As U.S. Defense Secretary Robert Gates puts the ailing F-35B short-takeoff-and-vertical-landing aircraft on life support and proposes another delay to the single-engine stealthy fighter’s testing, he is also pushing forward a broad savings agenda that will enhance several major aerospace programs.

For industry, the results are mixed. The most dramatic impact is on Lockheed Martin, which must turn around the F-35B within two years or expect its termination. Production would be cut by 124 aircraft through Fiscal 2016, limiting the company’s ability to reduce the near-term per-unit price and entice more international customers. Gates is also proposing termination of Raytheon’s Surface-Launched Amraam and General Dynamics’ Expeditionary Fighting Vehicle.

The outlook is not all bad for contractors, though. Gates proposes upgrading the U.S. Air Force’s F-15 fleet with new, active, electronically scanned array radars made by Raytheon, and Boeing can expect the Navy to buy 41 more Boeing F/A-18E/Fs to make up for aircraft cut from the F-35 Joint Strike Fighter buy profile. The United Launch Alliance also stands to gain at least some funding it has sought for the Evolved Expendable Launch Vehicle (EELV) rocket program. Gates says additional money will help stabilize the industrial base that supports these Atlas V and Delta IV launchers.

More funds would also be funneled into the Missile Defense Agency’s next-generation, long-range ICBM killer, which would notionally field around 2020. Boeing, Lockheed Martin, Raytheon and Northrop Grumman are all eyeing work on this system, dubbed the SM-3 Block IIB. Gates plans to field more Raytheon AN/TPY-2 missile defense radars in Europe, the Asia-Pacific region and Middle East as well.

These shifts are part of a major cost-savings and efficiency initiative begun by Gates last year to reduce the impact of federal budget pressures on the Pentagon’s ability to conduct its missions. While Fiscal 2012 may pass without big reductions, belt-tightening will start thereafter and increase annually.

The Pentagon expects to have nearly 3% of real growth in its budget in Fiscal 2012 (a budget request goes to Congress next month), but that will decline in Fiscal 2013-14. In Fiscal 2015-16, there will be zero growth, forcing planners to reduce the end strength of the Army and Marine Corps.

Despite savings produced by the budget exercise directed by Gates last year, cuts were still required, especially in the out-years, to meet White House-imposed spending limits. While this may be acceptable for a short time to reduce the deficit, Gates argues that ultimately 2-3% of real growth is needed in the defense budget to properly resource the services and operations.

Last May, Gates directed the services and the Office of the Secretary of Defense to find $100 billion in reductions over five years; that money could then be reinvested in higher-priority efforts. The Air Force found $34 billion; the Army, $29 billion; and the Navy, a little more than $35 billion. Another $2 billion would come from special operations accounts.

Much of this money is being redirected to other service programs, including several key aviation efforts. Those include development of a new vertical-lift unmanned aerial system (UAS) for the Army; a new sea-based unmanned surveillance and strike aircraft (likely the Unmanned Carrier-Launched Airborne Surveillance and Strike system) and an accelerated anti-jam system for the Navy; and a new nuclear-capable, penetrating bomber for the Air Force. This bomber would be optionally piloted, Gates said last week, the first time he has taken a public position on whether it should include unmanned technologies.

Also planned from the savings are boosts to buys of the Reaper UAS and an acceleration of the Grey Eagle UAS built by General Atomics for the Air Force and Army, and more MC-12 manned intelligence-collectors built on the Hawker Beechcraft King Air 350ER.

The largest programmatic disruption is clearly to the JSF, a U.S.-led effort with eight partner nations. Less than one year after its last major restructuring and a per-unit cost overrun of more than 50%, the F-35 production profile will be cut again in the forthcoming Fiscal 2012 budget request. The additional restructuring is needed to put the Marine Corps’ short-takeoff-and-vertical-landing (Stovl) variant on “probation” owing to “significant testing problems,” Gates says. “These issues may lead to a redesign of the aircraft’s structure and propulsion—changes that could add yet more weight and more cost to an aircraft that has little capacity to absorb more of either.” Defense officials have not clearly said what needs to be done to avoid termination of the Stovl version, but they say that two years is enough time to engineer a fix, if possible, and assess its impact on performance.

Gates says the Marine Corps “made a compelling case” to hold off termination, pending more work. Already, however, the U.K., a primary Stovl partner, backed out of the program, leaving only the Marine Corps and Italy as likely customers. Other potential buyers could include Israel, Japan and Spain.

Despite the cutback in Stovl buys, the Pentagon hopes to increase production orders by 50% each year, based on recommendations from a Manufacturing Review Team that conducted an assessment last year. However, its proposed buys alone would not be enough to achieve that rate; international orders would be needed, as well.

In addition to the six Stovls in Fiscal 2012 and 2013 each, the Pentagon expects to propose buying 19 conventional-takeoff-and-landing (CTOL) versions and seven carrier variants (CV) in Fiscal 2012; 24 CTOLs and 12 CVs in Fiscal 2013; 40 CTOLs and 14 CVs in Fiscal 2014; 50 CTOLs and 19 CVs in Fiscal 2015; and 70 CTOLs and 20 CVs in Fiscal 2016. If approved, Stovl production would include eight aircraft in Fiscal 2014, and 12 and 18 in Fiscal 2015 and 2016, respectively.

The development effort will also slip by nine more months on top of last year’s 13-month slip. Developmental testing was set to end in mid-2015; it will now slip to early 2016. Gates intends to decouple Stovl version testing from progress on the CTOL and CV, which he says are proceeding “satisfactorily.”

These changes mean the Marine Corps’ 2012 initial operational capability date cannot be met. USAF and the Navy planned for the F-35 to reach service in 2016. This is under review.

The development program will require another $4.6 billion, and a total of $13.8 billion to reach completion. This brings the development cost total to $59.4 billion. The original estimate was $38 billion when Lockheed was selected to build the JSF.

Lockheed Martin officials say that the software development program, which fell under scrutiny last year, “has been re-baselined to align with well-recognized industry standards for cost development and testing.” During last year’s restructuring, the Pentagon added funding for more attention to the software work.

“The changes . . . define a path to manage risk, provide funding and focus, and ensure the program’s success,” says Lockheed CEO Bob Stevens. “We recognize our role and responsibility to deliver extraordinary fighters in three variants. We’re committed to doing that, and we’re confident that we’ll succeed, including delivering the Stovl variant.”

Last year, Gates withheld more than $600 million in potential award fees because of the company’s problems delivering and testing the aircraft, and the Pentagon remains skeptical of Lockheed’s management practices (see p. 51).

Lockheed’s problems, however, are a boon for its rival, Boeing. Fifteen F/A-18E/Fs would be purchased in Fiscal 2012 and 2013 each, and the final 11 in Fiscal 2014. The current Super Hornet cost is $42.7 million per aircraft (excluding engines).