Navy Aircraft Carriers Have Political Backing, But Face Financial Perio

The defense policy legislation Congress passed this month firmly backs the Navy’s goal to operate a fleet of 11 aircraft carriers. But that mandate might not be enough to keep the carrier fleet from shrinking as the cost of new ships rises and the Navy’s budget gets squeezed.

To ensure the fleet stays at 11 carriers, the 2015 National Defense Authorization Act supports the refueling and complex overhaul of the USS George Washington (CVN 73) in 2017. Congress appropriated $483.6 million to begin work on the George Washington’s modernization.

But the refueling of the George Washington still might not avert future cuts to the size of the carrier fleet. Recent estimates from congressional auditors and budget experts continue to raise doubts about the financial viability of an 11-carrier force.

The ability to keep the fleet at its current size over the coming decade rests on budget decisions to fund future ships, and also on whether the Navy can complete the acquisition of its new Ford-class carriers without busting congressionally mandated cost caps.

A contentious debate over the cost of the Ford class is on the horizon next year as one of the program’s staunchest critics, Sen. John McCain, R-Ariz., takes over as chairman of the Senate Armed Services Committee.

The Navy said it would spend $43 billion on three Ford-class carriers. The Government Accountability Office reported last month that the Navy cannot afford to buy the first ship of the class, the CVN 78, unless Congress appropriates more money, beyond the $12.9 billion it already agreed to pay.

To make the March 2016 delivery date under the $12.9 billion cost cap set by Congress, the Navy agreed to accept the USS Gerald R. Ford with less capability than originally planned, on the assumption that it would request additional money later. It could take as much as $988 million more to acquire the ship as the Navy envisioned, said GAO. The Navy would have to defer work and costs until after the delivery period. For that reason, GAO suggested that Congress consider revising the cost cap legislation to ensure accountability of Ford-class construction costs. It also said Congress should require that all work included in the initial ship cost estimate is counted against the cost cap.

The Congressional Budget Office, too, raised red flags. In its latest projections, CBO warned the carrier fleet will not be ablet to stay at 11 ships unless the Navy buys them faster. “To prevent the carrier force from declining in the 2040s to 10 ships, the Navy could accelerate carrier purchases after 2018 to one every four years, rather than one every five years,” said CBO.

The Navy’s goal is to buy six Ford class aircraft carriers between 2015 and 2044. If it builds one carrier every five years, the Navy would have a force of at least 11 almost continuously through 2044 — except in 2015 to 2016, when the number would dip to 10. That temporary drop is because the Enterprise (CVN-65) was retired in early 2013 and the new Gerald R. Ford (CVN-78) will not be commissioned until 2016.
“Any delays in completing that new carrier would extend the period during which the Navy has only 10 carriers,” said CBO’s analysis of the Navy’s fiscal year 2015 shipbuilding plan.

The Navy projects that the total cost of the lead ship of the class will be $12.9 billion, an amount equal to the congressional cost cap. That equates to $14.3 billion in 2014 dollars, according to CBO. “That amount is 23 percent more than the amount requested in the president’s budget when the ship was first authorized in 2008.” The Navy’s estimate does not include $4.7 billion in research and development costs that apply to the entire class.

As the Navy copes with the fallout of cost overruns in the CVN-78, it is in the midst of negotiations with shipbuilder Huntington Ingalls Industries over the cost of the John F. Kennedy (CVN-79), a ship that would be delivered in the 2020s.

Huntington Ingalls CEO Mike Petters said these will be “very tough” negotiations because the Navy is constrained by cost caps set eight years ago.

For the shipyard, the cost cap means having to carefully weigh whether the “scope of work” can be realistically achieved within those constraints, Petters said last week at the Atlantic Council.

“Everyone knows what the budget and the cost cap is, we know what our portion is. When you sit down to negotiate, it’s about settling on the scope of work, and reaching an agreement on risk,” said Petters. It is a balancing act for the shipyard that relies on Navy contracts as its primary source of revenues, but also for the Navy because HII is the only yard that can make aircraft carriers.

Agreeing to build a ship whose price was set in 2006 and won’t be delivered until the early 2020s is potentially a financial risk for Huntington Ingalls, Petters said. He is hopeful that an agreement can be reached that “makes sense for taxpayers and for the company. It’s a challenge.”

Over the long run, the Navy’s carrier construction plan is relatively sound, CBO noted. It estimated the average cost of the six carriers in the 2015 plan at $12.8 billion, compared with the Navy’s estimate of $12.5 billion.

But analysts cautioned that costs have tended to rise more in the latter stages of ship construction, when systems are being installed.

The Navy projected that CVN-79 will cost $11.5 billion, or $160 million more than the estimate in the president’s 2014 budget, and called it an “aggressive but achievable target.” But CBO calculated that the cost of the ship will be $12.6 billion, or about 8 percent more than the Navy’s estimate.

GAO also raised doubts that the CVN-79 cost cap of $11.5 billion can be met. The savings that the Navy anticipates are “largely based on ambitious efficiency gains and reducing a significant amount of construction, installation, and testing, work traditionally completed prior to ship delivery,” said GAO in a November report. “The Navy continues to revise its acquisition strategy for CVN 79 in an effort to ensure that costs do not exceed the cost cap.”

Also clouding the financial picture for the carrier program are larger pressures in the Navy’s shipbuilding budget, which CBO has described as chronically underfunded. Rising price tags for new surface combatants and submarines could squeeze future construction of new carriers, analysts have predicted.

Under the Navy’s plan to expand its combat fleet to 306 ships, it would need to buy 264 vessels between 2015 and 2044, at an average annual cost estimated by CBO of $20.7 billion. That would be 32 percent more than the average annual funding the Navy has received in the past three decades.