Defense Acquisitions: Timely and Accurate Estimates of Costs and Requirements Are Needed to Define Optimal Future Strategic Airlift Mix
Published: 2008-11-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense's (DOD) C-5 Galaxy and C-17 Globemaster III aircraft play key roles in transporting weapons and other cargo. Since September 2001, these aircraft have delivered over 2.4 million tons of cargo to staging and operating bases in Iraq and Afghanistan. Yet determining the number and mix to meet current and future airlift requirements has become increasingly challenging given distinct differences between the two aircraft. While the C-5 can carry more cargo, the newer C-17 is more flexible since it can deliver to forward-deployed bases and has a higher mission capable rate. GAO was asked to identify the impact C-5 modernization cost increases have had on the mix of aircraft; assess the current C-5 modernization cost estimate; and identify C-17 production plans and issues related to production line shutdown. To conduct its work, GAO reviewed options DOD considered to meet its current and future strategic airlift requirements, and evaluated C-5 modernization and C-17 production line shut down cost estimates.
section_title: What GAO Found
paragraphs: The Air Force has cut the number of C-5s it plans to fully modernize by more than half because of substantial cost increases in the C-5 Reliability Enhancement and Reengining Program (RERP) and plans to acquire more C-17s, with additional congressional funding. Currently, the Air Force plans to provide avionics upgrades to all 111 C-5s, limit RERP to 52 C-5s, and acquire 205 C-17s. However, this mix may change again, based in part on the results of a new mobility capabilities study, the findings of which DOD plans to release in May 2009. While the new study is expected to consider transport needs for the future force, DOD has not identified specific metrics it will use to make strategic airlift decisions--a concern GAO raised about DOD's previous mobility capabilities study and one DOD agreed to address in future studies. The Air Force currently estimates it will spend $9.1 billion on upgrading the C-5s. However, this estimate may be understated because DOD did not apply risk or uncertainty analyses to its RERP major cost drivers. Moreover, the current RERP is underfunded by almost $300 million and may be unachievable if the engine production schedule is not met. At the same time, the Air Force has not priced or budgeted for a new upgrade program it plans to begin in fiscal year 2010 to address certain modernization deficiencies and to add new capabilities. Some future costs, however, may be avoided should the Air Force justify retirement of some older C-5s and forego planned modifications. Careful planning is needed to ensure C-17 production is not ended prematurely and later restarted at substantial cost. Current production plans call for shutting down the C-17 production line in September 2010. However, results from the new mobility capabilities studies and potential C-5 retirements could lead to decisions to extend C-17 production beyond the 205 now authorized. Both the manufacturer and Air Force agree that shutting down and restarting production would not be feasible or cost effective due to the costs to reinstate a capable workforce, reinstall tooling, and reestablish the supplier base. At some point, the C-17 production line will shut down, and DOD will have to pay substantial costs that have not yet been budgeted. The manufacturer and Air Force shutdown estimates differ significantly--about $1 billion and $465 million, respectively--in large part because the manufacturer's estimate included assumptions about demolishing facilities and environmental remediation, while the Air Force's did not.

section_title: Letter
paragraphs: Strategic airlift provides the capability to rapidly deploy, supply, and  Strategic airlift provides the capability to rapidly deploy, supply, and  sustain U.S. combat forces worldwide. The Air Force’s C-5 Galaxy and C- sustain U.S. combat forces worldwide. The Air Force’s C-5 Galaxy and C- 17 Globemaster III aircraft, supported by aerial refueling tankers and the  17 Globemaster III aircraft, supported by aerial refueling tankers and the  civil reserve air fleet, provide the “air bridge” to transport weapon  civil reserve air fleet, provide the “air bridge” to transport weapon  systems, equipment, cargo, and personnel from the United States and  systems, equipment, cargo, and personnel from the United States and  staging bases to overseas locations in support of military and humanitarian  staging bases to overseas locations in support of military and humanitarian  operations. Demands on strategic airlift have increased since the end of  operations. Demands on strategic airlift have increased since the end of  the Cold War and subsequent closure of about two-thirds of U.S. overseas  the Cold War and subsequent closure of about two-thirds of U.S. overseas  bases, requiring more frequent deployment of U.S. forces over greater  bases, requiring more frequent deployment of U.S. forces over greater  distances. The two airlifters continue to play a key role in supporting  distances. The two airlifters continue to play a key role in supporting  combat operations in the Middle East, collectively delivering more than 2.4  combat operations in the Middle East, collectively delivering more than 2.4  million tons of equipment and cargo to Iraq and Afghanistan in over  million tons of equipment and cargo to Iraq and Afghanistan in over  330,000 airlift sorties.  330,000 airlift sorties.
While there is a broad consensus for sustaining a robust and effective  While there is a broad consensus for sustaining a robust and effective  strategic airlift capability, determining current and future airlift  strategic airlift capability, determining current and future airlift  requirements—and the specific numbers and optimal mix of aircraft  requirements—and the specific numbers and optimal mix of aircraft  needed to meet those requirements—has become increasingly challenging  needed to meet those requirements—has become increasingly challenging  given affordability concerns and changes in threats, missions, and future  given affordability concerns and changes in threats, missions, and future  force structure. The 2006 Quadrennial Defense Report identified plans to  force structure. The 2006 Quadrennial Defense Report identified plans to  acquire and modernize a fleet of 292 strategic airlifters, comprised of 180  acquire and modernize a fleet of 292 strategic airlifters, comprised of 180  C-17s and 112 modernized and reliability enhanced C-5s. Subsequently,  C-17s and 112 modernized and reliability enhanced C-5s. Subsequently,  Congress provided additional funding that the Air Force plans to use to  Congress provided additional funding that the Air Force plans to use to  procure 25 more C-17s for a future force of 205, and 1 C-5 crashed, leaving  procure 25 more C-17s for a future force of 205, and 1 C-5 crashed, leaving  111 aircraft.  However, the Department of Defense (DOD) is currently  rethinking its strategic airlift plans, due in part to significant cost growth  for modernizing C-5 aircraft and a subsequent scaling back of  modernization efforts. New mobility requirements studies now under way  and pending decisions on C-17 acquisitions will further influence the  department’s airlift investment strategy. In this context, you asked us to  (1) identify the impact C-5 modernization cost increases have had on the  mix of aircraft DOD needs to meet its strategic airlift requirement, (2)  assess the current C-5 modernization cost estimate, and (3) identify C-17  production plans and issues related to production line shutdown.
In conducting our work, we collected information on options DOD  considered to meet its strategic airlift requirement and on DOD’s efforts to  determine its future airlift needs. We evaluated DOD and contractor cost  estimates for the C-5 Avionics Modernization Program (AMP) and the  Reliability Enhancement and Reengining Program (RERP), and the report  by the Institute for Defense Analyses to assess the underlying assumptions  and differences between various RERP cost estimates. We compared the  practices used by DOD’s Cost Analysis Improvement Group (CAIG) to  develop the RERP cost estimate with practices described in GAO’s cost  assessment guide to evaluate the overall reliability of the new estimate. We  discussed and evaluated C-17 production plans, costs, and issues related  to work force, tooling, and suppliers for both a shutdown and a  shutdown/restart scenario with DOD and contractor officials.
We conducted this performance audit from February 2008 to November  2008 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. Appendix I includes  additional details about our scope and methodology.
subsections: section_title: Background
paragraphs: The Air Force’s C-5 and C-17 strategic airlifters both possess  intercontinental range with aerial refueling and can carry weapons and  equipment too large for any other DOD aircraft. Each also has some  complementary characteristics that favor a mixed fleet. The larger C-5 can  carry more cargo than the C-17 and is the only aircraft capable of handling  some equipment, such as the Army’s 74-ton mobile scissors bridge. The C- 17 is more modern, has a higher mission capable rate, and is more flexible  in that it also provides tactical (intratheater) airlift to austere, forward- deployed bases. Figure 1 compares the two strategic airlifters.
The Air Force acquired the C-5 fleet in two production batches. Aircraft  designated C-5A were built between 1969 and 1974 and given new wings in  the 1980s.  Aircraft designated C-5B were built in a second production run  in the 1980s. In 1999, the Air Force began modernizing its C-5 aircraft to  improve fleet reliability and mission capable rates. The modernization is  being done in two phases.
The Avionics Modernization Program (AMP) upgrades capabilities,  including Global Air Traffic Management, navigation and safety  equipment, modern digital equipment, and an all-weather flight control  system.
The Reliability Enhancement and Reengining Program (RERP)  replaces engines and modifies electrical, fuel, and other subsystems.
Together, these two upgrades were expected to improve the fleet’s  mission capable rate to at least 75 percent, thereby increasing payload  capability and transportation throughput, and to reduce total ownership  costs over the life cycle by about $14 billion in 2008 dollars.
DOD initially expected to spend about $12 billion on the C-5 AMP and  RERP efforts. However, both modernization efforts experienced cost  problems. AMP development costs increased by approximately 20 percent  and would have been higher had the Air Force not reduced requirements  and deferred some development activities to other programs. Officials  waived 14 operational requirements and deferred the correction of 250  deficiencies identified during testing, many of which will be addressed and  funded in RERP or future efforts. In 2007, DOD reported that RERP  average procurement unit costs grew more than 50 percent from the  original baseline estimate.
C-17 procurement began in 1988 and the Air Force’s current plan is to  acquire a total of 205 C-17s for $66 billion. The first production C-17  aircraft was delivered to the Air Force in June 1993 and the service has  accepted delivery of 178 aircraft through October 2008. Delivery of the  205th aircraft is projected in August 2010. One aircraft is dedicated to  provide airlift capabilities to the North Atlantic Treaty Organization,  effectively setting the Air Force’s operational force at 204.
DOD periodically assesses global threats, the national military strategy,  and its force structure to determine future airlift requirements and to  judge the sufficiency of its acquisition and modernization plans. The  analytical basis for DOD’s current airlift requirements is the mobility  capabilities study completed in December 2005. Officials used the study  results to report in the 2006 Quadrennial Defense Review that 180 C-17s  and 112 fully modernized C-5s—i.e., those receiving both the AMP and  RERP modification—would be sufficient to meet national military strategy  with acceptable risk. The Air Force is now engaged in a new mobility  capabilities study, the results of which will be briefed in May 2009.  A final  written report is expected to be issued in November 2009. According to Air  Force officials, the new study will take into account a variety of changes  that have occurred since the last mobility study was completed in 2005,  including the following:    Addition of over 92,000 Marines and Army soldiers and their equipment  that will need to be transported to locations across the United States  and around the world.
Establishment of a new African Command that will require the  movement of troops and equipment to a variety of locations around the  second largest continent in the world.  Introduction of Mine Resistant Ambush Protected vehicles, which are  being used in Iraq to provide enhanced protection for U.S. troops.  Increase in weight of the Army’s Future Combat System vehicles,  which makes it no longer possible to transport some vehicles with C- 130 aircraft (DOD’s primary tactical airlifter).
In addition to the new mobility capabilities study, Congress in 2008  directed the Secretary of Defense to conduct a requirements-based study  on alternatives for the proper size and mix of fixed-wing strategic and  tactical airlift to meet the national military strategy for the 2012, 2018, and  2024 time frames. The study, accomplished by the Institute for Defense  Analysis, is due in January 2009.
section_title: Mix of C-5s and C-17s Needed to Meet DOD’s Strategic Airlift Requirement Continues to Evolve
paragraphs: The numbers and specific mix of strategic airlifters continues to be in a  state of flux as DOD struggles to define and control costs and to establish   firm requirements. Over the past several years, DOD has made changes in  the number of C-5s and C-17s it says it needs to meet its strategic airlift  requirement. C-5 modernization cost increases prompted DOD to reduce  the number of C-5s it plans to fully modernize.  Subsequently, Congress  provided additional funding that the Air Force is using to procure more C- 17s, which would offset the loss in capability of modernizing fewer C-5s.  While officials believe this mix will allow DOD to meet its strategic airlift  requirement, the number of C-5s DOD modernizes and C-17s it procures  may change again, pending the results of ongoing mobility studies,  potential C-5 retirements, and the eventual cost estimates of C-5  modernization. Past efforts to identify the appropriate mix have been  hampered by the lack of sufficient metrics, such as a million ton-mile  metric, that quantify specific C-5 and C-17 needs.  At this time, DOD  officials have not determined what metrics it will use to make strategic  airlift decisions.
subsections: section_title: Fewer C-5s Will Be Fully Modernized Due to Significant RERP Cost Increases
paragraphs: C-5 modernization cost increases caused DOD to change its approach for  meeting its strategic airlift requirements. DOD had planned to meet the  requirements with 112 fully modernized C-5s—i.e., those receiving both  the AMP and RERP modifications—and 180 C-17 aircraft. The cost for the  C-5 modernization efforts was estimated to be approximately $12 billion— about $900 million for the AMP program and $11.1 billion for the RERP  program.
However, just prior to the RERP production decision in February 2007, the  prime contractor, Lockheed Martin, indicated that RERP costs related to  labor and supplier parts had significantly increased, prompting new cost  estimates. The Air Force’s estimate of $17.5 billion was $4.2 billion more  than Lockheed Martin’s estimate of $13.3 billion at that time. The new  estimate increased projected average procurement unit costs by more than  50 percent compared to the original baseline and triggered a statutory  requirement for review and certification of the program.
Following notification to Congress of the cost increase, the Under  Secretary of Defense for Acquisition, Technology and Logistics requested  that the CAIG estimate the cost of various options for DOD to meet its  strategic airlift mission. The CAIG analyzed 14 options covering a range of  scenarios for the RERP program in three broad categories: modifying all  C-5 aircraft, partially modifying the C-5 fleet, and canceling the C-5 RERP  program. Each option also assumed that the department would have at  least 203 C-17 aircraft, 14 more than the program planned to acquire at that  time. The CAIG estimated the cost of providing the RERP modification to  all 111 aircraft to be $15.4 billion, halfway between the contractor’s and  the Air Force’s estimates. Based on this analysis, the Under Secretary of  Defense for Acquisition, Technology and Logistics concluded that the cost  to RERP all C-5 aircraft was unaffordable and opted to limit full  modification to 52 aircraft—47 C-5 Bs, both C-5 Cs, and 3 system  development and demonstration aircraft.  While the Air Force is expected  to spend $3.4 billion less under the restructured program, ultimately less  than one-half of the 111 aircraft will be modernized and at a much higher  unit cost than originally estimated (see table 1).
section_title: Additional C-17s Offset Capability Loss from Modifying Fewer C-5s
paragraphs: As part of the C-5 RERP restructuring, U.S. Transportation Command  identified a need for 205 C-17s,  25 more than were authorized at the time  the 2005 mobility capabilities study was completed.  Subsequent to the  study, Congress provided additional funding that the Air Force used to  procure 10 more C-17s in 2007 and 15 more in 2008.  The following table  shows the changes in the strategic airlift mix over the past 3 years and the  impact the mixes have had on DOD’s ability to meet its strategic airlift  mission (see table 2). While DOD did not use a million ton-mile per day  metric to determine how many C-5s and C-17s it needed in its December  2005 mobility study, officials were able to quantify for us the million ton- mile per day capabilities of the scenarios identified below.
The fiscal year 2009 National Defense Authorization Act authorizes  procurement of 6 more C-17s, which will bring the total number to 211  aircraft.
section_title: Forthcoming Decisions Could Lead to a Change in the Strategic Airlift Mix in the Near Future
paragraphs: The number and mix of aircraft needed to support DOD’s strategic airlift  mission could change again based on the results of ongoing mobility  studies, possible C-5 retirements, and the eventual cost of C-5  modernization efforts. However, DOD’s ability to make sound strategic  airlift portfolio decisions, including the number of C-5s to retire and the  number of additional C-17s that should be procured, may be hampered if  appropriate metrics are not included in the study efforts.
subsections: section_title: Mobility Requirements Studies
paragraphs: DOD is currently studying its future mobility requirements. The  congressionally directed requirements study by the Institute of Defense  Analysis is due in January 2009, followed by the Air Force’s mobility  capabilities study in May 2009. Some expect the studies will identify  increased demands on airlift, particularly for the C-17 since it can perform  both a strategic and tactical role. As Army equipment becomes heavier  and/or bulkier, the C-17 may be the only aircraft capable of delivering  major weapon systems to the front lines and to more austere bases in the  theater of combat. The results of both studies, if done accurately and  comprehensively, should provide the analytical foundation for the future  airlift force structure.
We previously reported on shortcomings in the Institute for Defense  Analysis’ study plan that could make it difficult for decision makers to  know how much strategic airlift is needed.  For example, the study plan  did not provide details on assumptions and the measures of effectiveness,  or metrics, the command officials would be using in their evaluation.   Measures of effectiveness are considered to be especially important when  evaluating alternatives, such as comparing the results of two analyses that  measure different airlift force mixes.  We recommended in April 2008 that  DOD take action to ensure that the final study plan included sufficient  details to address all the elements specified in the law and needed to  inform decision makers on airlift issues. DOD concurred with our  recommendation.
We also identified shortcomings in DOD’s 2005 mobility capabilities study  approach that, if not addressed, could be repeated again in the current  study.  Unlike prior studies, the 2005 study did not recommend a specific  airlift requirement expressed in million ton-miles per day—a common  metric integral to prior capability studies that defines and quantifies airlift  requirements as a basis for computing the size and optimal mix of airlift  forces. Instead, DOD officials stated that it expressed its airlift  requirement in terms of specific numbers and types of aircraft needed to  meet the national defense strategy to take into account real-world  operating parameters that may cause aircraft payloads to vary significantly  from standard planning factors. Later, in response to congressional  direction, DOD translated the requirements into a million ton-mile  requirement.  We also found the study did not identify the operational  impact of increased or decreased strategic airlift on achieving warfighting  objectives that would be associated with different mixes of C-5 and C-17  aircraft.  As a result, we could not determine how the study concluded that  the mix of C-5s and C-17s at that time was adequate for meeting mobility  requirements and for supporting strategic airlift portfolio investment  decisions. In 2006, we recommended that DOD include mobility metrics,  along with warfighting metrics to determine air superiority, when  completing future mobility capabilities studies.  DOD concurred with this  recommendation.
Although DOD concurred with the recommendation, a Transportation  Command official stated that a decision has not yet been made on what  specific metrics will be used to determine the number and mix of strategic  airlifters in the current mobility capabilities study. At the time of this  writing, the study plan had not been finalized and it is unclear whether a  million ton-miles metric will be used, though it is being considered. DOD  often uses the million ton-mile metric as an easy way to compare the  capacity of different fleet mixes.  For example, according to a DOD  official, since C-130s, C-130Js, C-17s, C-5As, C-5Bs, and C-5Ms all have  different capabilities when it comes to payload and range, it is difficult to  compare different mixes of them without using this metric.
section_title: Potential C-5 Retirements
paragraphs: Congressional legislation would allow the Air Force to begin to retire  some C-5s , if appropriate, beginning October 1, 2008, as long as the Air  Force maintains a strategic airlift fleet of 299 aircraft. Prior to retiring any  aircraft, DOD’s Director of the Operational Test and Evaluation must  complete its assessment of a C-5A that had received RERP modification.   According to an Air Force official, testing of a C-5A will begin in August  2009 and the final report will be released in February 2010.
Air Mobility Command officials told us that while they are concerned  about the emerging global threats and requirements, fiscal and personnel  demands require that the command limit overall fleet size once warfighting  risk is reduced to a reasonable level. Therefore, the Air Mobility Command  will consider retiring C-5s, as the law and requirements allow, on a one- for-one basis after 205 C-17s have been procured to ensure the right  combination of aircraft and capability is balanced against cost and risk. A  decision on whether and when to retire C-5s will not likely be made until  after the mobility study has been completed.
section_title: Relative Capability Increases from Modernized C-5s and New C-17 Aircraft
paragraphs: Finally, if the cost for C-5 modernization continues to increase, Air Force  officials may have to reconsider the mix within its airlift portfolio or  request additional funding. Additional investments in C-17 aircraft may  become more attractive.  Currently, a new C-17 would cost about $276  million compared to $132 million to fully modernize a C-5.  Each new C-17  potentially adds 100 percent of its cargo capacity toward meeting the total  airlift requirement. Because the C-5s are already part of the operational  force, each aircraft’s current capacity is already counted toward the total  requirement. Consequently, according to DOD data, the C-5 modernization  programs only provide a marginal increase of 14 percent in capability over  nonmodernized aircraft.  Using DOD’s million ton-mile per day planning  factors, we, working in collaboration with DOD, calculated that DOD  would need to fully modernize 7 C-5s to attain the equivalent capability  achieved from acquiring 1 additional C-17 and the costs would be over 3  times more (see table 3).
The analysis does not include the life-cycle costs of adding more C-17s to  DOD’s airlift portfolio.  However, previous DOD analysis indicated that the  life-cycle costs would be approximately the same if DOD replaced 30 C-5s  with 30 C-17s.
section_title: C-5 Modernization Costs Have Not Been Fully Identified
paragraphs: The Air Force has not fully identified the funding needed to modernize the  C-5 aircraft, and costs are likely to increase.  The current cost estimate is  $9.1 billion to AMP the entire fleet of 111 aircraft and RERP 52 aircraft.   However, we believe this is understated. The current budget does not fully  fund the revised RERP program and the CAIG’s cost estimate does not  adequately address risk and uncertainty. Further, the cost estimate does  not include the costs for a new modernization upgrade program slated to  begin in fiscal year 2010 that would fix AMP deficiencies and add new  capabilities. Alternatively, some future modification costs may be avoided  should the Air Force justify retirement of some older C-5s.
subsections: section_title: Current Estimate for C-5 Modernization Costs Is Questionable
paragraphs: The current budget does not sufficiently fund the revised RERP program.  According to the CAIG’s analysis, the C-5 RERP is underfunded by about  $294 million across the Future Years Defense Plan for fiscal years 2009-  2013. Approximately $250 million less is needed in fiscal years 2009  through 2011, and $544 million more is needed in fiscal years 2012 and  2013. According to program officials, the Air Force is committed to fully  funding the CAIG RERP cost estimate in the fiscal year 2010 President’s  budget yet to be submitted. However, program officials could not identify  sources for the additional funding needed in fiscal years 2012 and 2013.  Figure 2 provides the funding estimate developed by the CAIG to support  the restructured RERP program compared to the fiscal year 2009 budget.
While our review of the CAIG’s cost-estimating methodology found it  generally well documented, comprehensive, and accurate, we found some  weaknesses that impair the credibility and overall reliability of the C-5 cost  estimate. Specifically, the CAIG did not take risk or uncertainty into  account for some major cost drivers, in particular the propulsion system  and labor. Because cost estimates predict future program costs,  uncertainty is always associated with them. For example, there is always a  chance that the actual cost will differ from the estimate because of a lack  of knowledge about the future as well as errors resulting from historical  data inconsistencies, assumptions, cost-estimating equations, and factors  that are typically used to develop an estimate. Quantifying that risk and  uncertainty is considered to be a cost estimating best practice because it  captures the cumulative effect of risks and recognizes the potential for  error.
In a memo documenting its independent cost estimate, the CAIG stated  that the biggest risk to the cost estimate was the purchase agreement  between Lockheed Martin and General Electric for the propulsion system  that is conditioned on specific annual procurement quantities. The CAIG  had estimated that the Air Force could save 18 percent by meeting the  quantity and schedule identified in the revised RERP.  However, CAIG  officials stated that if the budget is not sufficient to meet these agreed-to  quantities, then anticipated price breaks would not occur, resulting in  increased costs of the C-5 RERP to the government. Despite this  significant risk, the CAIG did not perform a risk/uncertainty analysis to  determine the extent to which costs would increase should the buy  quantity be cut. CAIG officials stated that they believe propulsion system  procurement risk has been mitigated because they have identified the  quantities necessary to meet the conditions of the purchase agreement and  the Air Force plans to fully fund to this estimate. Despite these assurances,  however, we have found that DOD often changes procurement quantities  and there is a risk that quantities for the C-5 RERP program may change.   For example, DOD’s Selected Acquisition Report summary shows that of  the 56 programs currently in production, 38 (or 68 percent), have  experienced a quantity change since their production decisions.
In addition, the CAIG did not quantify or address uncertainty with its $2.1  billion labor cost estimate associated with the installation of the RERP on  C-5 production aircraft. The RERP program experienced a 29-month break  in production between the last system development and demonstration  unit and the first production unit. As such, the CAIG had to estimate  inefficiencies due to loss of learning and how it would affect the costs of  future production. The CAIG’s assumptions differed from those used by  the Air Force and Lockheed Martin, which caused the CAIG estimate to be  about $200 million more than Lockheed Martin’s estimate and about $400  million less than the Air Force’s labor estimate. As a result of the  weaknesses discussed above, the Air Force’s basis for making strategic  airlift portfolio investment decisions is impaired, and the RERP program is  at increased risk of experiencing cost overruns.
section_title: A New Modernization Program for the C-5 Will Add Further Costs
paragraphs: Additional modernization efforts not yet budgeted will add to future C-5  costs. Air Force officials stated that a new C-5 upgrade program is slated  to begin in fiscal year 2010. The initial funding requirement is $65 million— $40 million in research, development, test, and evaluation funds and $25  million in procurement funds—to migrate all C-5s toward a standard  software configuration, based on changes made in the AMP and RERP  programs. Requirements previous waived on the AMP may also be  addressed in the initial block of this program. Additional funding will be  requested in 2012 and beyond to provide additional capabilities. According  to a program official, the total requirements and funding needs for this  modernization program have not been finalized.  However, at this time it is  not expected to be as costly as the C-5 AMP or RERP.
The eventual costs for modernizing C-5 aircraft hinge upon the decisions  DOD officials make about the number and mix of strategic airlifters DOD  needs in the future. If additional C-5 capability is needed, more C-5 aircraft  may need to receive the RERP modification and costs will increase. On the  other hand, if decision makers believe additional C-17 capability is needed  in lieu of the C-5, the Air Force may be able to reduce the number of  aircraft that need the AMP modification and additional modifications  slated to begin in fiscal year 2010.
section_title: The Air Force Must Make a Decision Soon Regarding C-17 Acquisition and Eventual Shutdown of the Production Line
paragraphs: Results from the two mobility studies, potential C-5 retirements, and  future modernization cost increases could lead to a decision to extend C- 17 production beyond the 205 now authorized.  The production line is  currently scheduled to close in September 2010 with the supplier base and  portions of the line closing sooner.  A well-reasoned near-term decision on  the final force size could avoid substantial future costs from ending C-17  production prematurely and later restarting production.  Eventually, the  Air Force is responsible for providing the substantial funding for  shutdown expenses.  Contractor and Air Force cost estimates vary widely,  ranging up to $1 billion and more, and need to be reconciled.  Only $37  million has been budgeted thus far.
subsections: section_title: Careful Planning Needed to Avoid Shutting Down and Restarting the Production Line
paragraphs: Two alternatives to completely shutting down the C-17 production line  would be to slow down the rate of production or to close out current  production while preserving some ability to restart the line should  conditions change and additional C-17s are needed. Both options are not  attractive.  Slowing down production raises unit costs due to smaller  annual quantities.  Analysis indicates that, once closed, it would not be  feasible or cost effective to restart production due to costs for hiring and  training a new workforce, reinstalling tooling, and reestablishing the  supply base.  Therefore, careful planning to firmly and timely establish  future C-17 fleet requirements is important to avoid unnecessary costs  associated with a slowdown or a premature shutdown.
Our review of contractor and Air Force plans identified the following  major challenges and substantial costs for restarting production:    A workforce of nearly 3,100 people would have to be hired and trained  following a complete shutdown. Boeing officials believe that the vast  majority of its current workforce will not be available for  reemployment 1 year after the shutdown. A union representative  stated that workers, whose average age is around 57 years, will either  retire or find other jobs during the shutdown period. Boeing does not  have the ability to move its workers to other production lines at its  Long Beach, California, plant because the C-17 is the last aircraft being  built at that facility.
Production tooling would need to be dismantled, stored, and  maintained for the entire length of the shutdown. Tooling would then  have to be reinstalled and restored to its original working condition,  which officials believe would be no small feat considering the  significant amount of automation involved in the production process.  In addition, new tooling may need to be procured depending on design  changes that may occur during the shutdown period.
Suppliers would have to be identified and their processes and parts  would have to be qualified.  Boeing officials stated that some suppliers  it deals with now may not be available and many other suppliers may  not participate in the C-17 production program because they may  develop alternative business ventures following the shutdown.  Suppliers of certain specialty parts are of utmost concern.
Cost estimates to shut down and restart the C-17 production line are very  substantial.  In 2006, when various shutdown options were being  evaluated, Boeing estimated that the cost to shut down and restart would  be about $918 million; the Air Force estimated $2 billion. Table 4 shows  the main assumptions used to develop these estimates.
Boeing and the Air Force used different cost-estimating assumptions when  completing their production shutdown and restart estimates, and neither  estimate reflects all potential costs. For example, Boeing’s estimate only  addresses mothballing the production facility in anticipation of restarting  production, whereas the Air Force’s estimate includes the costs to stop  and restart production as well as a final shutdown that would occur after a  second production run is completed.  Neither Boeing nor the Air Force  included costs to hire and train approximately 3,100 workers or to make  configuration changes that may have occurred to the aircraft during the  time period when the line was shut down. According to Boeing and Air  Force officials, these two cost categories could add millions of dollars to  their production shutdown and restart estimates.
section_title: Air Force Has Not Budgeted Sufficient Funds for the C-17 Production Shutdown
paragraphs: At this writing, the Air Force has allocated $37 million in its outyears  budget for C-17 production shutdown, far less than what is believed to be  needed.  As above, cost estimates vary and were not consistently derived.   Identifying and reconciling the full costs of shutdown is needed.  The Air  Force plans to negotiate and issue a postproduction contract to Boeing to  identify the disposition of tooling and other production assets and to  ensure that a viable sustainment supplier base has been established when  production has ended.
In 2006, Boeing and the Air Force developed considerably different  estimates of about $1 billion and $465 million, respectively, for the cost of  shutting down production completely.  Table 5 below compares the two  cost estimates developed in 2006 and the underlying assumptions that  contributed most significantly to the differences.
Differences between the two estimates can largely be attributed to the  underlying assumptions used. For example, in assessing alternatives for  shutting down the C-17 production facility at Long Beach, California,  Boeing considered three options for the site: redeploy the property to  Boeing for reuse, treat the property as an operating asset, or sell the  property. Boeing officials concluded that the current production facility  would not be used for future business and should be sold. Therefore, they  included costs to demolish facilities and for environmental remediation in  their estimate.  Air Force officials believe demolition and environmental  remediation costs should not be part of the shutdown costs and did not  include them.
Since 2006, Congress has provided additional funding that the Air Force is  using to procure additional C-17s.  Thus, DOD officials stated that the  requirement to shut down the production has been delayed 1 year and now  estimate the shutdown costs to be $505 million, due to inflation. Boeing  has not updated its estimate.
section_title: Conclusions
paragraphs: Strategic airlift is an essential, key enabler of U.S. military capability to  rapidly project forces worldwide. The C-5 and C-17 provide  complementary capabilities. However, DOD continues to struggle with  identifying the specific quantities and determining the optimal mix of  aircraft needed. Clarity is needed before committing additional billions of  dollars to C-5 modernization programs, establishing C-5 retirement  schedules, and/or acquiring additional C-17 aircraft. Careful planning is  also important to avoid the costs of shutting down the C-17 line  prematurely and later deciding to restart the production. The new mobility  studies, if done correctly, could bring clarity to strategic airlift capabilities  needed to support the future force and changed threats, as well as inform  future tactical airlift requirements because of the C-17’s dual role.  Important metrics left out of the 2005 capabilities study—such as specific  ton-mile mobility requirements and relative reliability rates—are  considered critical factors in quantifying and analyzing cost-effective force  mixes. DOD concurred with our prior recommendation to use mobility  metrics to inform future mobility capabilities studies.  However, at this  writing, it is unclear whether DOD will use a million ton-mile metric in its  current analysis to determine the cost-effective mix of aircraft and guide  important investment decisions related to the expenditure of billions of  dollars.  Until comprehensive requirements—supported by appropriate,  quantifiable metrics—and the full costs for alternate courses of action are  identified, DOD decision making on the future size and mix of strategic  airlift is hampered, thus increasing the risk of incurring unnecessary costs  and establishing a less than optimal mix of strategic and tactical airlift  forces.
section_title: Recommendations for Executive Action
paragraphs: To better inform decision makers and provide improved and quantifiable  projections of airlift mobility requirements and investment needs, we  recommend that the Secretary of Defense direct the Office of the  Secretary of Defense (Program Analysis and Evaluation) and U.S.  Transportation Command to take the following action:    Ensure that the new mobility capabilities study specifies the ton-mile  per day metric and other relevant metrics to support sound strategic  airlift decisions, including (1) the cost-effective mix of C-5 and C-17  aircraft consistent with national security strategy; (2) the number of   C-5s required to airlift equipment that can only be carried by that  aircraft; (3) C-5A retirement schedules, if warranted by analysis;   (4) the number of C-17s needed to accomplish both its strategic and  tactical roles; and (5) future procurement and modernization needs.
We also recommend that the Secretary of Defense direct the Secretary of  the Air Force to take the following two actions:    Prepare updated, reliable, and comprehensive cost estimates for C-5  modernization to include risk and sensitivity analyses on major cost  drivers for the RERP, the costs of a new modernization program, and  potential savings should some C-5A retirements be warranted.
Identify and budget for the full costs to shut down the C-17 production  line in the time frame consistent with final decisions on the future size  of the C-17 fleet.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided us with written comments on a draft of this report. DOD  concurred with one recommendation, partially concurred with another,  and did not concur with one recommendation.  DOD’s comments appear  in appendix II. DOD also provided technical comments on our draft report  which we incorporated as appropriate in the report.
In its comments, DOD partially concurred with the draft recommendation  to ensure that the current mobility capabilities study specifies a ton-mile  per day metric and other relevant metrics to support sound strategic airlift  decisions.  The department stated that the Office of the Secretary of  Defense (Program Analysis and Evaluation) and U.S. Transportation  Command, offices that are jointly working on the mobility capabilities  study, will specify metrics, including a ton-miles per day metric, for the  study.  Accordingly, we redirected our recommendation to these offices  instead of the Air Force.
DOD did not concur with the recommendation to prepare updated C-5  modernization cost estimates.  DOD stated that the modernization is being  accomplished in two phases—the AMP and RERP—and that the third  modernization effort we identified that is slated to begin in fiscal year 2010  is a sustainment program that would fall below the ACAT II threshold.   Further, department officials believe that the most recent cost estimates  for the AMP and RERP are sufficient and areas of concern and mitigating  factors related to the RERP estimate were identified during the Nunn- McCurdy process.
We continue to believe updated estimates are warranted.  We are not  suggesting that the department revisit its RERP Nunn-McCurdy decision.  For the most part, we believe the CAIG did an adequate job identifying the  costs associated with 14 different RERP options, especially given the short  time frame in which the estimates had to be completed.  However, the  CAIG did not perform risk or uncertainty analysis, which is considered to  be a cost-estimating best practice.  Since the program is not fully funded  and the Air Force has not yet completed its analysis of mobility  requirements, there remains significant risk that funding will not be  available in outyears or that the quantities of C-5s and C-17s could change.   Therefore, we believe it is important that DOD identify a range of potential  costs based on different quantities, so that decision makers will have  adequate information for future budget decisions related to the number  and mix of strategic airlifters.
DOD concurred with our recommendation to identify and budget for the  full costs to shut down the C-17 production line consistent with final  decisions on the future size of the C-17 fleet.
We are sending copies of this report to the Secretary of Defense and  interested congressional committees. The report is also available at no  charge on the GAO Web site at http://www.gao.gov.
If you have any questions about this report or need additional information,  please contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. Key contributors to this report were Bruce  Fairbairn, Assistant Director; Cheryl Andrew; Marvin Bonner; John  Crawford; Karen Sloan; Karen Richey; and Marie Ahearn.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines the Department of Defense’s (DOD) efforts to meet  its strategic airlift requirements. Specifically, we (1) identify the impact C- 5 modernization cost increases have had on the mix of aircraft DOD needs  to meet its strategic airlift requirement, (2) assess the current C-5  modernization cost estimate, and (3) identify C-17 production plans and  issues related to a production line shutdown.
To determine the impact C-5 modernization cost increases have on the mix  of aircraft DOD needs to meet its strategic airlift requirement, we  compared the mix of aircraft DOD planned to use to meet the strategic  airlift requirements identified in a 2005 mobility study to the mix of aircraft  DOD currently plans to use. We collected information on the 14 options  DOD considered to meet its strategic airlift requirements following the C-5  Reliability Enhancement and Reengining Program (RERP) cost breach  notification to Congress. We also obtained cost data from the Cost  Analysis Improvement Group (CAIG) related to the 14 options. We met  with appropriate officials from the Office of the Secretary of Defense, the  Office of the Secretary of the Air Force, and Air Mobility Command to  obtain their opinions on the mix of C-5 and C-17 aircraft needed to meet  the current mobility requirement. When available, we obtained analytical  documentation supporting the views of these officials.
We also considered the impact decisions related to the current, ongoing  mobility studies, pending congressional legislation, and further C-5 cost  increases could have on the future mix of C-5 and C-17s. We identified  issues related to DOD’s 2005 mobility study and discussed DOD’s efforts to  address these same issues in the current study with DOD officials.
To determine the current cost estimates for the C-5 modernization efforts,  we collected cost estimates for the C-5 Avionics Modernization Program  (AMP) and C-5 RERP. We also gathered preliminary cost data for the  modernization program slated to begin in fiscal year 2010 from program  officials. We used C-5 AMP cost data from the December 2007 Selected  Acquisition Report and C-5 RERP cost data from the June 2008 Selected  Acquisition Report. The CAIG identified funding shortfalls for the C-5  RERP program.
During our examination of C-5 RERP costs, we collected various cost  estimates and supporting documentation developed by Lockheed Martin,  the DOD CAIG, and the Air Force. We met with appropriate officials from  each of these organizations to determine the underlying assumptions of  their respective estimates and to understand key differences between the  estimates. Since the CAIG’s estimate serves as DOD’s official estimate for  the restructured C-5 RERP program, we compared how that estimate was  developed to GAO’s guide for estimating and managing program costs to  determine the reliability of the DOD’s cost estimate. We also interviewed  officials from the Institute for Defense Analysis to discuss their analysis  and findings related to the various C-5 RERP cost estimates.
To identify C-17 production plans and issues related to the C-17  production line shutdown, we collected information on the number of C- 17s DOD is currently authorized to procure and discussed production  shutdown time frames with Boeing, the prime contractor. We collected  cost estimates and underlying assumptions Boeing and the Air Force made  in 2006 for shutting down the production line completely and shutting  down and restarting the production line at a later time. Additionally, we  obtained the opinions of Boeing and Air Force program officials about the  costs and challenges associated with shutting down and restarting the  production line. Our discussions with both of these organizations focused  on potential personnel, supplier, and tooling issues. We also discussed this  topic with Boeing union officials who have dealt with downsizing efforts at  Boeing’s Long Beach, California, facility and Lockheed Martin officials  who were involved with shutting down and restarting the C-5 production  line during the 1970s and 1980s at the Marietta, Georgia, plant. Finally, we  reviewed DOD budget documents to determine how much had been  budgeted for the C-17 production line shutdown.
We conducted this performance audit from February 2008 to November  2008 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense