This one’s a toughie. The DoD has historically tried to maintain at least two sources for critical components, even if they have no intention of using the second source. They have often had to make procurement decisions based on keeping a second company alive, rather than simply picking the best bid. Basically, they have to look at the strategic picture and make decisions that ensure the long-term health of the military-industrial sector.
This philosophy also has the benefit of avoiding monopolies in the military, ensuring continued competition among contractors. That competition is not just in pricing, of course – competition drives the engineering teams from each company to push their designs past the performance of their rivals, not just past the requirements specified by the military. And the more rivals there are, the more competitive the teams become. As a 2005 Rand study found:
The initial periods of high technological innovation that began each technology era were all characterized by an increased competition to innovate among at least seven experienced, credible prime contractors/integrators.
Maintaining second sources has become more difficult in modern times because rather than having a number of systems in development in parallel, we currently tend to have one system under development for a decade. Development of major systems, such as fighter aircraft, is hugely expensive so only one system can be afforded. The F-35 Joint Strike Fighter is a prime example.
The F-35 and the Combat Aircraft Industry. The F-35 development program is now expected to have cost $50 billion and taken 15 years when it is finally complete in 2016. The procurement is expected to cost $323 billion for 2457 aircraft. Can we really afford afford a second source? The F-35 is also a development program shared among the military branches: the Joint Strike Fighter is supposed to meet the needs of the Air Force, the Navy, and the Marines (this universal design approach is intended to save money). The sharing goes beyond the US since both Canada and the UK will be buying F-35s as well.
So the F-35 is the only game in town – there is nowhere else to go to find fighter development work. Not another military service, not another country. This extreme situation is the culmination of two decades of cost-saving measures, reduced emphasis on defense, and military program/military contractor consolidation. You can see the process in action in the chart below (taken from the Rand report above), which shows the number of fighter aircraft manufacturers over the previous century. As you can see, the number of major combat aircraft manufacturers dwindled from 8 in 1990 to 3 in 2000. In one decade the number of contractors dropped from more than Rand’s spec for the critical mass for innovation (7) to less than half that number.

By now the situation is even worse. Two of the 3 contractors surviving to 2000 are essentially out of the development game: Northrop-Grumman is a subcontractor to Lockheed-Martin, and Boeing lost completely. Essentially we have one fighter aircraft company that is maintaining an active development team. And this is in a world where other countries are not so complacent:
Russian fighter and military modernization efforts are proceeding rapidly, defying the expectations of many. In August, Russia undertook the largest airborne military exercises since the collapse of the Soviet Union, making “use of automated command and control systems.”[6] On January 29, 2010, Russia conducted the first test flight of the T-50, a prototype of the PAK FA, Russia’s fifth-generation fighter jet, which was designed to rival the American F-22. With advanced stealth technology and high-tech avionics, the PAK FA could eventually—as Moscow has repeatedly proclaimed—seriously challenge U.S. air supremacy.
The upshot is that:
The U.S. Air Force’s former top intelligence officer warned a roomful of generals this week that the U.S. has lost its air power advantages and is dangerously ill-prepared to stop the gap-closing efforts of China and Russia.
Lt. Gen. David Deptula, a former F-15 pilot, challenged Defense Secretary Robert Gates’ fundamental belief that U.S. air power vastly overmatches any foreign military.
“For the first time, our claim to air supremacy is in jeopardy,” Deptula told the Air Force Association’s national convention on Monday.
The F-135 Engine. Which brings us to today, where the Pentagon and the Obama administration are trying to kill off the F-135 alternate engine program. Pratt & Whitney has the primary contract to develop the F-35′s engine, and GE and Rolls Royce have formed a team to develop a backup version. But the Pentagon says:
The Pentagon on Thursday ordered a halt to work on an alternative engine for a next-generation warplane, angering congressional backers who vowed to fight President Barack Obama and Defense Secretary Robert Gates to save the program.
“The administration and the Department of Defense strongly oppose the extra engine program,” the Pentagon said, noting that Obama did not include money for a second engine for the F-35 Joint Strike Fighter in his budget for the next fiscal year.
“In our view it is a waste of taxpayer money that can be used to fund higher departmental priorities, and should be ended now,” the Pentagon said in a statement announcing that it had issued an order to stop work.
Is it really? As we said above, there are a number of good reasons to maintain a second source, and the GAO corroborated those reasons just last week:
based on past defense competitions (including a fighter engine competition started in the 1980s between these same manufacturers) and making certain assumptions about relative quantities purchased from each, competition could be expected to yield enough savings to offset the additional investments required to sustain a second source. Prior studies also indicate a number of nonfinancial benefits from competition, including better performance, increased reliability, and improved contractor responsiveness.
Gates says we can’t afford the extra $3 billion for the 2nd engine. The GAO says that we’ll make the money back. I say that strategically, we have to maintain a second source for these engines, which are designed for greater operating ranges, higher thrust-to-weight ratios, and higher fuel economies than commercial engines. So, whether you keep them as a second source or throw them a bone and start them on a development project for another sort of fighter engine, you’ve pretty much got to spend the money.
It’s also cheap insurance against Pratt & Whitney continuing their poor cost and schedule performance. Does Pratt & Whitney really care that they have a competitor? Oh yes, just look at this site, where article after article talks about their hope that the alternate engine program will die.
I should mention that I don’t particularly care for P&W. On the several occasions where I’ve interacted with them, they’ve been poster children for the “not invented here” syndrome (NIH, meaning that if they didn’t think of it or do it, it’s meaningless). And when I visited the USAF turbine engine group many years ago, I was told as an aside that they were essentially a branch of P&W. P&W told them what they wanted, and the Air Force worked to make it happen. It’s not supposed to work that way, and it’s another great reason to have a credible second source.
Conclusion. Right now we’re faced with such overwhelming deficits and debt that any extra costs seem unacceptable. But not all costs are the same. A strong military gives a geopolitical advantage which helps the economy. Taking money from defense contractors and handing it to the unemployed is compassionate, but only makes the economic situation worse. The defense industry is also one of the few areas where the US exports more than it imports.
In addition, the trickle-down technologies which are driven by these development efforts have benefited all other industries as well: lightweight alloy development, CAD systems, finite element codes (FEA), and computational fluid dynamics software (CFD) were all started and/or supported by defense projects (and aircraft development projects in particular).
It’s entirely possible that GE & Rolls Royce will survive without the F-136 contract (the alternate engine development contract). They’ve vowed to continue development on their own funds (at least for a while). That would be great, but it won’t be due to the foresight of the Pentagon or the Obama administration.