The US Navy confirms it will pay termination fees that would result from breaking the terms of a helicopter contract between the US Army and Sikorsky.
The confirmation, made to Flightglobal by a Navy official, applies to cancellation fees that would be triggered if the service moves forward with plans to cancel orders for 29 MH-60R Seahawk helicopters in fiscal year 2016.
The plan to cut the 29 aircraft orders was included in the Navy’s fiscal year 2015 budget proposal, which must be approved by the US Congress.
Those helicopters are part of a multi-year procurement contract signed by the Army.
The contract calls for the company to build roughly 650 aircraft between fiscal years 2012 and 2016, including Seahawks for the Navy, Black Hawks for the Army and aircraft for some foreign partners.
The Army told Flightglobal earlier this month that the cancellations would reduce fiscal year 2016 orders to below minimum requirements stipulated in the contract, which would terminate the agreement.
That would trigger terminations fees, says Sikorsky, although the company declines to provide specifics.
The US Navy has proposed cancelling orders for 29 MH-60R Seahawks, a move that would affect an Army contract for Blackhawks.
The Navy official says the service has “not determined the exact costs and fees associated with a cancellation” and that “cancellation fees would be calculated in accordance with federal acquisition guidelines.”
The official adds that 16 of the 29 cancellations are driven by cuts to the Navy’s carrier air wing, which will shrink if the service retires the aircraft carrier USS George Washington, as it has proposed.
The remaining 13 cancellations are linked to budget cuts to the Navy’s littoral combat ship programme, says the official.
Richard Aboulafia, vice president of consulting firm Teal Group, told Flightglobal earlier this month that terms of multi-year contracts typically make “cancellation financially prohibitive.”
“That way, all the contractors involved feel confident that they can invest in the future, and keep costs down,” he says.
“We've seen this dismal movie before,” adds Aboulafia, noting that in 2005 Secretary of Defense Donald Rumsfeld reversed a decision to cancel orders for about 60 Lockheed Martin C-130Js that were part of a multi-year contract.
The decision was made because cancellation would cost almost as much as buying the aircraft.
The Navy official stresses that the cancellations are not official and that a decision would be made during the fiscal year 2016 budget cycle, not during current fiscal year 2015 budget negotiations.
The official adds that the fiscal year 2015 budget proposal includes advanced procurement funding needed to maintain the orders.
A cancellation by the Navy could do more than trigger termination fees — it will also impact roughly 60 Blackhawks on order by the Army and at least two MH-60Rs ordered by Denmark under the same contract, says Sikorsky.
If the Navy cancels its order, “the contract vehicle is cancelled,” Tim Healy, Sikorsky's director of maritime programmes, told Flightglobal earlier this month.
“The effect of this is cancelling a contract for Black Hawks,” Healy said.
Maren Leed, senior advisor at the Center for Strategic and International Studies, says on 23 April that the Navy’s cancellation plans may represent a failure by the Office of the Secretary of Defense (OSD).
“Fundamentally, its OSD’s responsibility to sort this stuff out before it submits a budget,” she says during a panel discussion at the Heritage Foundation in Washington, DC. “These things are supposed to get mitigated in the programme budget review.”
OSD can prevent one service from making changes that negatively affect another, Leed says, or OSD could compensate the Army for financial losses resulting from the Navy’s plan.
It is possible, she adds, that “the budget process has been so incredibly chaotic that [the issue] slipped through the cracks.”
Now the Navy, Army and Congress may all working to understand the financial impacts, Leed says.
Source: FlightGlobal.com
