The F-35 Joint Strike Fighter program took up a lot of real estate in the national and international press and trade media in 2010, and the critical attention will continue into 2011. The sheer size of the program to supply the U.S. military and partner nations with a stealthy and relatively affordable strike fighter, coupled with questions about prime contractor Lockheed Martin’s ability to stick to the schedule and meet cost targets, makes it the No. 1 target of industry speculation.

The JSF program, currently in its system development and demonstration (SDD) phase, includes three different variants: the conventional takeoff and landing (CTOL) F-35A to replace U.S. Air Force F-16s and A-10s; the short-takeoff-and-vertical-landing (Stovl) F-35B to replace the U.S. Marine Corps’ AV-8Bs and F/A-18s; and the F-35C carrier variant for the U.S. Navy. The program is in the early stages of flight testing, and, typical of development programs, not everything is going to plan.

Restructuring of the program in February 2010, and again in January 2011 because of final-assembly flight-test delays, has pushed completion of SDD to mid-2016 from late 2013, and added $8.4 billion to the cost of development. The additional $4.6 billion needed in Fiscal 2012-16 to complete development will be found by cutting planned procurement by 124 aircraft, to 325. This will slow the ramp-up of production and make it more difficult to drive down unit costs.

In an effort to restore affordability to the program, the Pentagon struck agreements with Lockheed Martin and engine supplier Pratt & Whitney to buy the fourth low-rate initial production (LRIP) batch of 31 aircraft and 37 engines under fixed-price incentive contracts rather than continue with cost-plus procurement as originally planned. This places the risk of cost overruns largely on the contractors’ shoulders. Lockheed Martin said at the time the transition to fixed-price contracting was made two years ahead of schedule to counter concerns of escalating program costs.

Keeping the F-35 within targets is of critical concern to both the industry team and the Pentagon. The total program requirement across all partner nations currently amounts to 2,443 aircraft. While that figure is almost certain to be reduced in coming years as national deficits curtail defense spending, unit cost has always been a major concern for the Pentagon because of the large fleets of legacy aircraft that must be replaced. Even a small increase in unit cost can have a large impact on procurement budgets, and independent estimates say the price of the F-35 has roughly doubled since 2001.

Estimates for the price of a production aircraft vary widely, ranging from above $100 million on down. Lockheed Martin asserts the unit recurring flyaway cost of the F-35A will eventually drop to around $60 million in 2010 dollars, and argues this would put the cost of acquiring a CTOL F-35 on par with buying a Block 60 F-16 or Block 2 F/A-18E/F. For Lockheed Martin, meeting that cost goal depends heavily on the number of F-35s it will sell to international customers, and the number of F-35s is can sell abroad depends heavily on meeting its price target.

Repeating the success of the F-16 on the international market is part of Lockheed Martin’s vision for the JSF program. The F-35 is viewed as an aircraft that will allow friendly nations to buy a fighter with a high level of stealth, but without the high level of technical secrecy surrounding the U.S. Air Force’s F-22 Raptor. The F-35’s design also emphasizes the air-to-ground mission, an important feature in the modern security environment. For the U.S. military and its allies, it is more likely the highest threat in an air campaign will come from surface-to-air missiles rather than enemy fighters. Also, a fighter is far more likely to spend its time supporting ground forces and acting as a node in the wider command-sensor network.

The eight nations participating in the F-35 SDD phase—the U.K., Italy, Australia, Turkey, the Netherlands, Canada, Denmark and Norway—all typically engage in military operations beyond their borders through collective security arrangements and coalitions. Two of them—the U.K. and Italy—are also Eurofighter Typhoon operators and already possess a fighter designed for the air superiority role. For the remaining partner nations, that any of them will find themselves in a solo campaign against a peer competitor seems fanciful. The argument for purchasing the F-35 to operate within a multinational security framework is underpinned by Lockheed Martin’s strategy of distributing industrial work among the participating nations.

While it is likely the JSF partners will order fewer aircraft than initially planned to save money—the U.K. deciding to jettison its planned purchase of 138 Stovl F-35Bs for a lower number of carrier-capable F-35Cs—they have yet to signal an intent to acquire a different aircraft instead. Denmark and the Netherlands have delayed final decisions, but elsewhere the procurement of F-35s has already received government and/or parliamentary approval, with only the timing and size of initial orders to be determined.

The result of Lockheed Martin’s global supply-chain approach is a European fighter market in which many of the promising customers have a financial interest in the F-35 via local industry involvement in production. Looking around the rest of the European fighter market, Germany and Spain are partners in the Eurofighter program and France is off the table because of its own domestic fighter program, the Dassault Rafale. Left up for grabs in Europe are primarily the smaller nations with modest requirements for combat aircraft, and it is hard to keep a fighter program alive over the long term by making small sales to nations like Bulgaria, Croatia and Slovakia.

There are still a few countries capable of funding several billion dollars’ worth of fighter orders left in Europe—Belgium, Finland, Greece, Poland and Switzerland among them—but defense funding is under pressure across the continent, and each of these nations is in a position to defer funding for new fighters for an extended period. The reality of the security situation is that, with the fall of the Soviet Union and the continued existence of NATO, there is little urgency in European capitals to replace fighter fleets. In fact, fleet shrinkage remains a popular tactic in Europe for dealing with budget pressures, a situation that will not change any time soon.

With Europe now mostly out of play, there is more pressure to make deals in the Middle East/North Africa region and in Asia. For Boeing, Dassault, Eurofighter and Saab, securing sales in these markets will be key to the continued survival of their fighter production lines into the next decade. Sales in Latin America will not be enough to keep those lines going. While Chile and Venezuela are recent buyers of new F-16s and Sukhoi Su-27s, respectively, and Brazil is conducting a much-talked-about competition for 36-plus new fighters, the Latin American market remains dominated by sales or donations of used aircraft rather than new purchases.

The difficulty for European industry is that the Middle East market is now largely dominated by U.S. manufacturers. Dassault was formerly a big player in the region, but has been attempting to close a deal for Rafales for years without success. British defense contractor BAE Systems sold 72 Eurofighters to Saudi Arabia, but the Saudis turned back to the U.S. in 2010 with an agreement to purchase 84 F-15s and upgrade 70 more. There has been talk of an Omani purchase of used British Typhoons, and the United Arab Emirates has seemed close to ordering Rafales, but closing deals is turning out to be harder than expected for European manufacturers.

The fighter market is growing in Asia, meanwhile, primarily because of rising wealth and concerns over the Chinese military’s modernization efforts. China itself is not yet at the point where it can build fighters that are competitive with the best the West has to offer, with engine development being a major stumbling block. Chengdu has developed the FC-1 lightweight fighter for the export market and the multirole J-10 for China’s own needs. Both are relatively low-cost single-engine modern fighters that are a little behind the latest versions of the F-16 and Gripen. But China is acquiring large numbers of J-10s and has developed the J-11, its own improved version of the Su-27. A large stealthy fighter, the J-20, entered flight test in January, but when it will enter service is not known. Add into the mix an unpredictable North Korea, and Indonesia’s interest in growing its fleet of Su-27/-30s to 180 aircraft, and the result is a number of nations seeing a threat and looking to replace aging models with newer aircraft with the latest in sensors and weapons.

As in the Middle East, the importance of U.S. military power to regional stability gives a major push to offerings by Boeing and Lockheed Martin. South Korea and Singapore are both building fleets of F-15s. Australia has ordered F/A-18F Super Hornets and plans to order a larger number of F-35s. Japan looks likely to select the F-35 to replace its fleet of aging F-4EJs under its F-X program. The Japanese government wanted the F-22 to fill the requirement, but the Raptor cannot be exported without a change in U.S. law. The refusal to sell the Raptor has led the Japanese to flirt with Eurofighter and examine the possibility of developing its own stealthy aircraft, but ultimately the Japanese will stick with tradition and buy American.

With the U.S. dominating sales to big customers in the Middle East and Asia, the Indian air force’s Medium Multi-Role Combat Aircraft (MMRCA) program has become hugely important to the future shape of the fighter market. The contest involves six aircraft: the Boeing F/A-18E/F, Dassault Rafale, Eurofighter Typhoon, Lockheed Martin F-16IN, RAC MiG-35 and Saab Gripen NG. All of these aircraft are at risk of going out of production at some point during the next decade unless a new major order can be secured. What makes the contest interesting is that a good case can be made for betting on any of the horses in the race. The Indian government has tended to buy Russian fighters over the years, but also owns a fleet of French-made Mirage 2000Hs. The rumor mill is working overtime; at one point the Rafale was reported to be out of the running, then the Indian air force was said to be so unhappy with maintenance costs on its MiG-29s that it had no interest in the upgraded MiG-35. A decision is expected in 2011 but may slip.

The initial requirement under the MMRCA program is 126 aircraft, with an option for an additional 74. That is a huge contract in today’s market. Unlike other nations that are looking to cut costs by rationalizing fighter fleets around one or two models, India is building a mixed fleet that will eventually include not just Su-30s, MiG-29s and Mirage 2000s, but the indigenously designed Tejas Light Combat Aircraft and a version of Sukhoi’s T-50 stealth fighter. Buying so many dissimilar types is not a rational approach from a cost or operational standpoint, but India’s procurement system has often centered more on building technical know-how and creating jobs for its own defense industry than on efficiency or economy in operations.