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Monday March 11, 2002

Key Helo Programs' Survival in Question

WASHINGTON, USA ( ROBERT WALL for Aviation Week ) - Costs on two of the Defense Dept.'s helicopter programs have skyrocketed to the point where senior Pentagon officials must reassess whether they still want the aircraft.

Delays with the Marines' helo modernization mean the Corps will have to keep AH-1Ws in service longer. They are supporting Operation Anaconda in Afghanistan.

Both Bell Helicopter Textron's AH-1Z and UH-1Y and Boeing's CH-47F Chinook upgrade have seen costs balloon, triggering so-called Nunn-McCurdy breaches.

Under this legislative provision, projects that incur a 25% cost increase have to get the blessing from the Pentagon to move forward. In particular, senior acquisition officials must conclude that there are no comparable alternatives at less cost, that new cost estimates are reasonable, and that management has been restructured to control costs. Industry and government project managers are extremely concerned about Nunn-McCurdy violations after the Pentagon's decision last year to terminate the Navy Area Wide ballistic missile development program due to such a breach. It was the first time the rule was invoked.

The Pentagon, in the Fiscal 2003 budget request, signaled there were serious problems with the Marine Corps AH-1Z and UH-1Y programs. It identified the Naval Air Systems Command-run effort as one of several where cost estimates had to be fixed. Pentagon officials adjusted funding and scaled back the production rate.

The setback means the modified attack and utility helicopter won't be fielded until September 2007, a year later than planned, pending approval by Marine Corps leadership. Operational tests also were pushed back and prolonged to make time to apply lessons learned.

For several weeks, the Navy refused to address the extent of the problem, which amounts to an 87% cost increase since its inception in 1996. This escalation, first reported by Bloomberg News, brings the development cost to almost $900 million. The Navy now blames the increase on poor estimates of the work required, growth in the project's scope, declines in the business base and manufacturing delays.

AH-1Z production was to begin in Fiscal 2003 with four aircraft, and then increase to 12, 16, and flatten out at 24. Now the purchase will be limited to five aircraft starting in Fiscal 2004, followed by seven, 16 and 18, the Navy finally stated. In the end the Marines would still get 180 helicopters; it will just take longer. Similarly, UH-1Y production won't begin until 2004--with four aircraft--followed by four, six and then 10 by 2007. The old program had three Hueys in 2003, followed by six, eight, and 12 in 2006 and 2007. Total acquisition would remain at 100 UH-1Ys.

This is only the latest in a series of set-backs for Bell Helicopter Textron. The company has been under intense scrutiny because of problems in the V-22 tiltrotor it is codeveloping with Boeing. Additionally, it was embroiled in internal management problems, which culminated in the ouster of CEO Terry Stinson who has been succeeded by John Murphey. The turmoil with its development projects also had a financial impact that forced the company to adjust earnings last year. The AH-1Z also has been a source of bad news for senior executives, having failed to win in multiple overseas competitions last year, including in Japan and Australia.

The massive cost increase with the AH-1 Cobra and UH-1 Huey upgrades casts a bad light on the analysis that led to the decision to stick with those aircraft. Senior Pentagon officials urged the Marine Corps to buy UH-60 Black Hawks and AH-64 Apaches for the utility and attack helicopter missions, instead of upgrading their legacy helicopters. But Marine Corps officials insisted that remanufacturing Cobras and Hueys would be cheaper.

THE COMPARISON WITH the UH-60 and AH-64 could reemerge and spell trouble for the Marines and Bell. For the UH-1Y and AH-1Z to continue, the Pentagon must show there is no cheaper alternative that would provide at least the same capability.

In another blow to the program, the Pentagon's operational test community stated in a new report that funding constraints "threaten the overall scope of testing."

In the case of the Army's CH-47F project, service officials believe they have the money to pay for the upgrade of 300 Chinooks despite the cost increase. Although the service didn't specify how large it was, it acknowledged that it exceeds 25% of the original estimate.

The service identified several causes for the cost increase. Among them are the added capability requested by the government, inaccurate cost estimating data used initially, and higher production costs identified by Boeing. The company last year announced a restructuring of its Ridley Park, Pa., site, where the Chinook work would be located. Those changes, the Army said, should contain and "ultimately reduce production cost increases."

The Army was quick to address the questions the Pentagon will ask as part of its review, to ensure that senior acquisition officials allow the program to go forward. For instance, it noted that the changes implemented by Boeing and funding the Army has identified put the program on a stable footing. Additionally, they stressed how imperative it is to retain the system. "The war against terrorism in Afghanistan underscores Chinook's current and future importance to the Army," according to the Army's cargo helicopter program manager, James T. Caudle.

March 11, 2002 The McGraw-Hill Companies Inc.

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