The F-35 program made progress in 2012 on several fronts. The program met or substantially met most of its key management and development testing objectives for the year. We also found that the program made progress in addressing key technical risks, as well as improving software management, manufacturing, and supply processes. The F-35 program met or substantially met most of its key management objectives established for calendar year 2012. The program office annually establishes major management objectives that it wants to achieve in the upcoming year. The F-35 program achieved 7 of its 10 primary objectives in 2012. Those included, among other things, the completion of development testing on early increments of software, the beginning of lab testing for both variations of the helmet mounted display, the beginning of pilot training for two aircraft variants, and the completion of negotiations on the restructured development contract. Although the program did not complete its software block 3 critical design review as planned in 2012, it did successfully complete its block 3 preliminary design review in November 2012 and the critical design review in late January 2013. The program did not meet its objectives to (1) deliver 40 production aircraft in 2012 and (2) receive approval from the Defense Contract Management Agency of the contractor’s plan for correcting deficiencies in its system for tracking and reporting cost and schedule progress. The F-35 development flight test program also substantially met 2012 expectations with some revisions to original plans. The program exceeded its planned number of flights by 18 percent, although it fell short of its plan in terms of test points flown by about 3 percent, suggesting that the flights flown were not as productive as expected. Test officials had to make several adjustments to plans during the year due to operating and performance limitations with aircraft and late releases of software to test. As a result, none of the three variants completed all of their planned 2012 baseline points, but the test team was able to add and complete some test points that had been planned for future years. Testing accomplished on each of the aircraft variants in 2012 included: Conventional takeoff and landing variant (F-35A)—accomplished high angle of attack testing, initial weapons separation, engine air start, expansion of the airspeed and altitude envelopes, and evaluated flying qualities with internal and external weapons. Short takeoff and vertical landing variant (F-35B)—accomplished the first weapons release, engine air start tests, fuel dump operations, flight envelope expansion with weapons loaded, radar signature testing, and tested re-design air inlet doors for vertical lift operations. Carrier suitable variant (F-35C)—conducted speed and altitude range verification and flights with external weapons, prepared for simulated carrier landings, and conducted shore-based tests of a redesigned arresting hook. In 2012, the F-35 program also made considerable progress in addressing four areas of technical risk that if left unaddressed could substantially degrade the F-35’s capabilities and mission effectiveness. However, additional work remains to fully address those risks. These risk areas and the actions taken in 2012 are discussed below: 1. Helmet mounted display (HMD)—DOD continued to address technical issues with the HMD system. The original helmet mounted display, integral to mission systems, encountered significant technical deficiencies and did not meet warfighter requirements. The program is pursuing a dual path by developing a second, less capable helmet while working to fix the first helmet design. In 2012, DOD began dedicated ground and flight testing to address these issues. Both variations of the helmet mounted display are being evaluated and program and contractor officials told us that they have increased confidence that the helmet deficiencies will be fixed. DOD may make a decision in 2013 as to which helmet to procure. 2. Autonomic Logistics Information System (ALIS)—ALIS is an important tool to predict and diagnose aircraft maintenance and supply issues. ALIS systems with limited capability are in use at training and testing locations. More capable versions of ALIS are being developed and program and contractor officials believe that the program is on track to fix previously identified shortcomings and field the fully capable system in 2015. Limited progress was made in 2012 on developing a smaller, transportable version needed to support unit level deployments to operating locations. 3. Arresting hook system—The carrier variant arresting hook system was redesigned after the original hook was found to be deficient, which prevented active carrier trials. The program accomplished risk reduction testing of a redesigned hook point to inform this new design. The preliminary design review was conducted in August 2012 and the critical design review in February 2013. Flight testing of the redesigned system is slated for late 2013. 4. Structural durability—Over time, testing has discovered bulkhead and rib cracks on the aircraft. Structural and durability testing to verify that all three variants can achieve their expected life and identify life- limited parts was completed in 2012. The program is testing some redesigned structures and planning other modifications. Officials plan to retrofit and test a production aircraft already built and make changes to the production line for subsequent aircraft. Current projections show the aircraft and modifications remain within weight targets. In 2012, the F-35 aircraft contractor and program office took steps to improve the program’s software management and output. The program began the process of establishing a second system integration laboratory, adding substantial testing and development capacity. The program also began prioritizing and focusing its resources on incremental software development as opposed to the much riskier concurrent development approach. In addition, the program began implementing improvement initiatives recommended by an independent software review, and evaluated the possible deferral of some of the aircraft’s capabilities to later blocks or moving them outside of the current F-35 program altogether. At the same time, program data regarding software output showed improvement. For example, program officials reported that the time it took to fix software defects decreased from180 days to 55 days, and the time it took to build and release software for testing decreased from 187 hours to 30 hours. Key manufacturing metrics and discussions with defense and contracting officials indicate that F-35 manufacturing and supply processes improved during 2012. While initial F-35 production overran target costs and delivered aircraft late, the latest data through the end of 2012 shows labor hours decreasing and deliveries accelerating. The aircraft contractor’s work force has gained important experience and processes have matured as more aircraft are built. We found that the labor hours needed to complete aircraft at the prime contractor’s plant decreased, labor efficiency since the first production aircraft improved, time to manufacture aircraft in the final assembly area declined, factory throughput increased, and the amount of traveled work declined. In addition, program data showed that the reliability and predictability of the manufacturing processes increased while at the same time aircraft delivery rates improved considerably. Figure 1 illustrates the improvement in production aircraft delivery time frames by comparing actual delivery dates against the dates specified in the contracts. Ensuring that the F-35 is affordable and can be bought in the quantities and time frames required by the warfighter will be of paramount concern to the Congress, U.S. military and international partners. As we recently reported, the acquisition funding requirements for the United States alone are currently expected to average $12.6 billion per year through 2037, and the projected costs of operating and sustaining the F-35 fleet, once fielded, have been deemed unaffordable by DOD officials. In addition, the program faces challenges with software development and continues to incur substantial costs for rework to fix deficiencies discovered during testing. As testing continues additional changes to design and manufacturing processes will likely be required, while production rates continue to increase. We recently concluded that while the March 2012 acquisition program baseline places the F-35 program on firmer footing, the aircraft are expected to cost more and deliveries to warfighters will take longer than previously projected. The new baseline projects the need for a total of $316 billion in development and procurement funding from 2013 through 2037, or an average of $12.6 billion annually over that period (see figure 2). Maintaining this level of sustained funding will be difficult in a period of declining or flat defense budgets and competition with other “big ticket items” such as the KC-46 tanker and a new bomber program. In addition, the funding projections assume the financial benefits of the international partners purchasing at least 697 aircraft. If fewer aircraft are procured in total or in smaller annual quantities—by the international partners or the United States—unit costs will likely rise according to analysis done by the Office of the Secretary of Defense (OSD) Cost Assessment and Program Evaluation (CAPE) office. In addition to the costs for acquiring aircraft, we found that significant concerns and questions persist regarding the cost to operate and sustain the F-35 fleet over the coming decades. The current sustainment cost projection by CAPE for all U.S. aircraft, based on an estimated 30-year service life, exceeds $1 trillion. Using current program assumptions of aircraft inventory and flight hours, CAPE recently estimated annual operating and support costs of $18.2 billion for all F-35 variants compared to $11.1 billion spent on legacy aircraft in 2010. DOD officials have declared that operating and support costs of this magnitude are unaffordable and the department is actively engaged in evaluating opportunities to reduce those costs, such as basing and infrastructure reductions, competitive sourcing, and reliability improvements. Because of F-35 delays and uncertainties, the military services have made investments to extend the service lives of legacy F-16 and F-18 aircraft at a cost of $5 billion (in 2013 dollars). The Navy is also buying new F/A-18E/F Super Hornets at a cost of $3.1 billion (in then-year dollars) to bridge the gap in F-35 deliveries and mitigate projected shortfalls in fighter aircraft force requirements. As a result, the services will incur additional future sustainment costs to support these new and extended-life aircraft, and will have a difficult time establishing and implementing retirement schedules for existing fleets.