NATIONAL HARBOR, Md. — In recent years, the undercurrent at the US Air Force Association’s annual Air & Space Exposition has been the sequester, with the military and industry alike decrying the impact of devastating budget cuts on readiness levels.  
 
But this year, a new shadow loomed over the conference. With less than two weeks left for Congress to reach an agreement to fund the government, the Pentagon is waking up to the possibility of an unprecedented, full-year continuing resolution. 
 
Last week, top Air Force officials hammered home the message that if the Pentagon is forced to operate under a stop-gap spending measure next year, the service’s ability to buy new aircraft and modernize its existing fleet is in peril.
 
A full-year CR would actually be worse than sequestration-level budgets in fiscal 2016, Secretary Deborah Lee James said in an interview with Defense News. A long-term CR would impact about 50 large and small Air Force programs, she said. 
 
"A full-year continuing resolution or any form of a long-term CR would actually [be] less money than sequestration-level budgets in terms of our top line number, and it would impact, we estimate, on the order of 50 programs in the Air Force," James said, "Seventy-five percent of which are smaller programs, but that doesn’t mean they are not important, because they are, and 25 percent would be larger programs."
 
James pointed to the B-2 communications upgrade, the Huey helicopter replacement and several space programs as examples of major initiatives a CR could derail, adding that a stopgap spending measure would also limit resources for other service priorities. A CR by law prohibits new-start programs and limits resources for platforms currently in production to prior year funding levels. 
 
If the Pentagon is forced to adopt a CR, the Air Force’s effort to upsize its nuclear, cyber and maintenance forces are also at risk, James said. 
 
Gen. Ellen Pawlikowski, head of Air Force Materiel Command, stressed in an interview with Defense News that a major challenge under a CR would be keeping up with aircraft depot maintenance. If the Air Force is trapped at last year’s budget for flying hours and weapon system sustainment, work begins to pile up at the depots, creating a backlog for years to come. 
 
"If those numbers don’t have the appropriate ramp up, that means that I will not be able to put the throughput through the AOCs, which means that coming out of it I’m going to have some real issues in ’17 because I’m going to have planes that should have gone through depot that didn’t go through depot," she said. "It is going to create a backlog, if you will, on those programs."
 
The Air Force can choose to seek exemptions from the CR for its top priorities. But the service has only so much negotiating power, and some programs may fall through the cracks. 
 
KC-46 Contract Breach
 
Should a CR take effect Oct. 1, arguably the Air Force’s most pressing concern is the possibility it will be forced to break a contract with Boeing on the KC-46 tanker.  
 
Brig. Gen. Duke Richardson, the program executive officer for the Air Force’s next-generation tanker, told an audience at the convention that a CR would create a "very large problem" for the program. 
 
But how big a problem wasn’t clear until after his speech, when he told Defense News that the CR could potentially break the contract with Boeing.
 
According to Richardson, the contract requires the Air Force to award eight aircraft at minimum in the second low rate initial production lot, planned for FY-16. But if a CR scenario occurs, the Air Force is by law limited to last year’s funding levels. In FY-15, the Air Force only budgeted for seven aircraft in LRIP 1. If the service is only allowed to buy seven aircraft again in FY-16 due to a yearlong CR, that would breach the terms of the contract, Richardson said. 
 
Even if the Air Force gets some relief from Congress, the service could be forced to pay a fine, Richardson added. If LRIP 2 does not hit the "sweet spot" of 12 aircraft in FY-16, the Air Force will pay a per-year penalty. 
 
A CR "breaks the contract, so we would have to reopen it up," Richardson said. "We don’t want to do that, we think the terms of the contract are favorable."
 
When pressed on whether the Air Force would rebid the program if a breach is forced, Richardson declined to answer, saying: "I don’t want to answer a hypothetical until it actually happens." 
 
The Air Force is likely to seek relief from a CR for the tanker, analysts said, particularly given the favorable terms of the contract. The service's liability for the engineering and manufacturing development phase of the tanker program is capped at $4.9 billion; anything over is paid by Boeing. So far, technical issues have cost Boeing $1.2 billion in pretax overages on the program.
 
"This is arguably the most favorable and most important contract at risk … I don’t think Airbus is suddenly available to make a tanker," said Rebecca Grant, president of IRIS Independent Research. "It’s uncharted waters if they break the contract, and I think everyone from Congress on down should do everything they can to make sure they don’t break the contract." 
 
Boeing must deliver 18 operational tankers to the fleet in August 2017. Despite the technical challenges and repeated delay of a critical milestone — first flight — Richardson said he remains confident the company will meet the deadline. 
 
"They are applying company resources to make this program and so they are committing to us that they are going to meet the August of ‘17," Richardson told Defense News. "They’ve got a pretty goodcash cache of resources at their disposal, so I think if they apply those resources they can do it. We’re not going to back away from helping them meet it. I’m not ready to entertain what happens if they don’t meet it."
 
Richardson noted during the panel that Boeing Defense recently brought in Scott Fancher, senior vice president of Boeing Commercial, to help with the tanker program after a mislabeled chemical was mistakenly loaded into the test aircraft’s refueling line during testing. The accident caused the company to delay first flight, planned for late August or early September, by one month. 
 
First flight will now take place on Sept. 25, Richardson announced during the panel. Afterward, he emphasized the need to begin flying the aircraft before the end of September in order to meet major test points and reach a Milestone C decision — formal approval for production — as planned between January and April 2016. With the latest delay, Milestone C is slipping to the end of April, he told reporters. 
 
"I am cautiously confident," Richardson said during the presentation, although he added: "There’s no doubt that the schedule margin is gone on the program, and I think that if you look at what the secretary, the chief [of staff] have been saying, they are not happy with where we are at on the schedule and neither am I." 
 
The Air Force is still reviewing Boeing’s master schedule to make sure the program is on track to meet its deadlines, an initiative James announced late last month, Richardson told Defense News. 
 
F-35 Production & Software Development
 
The CR also threatens to derail another major Pentagon recapitalization program: the F-35 joint strike fighter. 
 
Next year, the Air Force plans to buy 44 F-35As, 16 more than the service bought this year. Meanwhile, the Marine Corps is slated to buy three additional F-35Bs next year compared to this year, Lt. Gen. Chris Bogdan, head of the F-35 joint program office, told reporters during the conference. If the Pentagon is trapped in a yearlong CR, the JPO won’t be able to buy these additional 19 aircraft in FY-16, Bogdan said. 
 
"If we are capped at the ’15 dollars, those 16 Air Force model A airplanes and those three Marine Corps airplanes, they are orphans, I can’t buy them," Bogdan said. "I won’t have the authority nor the money to buy them in FY-16, so we will have to figure out something because those airplanes are being built right now." 
 
Lockheed Martin is in the midst of building the Lot 10 aircraft, and is slated to deliver the jets within two years, Bogdan said. 
 
If a CR occurs and the F-35 program does not get relief, the Air Force may be forced to move the buy to the next fiscal year, Bogdan said. 
 
"We’ve got to do something because there’s 19 US service airplanes that are at risk now for a full-year CR, and that’s just not good," Bogdan said. "It’s not good for industry, it’s not good for the services, it’s not good for us." 
 
At $100 million each, those 19 aircraft are worth on the order of $2 billion — a significant amount of money for Lockheed and the lower-tier suppliers to lose, Bogdan stressed. Plus, the government will likely incur an added cost if the JPO is forced to push the buy. 
 
Development of the jet’s follow-on Block 4 software, which will come online sometime in the 2020s, would also feel the impact of a long-term CR, Bogdan said. The JPO is slated to spend about $120 million on planning for the as-yet undefined Block 4 in FY-16, about three times as much as the joint office is spending this year, he said. 
 
"If a continuing resolution occurs, we will be capped at that in ‘16, and that’s about a third of what we intended on spending in 16 to do that planning to get to follow-on development," Bogdan said. 

Space

Failure to pass a 2016 budget by Oct. 1 would also stall several new classified and unclassified programs aimed at improving the government’s space protection activities, according to the head of US Air Force Space Command. 
 
"We have some significant space recommendations that are in the ’16 President’s Budget, many of those are classified, we wouldn’t be able to get started on those," Gen. John Hyten told reporters during the conference. "All that stuff just gets put on hold — that’s just bad." 
 
The Pentagon is pushing a strategic effort to boost its space surveillance and counterspace spending by $5 billion in the face of a growing threat from Russia and China to US operations in space. Much of these dollars would go to classified programs. 
 
The CR could also derail a new effort to create a US-based alternative to the Russian-made RD-180 engine the US military currently uses for space launch. 
 
Aaron Mehta and Andrew Clevenger contributed to this report.