets, and no one can seriously argue that cost is or should be the primary factor in national security decisions. However, since the DOD is charged with acquiring and managing weapons systems that will last decades, with finite resources at its disposal, an accurate assessment of cost arguably plays a strategic role in long-term decision-making.

There are valid reasons to prefer investments in capabilities at the cost of quantity, as many advanced systems are force multipliers that create significant advantages for US forces in terms of agility, awareness, and impact. But there is a limit to this tradeoff that is obscured by artificially low cost assumptions.

This tradeoff between capability and capacity is as old as warfare itself. Our key argument is that the DOD’s cost accounting for its fighter fleet creates two distinct problems.

First, by including only marginal operating costs and ignoring the capital costs of its assets, commanders are incentivized to overutilize aircraft, and to use them for relatively low quality missions where a cheaper alternative might serve better.

Second, by obscuring the true cost of operations, the services hide the true cost of the tradeoff, leading to an overinvestment in capability and an underinvestment in capacity.

Analyzing the True Cost of a Flight Hour

While the DOD Comptroller report does not detail how the reimbursement rates were calculated, we can estimate the true cost with some rough assumptions.

Aircraft costs are made up of marginal operating costs (consumables such as fuel and oil, parts and engine wear, aircrew compensation, etc) and the amortized capital cost of the asset. Our analysis indicates that the DOD’s published rates only include marginal operating costs.

Consider the two-seat, twin-engine F/A-18F. The DOD rate for the aircraft is $10,507 per flight hour.

The Hornet burns approximately 1,100 gallons of jet fuel in an hour. At $3 per gallon, the fuel cost tallies to $3,300. We assume aircrew compensation rates for an O-3 with more than 6 years of service, and add 35% to account for fringes such as taxes, healthcare, and leave. For a pilot and Weapons System Officer each earning $125,000 per year, flying 200 flight hours annually, the cost is $625 per flight hour, or $1,250 for both crew.

Rotables – the multitude of parts and components with unique service lives – have to be accounted for. These range from a $100 oil filter with a 50-hour service life, to a $4 million engine with a sequence of inspections and overhauls over a 4,000-hour life. We estimate about $1,500 per flight hour for each engine – $3,000 total for the Hornet – and about $500 per hour for other rotables.

Sorties depend on a dedicated team of squadron maintainers, NCOs, and administrative personnel to support flight operations. With a complement of 180 enlisted and officer personnel (not including aircrew), at an average salary of $50,000 plus fringes, we calculate squadron labor costs at $12 million. For the average Hornet squadron flying about 4,000 hours per year, we calculate a cost of $3,200 per flight hour. (Note that we’ve ignored facilities and other costs, such as travel, for simplicity).

Adding these costs together, we get to a number remarkably close to the DOD’s published rates: $11,250 compared to $10,507 (or $11,140 for non-DOD users).

But what about the capital cost of the aircraft? The advertised flyaway cost of the F/A-18F is about $65 million. With an expected life of 6,000 flight hours, the amortized capital cost of the asset is $10,800.

There are valid reasons to ignore capital costs and treat them as sunk costs in certain situations. However, by ignoring capital costs, the Department of Defense is implicitly stating that its fighter aircraft are free, or – like the pyramids – they can be expected to function forever.

The true operating cost of the Super Hornet is closer to twice the published DOD rate – about $22,000, not $10,507, per flight hour.

Other fighter aircraft on the list show the same problem. The F-22 Raptor lists at $33,538 per flight hour. But with a unit cost of $150 million (in 2009 dollars) the amortized cost of the asset is $25,000 per flight hour, indicating a total cost around $60,000.

The F-35 unit cost of $110 million amortized over its 8,000 hour service life is $14,000 per hour. Reliable sources with knowledge of the official figures inform us that the marginal operating costs of the JSF run to $35,000 per flight hour, about $7,000 more than the published DOD rate. That implies a true operating cost of $49,000, not the DOD’s advertised rate of $28,455.

Why Accurate Costs Matter

Flying more than 230,000 fighter hours, the Navy alone consumes the equivalent of 39 fighters each year. Without an equivalent or greater number of acquisitions, the fighter inventory will decline. Unfortunately, the long acquisition cycle for new aircraft disguises this reality. Growing or stable fighter inventories signal health during the early phase of acquisition, but later in the acquisition cycle attrition rates suddenly accelerate and lead to capacity shortfalls. This appears to be the situation we face now.

Fantastical accounting practices are a core part of this problem. By assuming that its assets are free and last forever, the DOD is like our neighbor who wears out his operating assets without accounting for their true cost.

The United States faces rising threats from Russia, China, and various non-state actors, with a fighter fleet that is failing to meet readiness requirements. Meanwhile, we have embarked on an acquisition strategy that entails twice the unit acquisition costs, and three times the hourly operational costs.

While the JSF promises an impressive set of capabilities, they are worthless if the actual capacity to deliver them to the battlefield is attenuated by insufficient spare parts and cannibalized airframes. It is past time that the DOD start accounting for the true costs of its fighter fleet.

Brett Odom is a former F/A-18 Hornet pilot with combat experience in Operation Southern Watch and Operation Iraqi Freedom. A graduate of the US Naval Academy and the Harvard Business School, he is founder and Managing Director of Azimuth (www.azimuth.solutions), a boutique consultancy that provides advanced data analytics, business intelligence, and business transformation services to clients.

Top Photo:An F/A-18E Super Hornet assigned to the Gunslingers of Strike Fighter Squadron (VFA) 105 launches from the flight deck of the aircraft carrier USS Dwight D. Eisenhower (CVN 69) (Ike). Ike and its Carrier Strike Group are deployed in support of Operation Inherent Resolve, maritime security operations and theater security cooperation efforts in the U.S. 5th Fleet area of operations. (U.S. Navy photo by Mass Communication Specialist 3rd Class J. Alexander Delgado/Released)