PENTAGON CUTS $1.1 BILLION FROM MARINE CORPS' OSPREY PROGRAM

December 12, 2005

The Defense Department is cutting $1.1 billion from the Marine Corps' MV-22 Osprey program, which could lead naval officials to significantly curtail the number of tiltrotors DOD buys in the coming years.

Pentagon acquisition chief Kenneth Krieg sent naval officials a brief acquisition decision memorandum directing the change early last week, defense officials told Inside the Navy.

The department is clearly moving to implement the cut in the fiscal year 2007 budget process. DOD's office of program analysis and evaluation repeated the directive in a budget document known as the second program decision memorandum, said a Pentagon official. That document was issued to the armed services in draft form Dec. 8.

The change to the Osprey program was approved by a senior-level Quadrennial Defense Review panel, the so-called Group of 12, Pentagon officials said.

The rationale for the $1.1 billion cut, defense officials told ITN, is an unusual situation: the Office of the Secretary of Defense's Cost Analysis and Improvement Group (CAIG) has a cost estimate for the program that is about $1.1 billion less than the Navy's estimate. Typically, the CAIG is known for its higher, more conservative cost estimates.

Krieg's latest directive forces the Navy to lower the overall funding for the program. This is a reversal of his recent decision -- documented in an Oct. 24 memo -- to use the higher cost estimate derived by the Navy.

"It was really a change in the original direction," a service official said of the new decision. The switch means $1.1 billion will be cut from procurement and $50 million will be added to Osprey research and development because that is how the two estimates differed, said the official. Money cut from the program would be rerouted to other defense budget priorities.

Osprey proponents may not have an opportunity to challenge the basis for the decision. But Marine Corps leaders are concerned the cut would force naval officials to slash MV-22 purchases in the coming years by 19 aircraft.

Rather than changing their assumptions about the cost of the aircraft, naval officials are likely to react to the funding cut by trimming the number of MV-22s they would buy in the coming years. Procurement plans for the Air Force CV-22 would not be affected, officials said.

The Navy Department, which oversees the purchase of Marine Corps aircraft, is still evaluating the impact of the Pentagon's directive. The cut is to procurement funds -- not quantities, which are yet to be contracted and therefore are not as precise as the money.

DOD has been pressing the Osprey program and its contractors Bell Helicopter Textron and Boeing to cut costs and guarantee more savings before defense officials will seriously consider a potential multiyear production deal for the Marine Corps tiltrotors.

The Osprey production rate is "extremely budget dependent," said V-22 program manager Marine Corps Col. Bill Taylor during a media teleconference Dec. 8.

"And I really can't talk details of what's going on in the budget process until Congress has heard the first word," he said.

According to the Bush administration's FY-06 budget, submitted to Congress earlier this year, naval officials had planned to buy 14 MV-22s in FY-07, 19 in FY-08, 30 in FY-09, 35 in FY-10 and 38 in FY-11. Any reductions to MV-22 production numbers would be distributed over those five years.

Taylor alluded to the behind-the-scenes deliberations when asked about the Osprey's cost.

"So aside from any budget perturbations that impact our ability to manage the program in the manner in which we have budgeted and planned and programmed, we're right on track," said Taylor. "But there are some aspects that are beyond our control. And we're very, very budget dependent in order to achieve our targets."

Aside from such issues, Taylor was upbeat about cost-reduction efforts.

"Without going into specifics because we're coming up to a sensitive point with respect to lot 10, I can tell you this," he said. "We are below target on the last four lots. We've beaten our targets by over a million bucks a piece. And that includes lot 10. At this point it's kind of sensitive, but we have a handshake agreement on lot 10. I believe we'll be in the same ballpark on that as well."

DOD has not publicly disclosed the total cost of the Osprey program. The Pentagon's latest public estimates indicate the total cost of buying 458 Ospreys is roughly $50.5 billion. That includes 360 MV-22s, 50 CV-22s and 48 so-called Navy tiltrotors, though it remains questionable whether the Navy will ever buy Ospreys for its own force.

The $50.5 billion estimate changed in September when Krieg chaired a Defense Acquisition Board meeting behind closed doors, but the Pentagon did not reveal the revised number in the selected acquisition reports for the Sept. 30 reporting period. Now the program's cost estimate has shifted yet again.

In other Osprey-related news, Bell-Boeing delivered its first Block B MV-22 to the Marine Corps at a ceremony at Bell's facility in Amarillo, TX, Dec. 8. This is the baseline configuration of the aircraft that officials plan to introduce to the fleet by September 2007. It is the 19th Osprey delivered this year. -- Christopher J. Castelli