The Republic of Alberta and the F-35 Purchase: Let's Ask AI

 In my recent post, The Alberta Prosperity Project, NATO and the Cost of Defence, I used the purchase of 12 F-35s as an example of the costs involved in building military capability. The price I cited, and the process I described were, of course, gross oversimplifications of defence procurement. I thought I would institute a new feature called "Let's Ask AI" to flush out the issue and be transparent about sources. So I sparked up my Google Gemini PWA and entered this prompt:

"I'm starting my own country. I've placed an order with Lochheed Martin for 12 F-35 fighter jets. The price I've been quoted is $1.459 billion. How will the financial side be structured? How much for a down payment, etc?"

[Gemini's Response Starts here] 

Based on publicly available information about F-35 procurement, the financial structure for a purchase of this magnitude is far more complex than a simple down payment and final bill. Here's a breakdown of the factors involved, based on what is known about how countries acquire these jets:

1. The Purchase is Not a Simple Commercial Transaction

Lockheed Martin does not sell F-35s on the open market like a car dealership. The F-35 program is a multi-national partnership, primarily managed by the U.S. government's F-35 Joint Program Office (JPO). For a new country to acquire F-35s, it would have to be approved by the U.S. government through a process called Foreign Military Sales (FMS). This is a government-to-government agreement, with Lockheed Martin as the contractor.

This means you would not be negotiating directly with Lockheed Martin for payment terms like a down payment. Instead, you would be negotiating with the U.S. government, which would then handle the financial side with the manufacturer.

2. The Quoted Price is Likely an Incomplete Figure

The $1.459 billion you've been quoted for 12 jets is likely what is referred to as the "flyaway cost" or "unit recurring flyaway cost." This is the price of the aircraft itself, including the engine. The average flyaway cost for the F-35A, the most common variant, has recently been around $82.5 million per jet. For 12 jets, this would total about $990 million. The higher quote you've received may include some initial ancillary costs, but it still doesn't represent the full cost of the program.

The true "total package" cost, including all the necessary equipment and support, is significantly higher. This is what you would be paying for, and it typically includes:

• Aircraft and engines: The jets themselves.

• Initial spares and spare parts: A crucial and expensive component to ensure the planes can be maintained.

• Ground support equipment: Tools, test equipment, and other hardware needed to service the jets.

• Infrastructure: The cost of building or upgrading hangars, maintenance facilities, and runways to support the advanced aircraft.

• Training: Training for pilots and ground crews, which is a lengthy and complex process.

• Weapons and munitions: The missiles and bombs to be carried by the jets.

For example, Canada's program to acquire 88 F-35s was initially estimated at a "flyaway cost" of around $10.7 billion [Editor's note: this price was revised upward several times between the time the project was initially explored and when the order was actually placed], but the total acquisition cost, including all these other elements, was estimated at nearly $20 billion. The full "life-cycle cost" to operate and sustain the aircraft over its service life is often many times the initial purchase price, with some estimates reaching hundreds of millions of dollars per jet over its lifetime.

3. Payment Structure for an FMS Case

Since this would be an FMS case, the payment would be structured by the U.S. government. While the exact terms would be part of a confidential agreement, typical FMS payment structures involve a series of payments rather than a simple down payment. The U.S. government often requires payment in advance of work being performed. This is a key difference from a standard commercial contract.

Here's a potential breakdown of how it would work:

• Initial Obligation: You would likely be required to commit to a certain amount of funding upfront to get the process started and for the U.S. government to begin contracting for the first stages of production and planning.

• Milestone Payments: Payments would likely be tied to program milestones, such as the start of production for your specific jets, the delivery of long-lead items, and final delivery.

• Annual Payments: The total cost could be spread out over several years, with annual payments based on the agreed-upon delivery and production schedule. This would be a government-to-government financial agreement.

In essence, you wouldn't just be buying 12 jets. You'd be entering into a multi-year, multi-billion-dollar program with the U.S. government to acquire, sustain, and operate a small fleet of the world's most advanced fighter jets. The financial structure would be a series of legally binding commitments and payments over a long period.

"Can you estimate how much the "Initial Obligation" might be in such a case?"

This is an excellent and very specific question that gets to the heart of how such a massive financial undertaking would be structured. While the exact figure would be a confidential part of the government-to-government agreement, we can estimate the "initial obligation" based on the established Foreign Military Sales (FMS) process.

The Letter of Offer and Acceptance (LOA)

The "initial obligation" you refer to would be a key part of the Letter of Offer and Acceptance (LOA). This is the legally binding agreement between your country and the U.S. government. Before this is signed, a Letter of Request (LOR) is submitted to get a price and availability (P&A) data. The LOA outlines the full scope of the program, including the costs for the jets, training, spare parts, and support.

Estimated Initial Obligation Breakdown

The initial obligation wouldn't be a single, simple "down payment." It would likely be a combination of several upfront payments to cover costs the U.S. government must incur before any hardware is delivered.

1. Administrative and Sunk Costs: FMS sales include administrative charges and, in some cases, non-recurring costs (NCs). The administrative fee is typically a percentage of the total case value, and it covers the U.S. government's costs for managing the sale, from contract negotiation to logistics. For a program of this size, even a small percentage would be a significant amount. A country might also be required to pay a share of the F-35 program's development costs, though these can sometimes be waived.

2. Long-Lead Time Items: Manufacturing an F-35 takes years. The U.S. government, on your behalf, would need to place orders for parts that have long production cycles, such as the engine, specific components, and specialized electronics. The initial obligation would include payments to cover these long-lead items so that production can begin on schedule.

3. Initial Spares and Support Equipment: The "Total Package Approach" of FMS means you're not just buying planes, you're buying a complete military capability. The initial obligation would likely include funding for the first set of spare parts, ground support equipment, and other logistical items that need to be procured early to prepare for the jets' eventual arrival.

4. Training and Infrastructure Planning: A significant portion of the initial funding would go toward preparing for pilot and maintainer training, which often begins long before the first aircraft is delivered. This could also cover the costs of U.S. government and contractor personnel who would assist in planning the necessary airfield and maintenance facility upgrades in your country.

A Plausible Estimate

While it's impossible to give a precise number without knowing the exact details of the LOA, we can make an educated guess based on the program's complexity and the "advance payment" nature of FMS.

• Total Cost: Let's use your quoted price of $1.459 billion as a baseline, but acknowledge that the "total package" cost (including spares, training, infrastructure, etc.) would be significantly higher, likely pushing the final price well over $2 billion for a new F-35 operator.

• Initial Obligation: The U.S. government often requires advance payments to ensure that it doesn't incur a financial loss on behalf of a foreign customer. It is not uncommon for the initial obligation to be a substantial fraction of the total cost to cover these upfront expenses. A plausible estimate could be in the range of 10-25% of the total program value, paid in the first year or two after the LOA is signed.

For a total program cost of around $2 billion, this would mean the "Initial Obligation" could be in the range of $200 million to $500 million. This would be a series of payments over a specific, short-term period, rather than a single lump sum, and it would cover everything needed to get the program off the ground and begin production of the long-lead items for your jets.

[Gemimi Session Ends Here]

Very interesting! We can see that Alberta's upfront cost for the aircraft would be reduced from $1.5 billion to the range of $200 - $500 million. But the lifetime cost has jumped by significantly.

If you found this "Let's Ask AI" feature helpful (or a complete waste of time and space) let me know in the comments, or send me an email: info@pollproject.ca