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WASHINGTON, VICTORIA, British Columbia, LONDON, PARIS and TEL AVIV — In a move that promises to shake up the fighter jet market, Canada's new Liberal Party government is widely expected to pull out of the Pentagon's F-35 program.

Although the remaining international partners are standing by their commitment to the joint strike fighter, Ottawa's potential exit is not exactly a vote of confidence in the fifth-generation fighter jet.

If Justin Trudeau, the newly elected prime minister, follows through on his pledge to cancel the country's planned 65-plane purchase, Canada would become the first country to reject the fifth-generation fighter — and, potentially, the first industrial partner to withdraw participation in the program.

Such a move would reverberate across the globe, with all remaining partners forced to pay higher prices for F-35s.

For Canada's supply base, the stakes are high. Many Canadian companies have spent years building components for the new plane and stand to lose as much as CDN$11 billion (US $8.3 billion) in work over the life of the jet.

On the other hand, the new Liberal government argues that an open competition for Canada's fighter-jet replacement would more than make up for the loss of the F-35 business.

Impact to F-35 Partners

In 2010, Canada committed to buying 65 F-35s on a sole-source basis as the replacement for its fleet of CF-18s. Two years later, then-Prime Minister Stephen Harper paused that purchase amid accusations that his government had lied about the true cost of the fighter program.

The F-35's future in Canada has been called into question since Trudeau's sweeping victory in the Oct. 19 election.

Trudeau has promised to pull out of the F-35 program and to move quickly on replacing Canada's aging CF-18s with another plane through a competition. He has said that Canada does not need a stealth fighter for its defense needs and that the F-35 is too expensive.

In Washington last week, US Lt. Gen. Christopher C. Bogdan, F-35 Joint Program Office chief, said the remaining international partners can blame Canada for a $1 million price increase per jet if Ottawa scraps its 65-plane buy.

"If any partner or any service moves airplanes to the right or takes airplanes out, the price of the airplane" will rise, Bogdan told lawmakers Oct. 21. "We have estimated that the increase in price to everyone else is about 0.7 to one percent [or] about $1 million a copy for everybody else."

If Canada pulls out, there would be no impact to the current development program, which ends in 2017, Bogdan stressed. However, the international partners would be forced to absorb Canada's 2.1 percent share in the cost of future sustainment and follow-on modernization, he said.

But what would happen to the Canadian supply base, which has spent millions to help develop technology and components for the plane?

Bogdan said the JPO does not have a "set rule" to deal with this scenario, but said the international and industry partners should have a "discussion" about what to do with the Canadian companies building parts for the F-35.

Trudeau does not become prime minister until Nov. 4, and details about how he will proceed with the withdrawal from the F-35 program are still unclear.

Asked about the impact on Canadian firms, a Liberal spokesman pointed to the party's election platform, which argues that such companies stand to gain more work from an open competition for Canada's fighter jet replacement. The platform noted that, under a Canada-run competition, Canadian firms would be guaranteed work — unlike under the F-35 program.

Global Reaction

Despite a potential price increase, the other international partners remain committed to the F-35 program.

An Israeli defense source said he was "certainly not happy" about prospective cost growth as a result of Canada's presumptive withdrawal, but insisted that such a scenario would not affect Israel's interest in pursuing follow-on orders for the F-35I.

He noted that additional squadrons of F-35Is — and the US military grant aid to pay for them — will be high on the agenda of Defense Minister Moshe Yaalon when he visits Washington this week to discuss Israel's enhanced security needs. Yaalon's discussions with US Defense Secretary Ashton Carter and other top Pentagon officials precedes a scheduled Nov. 9 meeting for Israeli Prime Minister Benjamin Netanyahu and US President Barack Obama – their first since conclusion of the so-called P5+1 Joint Comprehensive Plan of Action.

Israel has 33 F-35Is on order, with a contractual option for another 17. The first aircraft is expected in December 2016, with initial operational capability planned by the end of 2017. Eventually, the Israeli Air Force expects a full force strength of 75 F-35Is.

Italy, which is planning to buy 90 JSFs, stands to fork out $90 million extra should Canada leave the program.

"We'll negotiate on the price," said a senior Italian defense source when asked about the possibility.

But one fighter-industry executive in the UK, who asked not to be named, said the F-35's problems went deeper than a possible price hike caused by any Canadian withdrawal.

"If the only problem the F-35 had was that the aircraft was $1 million more expensive, they wouldn't have a problem," he said. "The problem is the aircraft is tens of millions of dollars more than they originally told people it would be, and that's just the acquisition price. It's the sustainment cost that will destroy air forces."

Norway's government is showing no deep anxiety that costs relating to acquisition will spiral to a level where it may want to re-negotiate on price or reduce its agreement to buy 52 aircraft. Maj Gen. Morten Klever, director of Norway's Fighter Replacement Program, said that Norway would conduct its own analysis on cost and the overall development of the F-35 program.

However, the latest wrinkle in the F-35 development has been greeted with interest next door in Sweden where Saab is expected to re-establish contact with Canada about the single-engine Gripen NG fighter, which has notched up several export successes lately, most notably in Brazil, where a contract for 36 aircraft became effective last month. Sweden is also certain to try and garner advantage from the F-35 project's woes in efforts to sell the Gripen to Finland, which has started its fighter replacement program.

A Saab spokesman would not say whether the company would bid the Gripen NG for a Canadian requirement if Ottawa bails out of the F-35. However, he emphasized the low cost of the aircraft as a reason for Canada to look more closely at the Swedish fighter.

In Denmark, which is due to reach a decision on its multi-role aircraft by the end of 2015, the Ministry of Defense last week suggested that Canada's departure might add $50 million more to the overall F-35 acquisition cost, but the competition's short-listed candidates also include Boeing's F/A-18E/F Super Hornet, Dassault's Rafale and the Eurofighter Typhoon. The MoD has asked the office in charge of the competition to conduct a deeper cost assessment.

Doug Barrie, the senior air analyst at the International Institute for Strategic Studies think tank in London, said the potential impact of a price rise caused by a Canadian withdrawal from the program is a bit of a red herring. Virtually all of the F-35 price escalation is down to US issues, he said.

The biggest danger posed by Canada's presumptive exit is the pressure it puts on potential customers to look at other solutions, he said.

"It's the precedent, not the price, that is the bigger danger for F-35 exports," he said. "If I was in a rival fighter company, I'd be thinking this development gives me a little more market leverage."

What's next for Canada?

Canada's expected decision to drop the F-35 was mixed with politics, as the cost for the fifth-generation fighter had dogged Harper's government. But Trudeau has positioned the argument as one of necessity, emphasizing that Canada should focus more on homeland defense than power projection with its new fighter buy.

Richard Aboulafia, an analyst with the Teal Group, points to Trudeau signalling he'll withdraw Canada from military operations against the Islamic State group as proof that the new government is focusing inward, rather than outward, with its security decisions.

"It was form fitting function — it's not about if it's a good fighter, but, rather, if this is a role Canada should have," Aboulafia said. "The F-35 is the perfect plane if Canada is going to be part of coalition warfare. If they just want something that provides air protection for sovereignty, something else fits just fine."

Gene Colabatistto, group president for defence and security at CAE, the largest Canadian-owned defense company, agrees that the primary mission set Canada needs to fulfill is the sovereignty mission.

The question now becomes what jet will fill that mission.

Trudeau has previously suggested that the F-35 would not be considered in any competition, but even if it were invited back in, it seems an unlikely winner. Any new competition immediately becomes a plum prize for jet producers, as there are few large-scale fighter procurements expected in the next few years.

The obvious choice to replace the Boeing-made CF-18 fleet would be the procurement of Boeing's F/A-18 Super Hornets, said Aboulafia. The familiarity of pilots with the jet, interoperability with the older fleet, and the military ties between the US and Canada make it an easy choice.

And, while it seems unlikely Canada would pick a non-American supplier, Aboulafia says not to be surprised if the Dassault Rafale, Eurofighter Typhoon and Saab's Gripen NG enter any competition. Rafale and Eurofighter have mounted strong marketing campaigns in the last six months as uncertainty over the F-35 grew.

Dassault aviation chairman Eric Trappier said Oct. 22 he wrote a letter of congratulations to Trudeau that included a pitch for Rafale.

A spokesman for Eurofighter Typhoon declined to comment, other than to say that officials are closely monitoring the political developments in Canada.

If Canada selects the Super Hornet over the European fighters, it would be a huge win for Boeing, which has sought to extend the life of its facility in St. Louis.

"That buys Boeing three more years," Aboulafia said, while noting it could also have an impact on US procurement. The Navy has argued for the procurement of more F/A-18s, and having the Canadian jets on the line could make the economic case that helps the Navy do just that.

A Boeing win "works out very well for the carrier part of the Navy," Aboulafia said.

But the decision to have a full competition instead of the sole-source selection of F-35 will result in a delay in getting the new fleets online, CAE's Colabatistto said.

That, in turn, means the existing training infrastructure — including the CAE-run NATO Flying Training in Canada (NFTC) program which trains pilots for the Canadian military — will likely need to be extended.

"The net is that [the competition] will delay the acquisition of a new fighter program," he told Defense News on Oct. 22. "It's not going to start in a year or two, which means that the fleet will start to be replaced in the early mid-2020s. Therefore, the training enterprise [will] extend the current training programs to get ready for that."

And, while Canadian firms tied to the F-35 base released a Sept. 25 statement warning Trudeau's decision would cost "current and future jobs," Colabatistto does not see reason to panic.

He sees more of a "reallocation" of defense funds than a major cut coming under Trudeau's government. Funding that may have gone in the short term to fighters will now instead be shifted to maritime assets, he said.

"It's all one budget, and they will have to accommodate that," Colabatistto said. "But I think the most visible part will be the delay, or the stretching, of the fighter programs."

By Lara Seligman and Aaron Mehta in Washington; David Pugliese in Victoria, British Columbia; Andrew Chuter in London; Pierre Tran in Paris; Barbara Opall-Rome in Tel Aviv; Gerard O'Dwyer in Helsinki; and Tom Kington in Rome.

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