May 2022 | Content by Kees Schulten, NAPMA Financial Controller

Will inflation affect the FLEP programme?

The NE-3A Final Lifetime Extension Programme (FLEP) is on a fixed budget…inflation is notorious for eroding all things fixed. Will FLEP suffer big? Interestingly, the short answer is no. But why not?

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FLEP is technically a continuation of the NATO E-3A acquisition programme that began in 1978. Then, the NAPMO Nations agreed that the annual funding to acquire 18 NATO E-3A aircraft with all requisite support equipment and facilities “…are understood to be adjusted by yearly inflation…”. They did this because in the 1970s, inflation was in the double-digits; they had to account for it. NAPMO founders created an inflation-heavy fixed contribution payment schedule as part of the NATO E-3A Cooperative Programme.

As inflation started to come down in the 80s, the NAPMO instructed NAPMA to financially accredit the acquisition of the NE-3A using actual inflation indices for the quarter in which the contributions were received. In 1990, programme accreditation - only addressing contributions - showed actual inflation $96M below the original estimate and a $16M shortfall due to so called “late payers”. Other nations had preferred to pay their contributions early, allowing NAPMA to earn interest. Early 1995, NAPMA estimated total interest at $503M (including projections through 1997) which was used for unforeseen requirements and cost overruns.

When commencing FLEP in 2019, inflation was still historically low, with even negative interest rates in some European countries! NAPMO agreed on a Base Year 2016 contribution ceiling of $1,000M for the Programme. Instead of a fixed payment plan, the NAPMO Nations directed that NAPMA will adjust each nation’s calls for FLEP contributions by yearly inflation.

The hard lesson learned in the 1970s rings true today….it is wise to account for inflation, even when it seem unlikely.