NATIONAL HARBOR, Md. — Craig Perciavalle runs one of the most modern shipyards in the U.S., specially designed to produce high-speed, all-aluminum ships. The company, a U.S-based subsidiary of Australia-based Austal, is in full-rate production on Independence-class littoral combat ships, or LCS, and expeditionary fast transports, or EPF, for the U.S. Navy at its facility in Mobile, Alabama. But the future is less certain.
The EPF line is nearing its end without a replacement, and the future of the LCS and a possible follow-on frigate is not at all clear — although the company revealed a new proposed design for the frigate at the recent Sea-Air-Space Exposition. We spoke with Perciavalle on April 5 while he was in Washington for the show.
You've just been up on Capitol Hill talking with Congress. What are you hearing?
Everybody is on board with the 350-ship Navy, and we are trying to communicate a very cost-effective and capable solution to help the Navy get there. And it has been well-received. I think our frigate design addresses a lot of the concerns raised in the past, and the feedback is very favorable. We are excited about a 350-ship Navy as a shipbuilder, as you can imagine, and we think we have positioned ourselves very well to support that overall goal. It has been a good visit so far.
On the negative side, what are you hearing, particularly about LCS?
Obviously some of the causalities on some of the ships have been a concern, but from our perspective those sorts of things happen on ships in general. We are very confident and happy with how we have been able to get our ships back up and running when they do experience a challenge. Some of the other information that we are seeing is somewhat dated. You know, still some people are bringing up corrosion issues or some of the other challenges that we have experienced in the past, but those are long behind us and we came through that, quite honestly, a couple of years ago. Bottom line is we are happy with how our ship performed in the shock test, and the feedback from the Navy has been very favorable in that regard as well. And we are happy with what the ship is doing today.
There were a lot of concerns heard last December in congressional hearings about cost growth. Are you still experiencing cost growth on LCS?
Quite honestly, the exact opposite. We have been coming down a pretty significant learning curve, and we are seeing significant cost reduction ship to ship that we are very proud of. It is interesting that the Government Accountability Office mentioned in that hearing that cost was really not as much a concern of theirs as it has been in the past. I think everybody is seeing now that that's under control and stabilizing, and we are going to continue to focus on that going forward. That is our No. 1 priority — besides safety and the quality of the product — getting the cost down and making it an easy decision for the government to buy more ships. That is our commitment, and that is our never-ending focus.
You had schedule problems for quite a while. Where are you now
—
behind, on schedule or ahead on LCS?
We are delivering two ships a year as promised. We did it last year. We are going to do it this year. We are going to do it next year, and quite frankly we are going to be able to deliver two ships per year or more going forward. We have really focused on maximizing and improving our efficiencies in the manufacturing process, and we are seeing the fruits of that labor. Now that design is stabilized, our workforce is stabilized, we are seeing significant savings and reductions in schedule. We are pretty pleased with where we are today and where we are heading. So from a schedule perspective, we are going to meet the demands of the Navy going forward.
What is your building time for an LCS right now?
Thirty-six months is our goal for building time. It has been about 40 months and we are quickly getting to 36 months. We have not quite gotten there yet. It is a little bit loose for us because we start construction with a couple of modules early in the process that would kind of extend that duration. But overall the key focus for us is the assembly bay time and in-the-water time, and then meeting the two-delivery-per-year cadence. And we have achieved it and we are not going to stop.
You are also building
expeditionary fast transports
. What's your delivery rate on those?
Two per year. And that program is really performing very well. We are actually utilizing just one assembly bay for the EPF program, and we have got [the eighth ship] getting ready to deliver by the end of the month. And EPF 9 is going to launch within the next month and a half as well. [The] EPF program has been kind of that sleeping program that nobody seems to be worried about, for good reason, because it is actually performing very well and the ships are doing phenomenal things around the globe.
GAO has recommended taking a pause in the LCS/frigate program. There remain a number of funding issues with the absence of a 2017 budget, a 2018 budget yet to be presented to Congress and the ongoing threat of a government shutdown. What happens if production slows?
If production slows, we will have to adjust our workforce accordingly. But we are hoping that does not happen, and we are cautiously optimistic about what I am hearing on the Hill about getting through the continuing resolution by the April 28 deadline and moving forward with a budget they can execute to. We will see where that goes, but obviously if things slow down we will have to make business adjustments to accommodate accordingly.
It is unclear when the Navy might go to the frigate or even if the frigate will be an LCS variant. What are the effects if there is a pause in production for any reason?
Increased cost, without a doubt. As soon as we do the pause, it will increase the unit cost of the ship — both the ships that we are building today and the ships going forward because what will happen is we will have less volume going through the facility. Overhead costs go up and there is an increase in cost across the board.
What happens to the supply chain
—
your sub-contractors who make hundreds of parts and systems that go into the ships?
If you are able to go to suppliers and give them a proposal or a request for proposal with multiple ship starts, multiple options of ship starts, their unit cost comes down. Economic order quantity really comes into play — quite frankly that is the most efficient and economical way to move forward. So any pause of the program would result in increasing costs of the ship, which I do not think anybody wants.
We have over 900 suppliers across 37 states in the country, and a lot of really good suppliers across the country are doing their best to provide the most cost-effective solution to us. We pass that directly on to the customer. It is very important to us to keep that ball rolling.
The program of record for the frigate at the moment is to go to a downselect, choosing either you or Lockheed Martin to build the frigate. It Austal emerges victorious, how much further can your yard go it alone to equal the output of both yards?
It depends where things go with other programs. We project to have excess capacity going forward, and we feel that we can certainly continue to build two LCSs per year, if not three, depending on the workload in the facility. Obviously if EPFs cycle down, that will give us more capacity to do LCS or other ships. Quite frankly, our focus and our activity and our drive is agnostic to whether there is a downselect or not. We are going to continue to do all we can to improve what is happening to reduce the cost of the ship and put ourselves in the best position to accommodate both acquisition strategies.
If EPF comes to a close, can you produce three LCSs or frigates per year?
We have the opportunity to do that. Yes, we could do that. Four would be a big stretch. But we are confident we would be able to do three.
Your EPF line is coming to a close.
We have EPF 12 under contract right now. We continue to have discussions with Military Sealift Command and the Navy about other opportunities and other capabilities to add to the ship, and we think that will help extend that program as well. A lot of irons in the fire with both platforms. We are forward thinking and trying to provide additional solutions to the Navy to meet future needs, and we are pretty optimistic of where we stand on both.
But the EPF line is coming to a close
.
You really need the LCS and the frigate to keep your yard going. That is really your only long-term prospect at this point. Would that be fair to say?
Yes, right now. We are looking at other opportunities from a business perspective, but certainly LCS is our major program right now. There is no reason why LCS/frigate cannot be a significant part of the fleet going forward, especially if you are going to get to a 350-ship Navy. I mean, this is a pretty affordable, cost-effective way to get there and a very capable way of getting there.
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