The Arrow programme was plagued by trouble from the beginning. In 1952 an apprehensive Howe, now overseeing the Department of Defence Production (DDP), opposed awarding Avro the Arrow contract, but the nationalistic arguments of Brooke Claxton, Minister of National Defence, won out in Cabinet. In 1954, scientific advisors at two Canadian aeronautical research agencies disputed Avro's performance calculations; Avro was only vindicated after a third-party evaluation by a US laboratory. In 1956, over Avro's strenuous objections, the RCAF and DDP opted to fund the development of Astra I, an exceedingly ambitious radar fire-control system, and to take over development of the Sparrow II, a cancelled US air-to-air missile, insstead of buying off-the-shelf equipment. While the US and Britain offered their encouragement and admiration, neither expressed any serious desire to purchase the Arrow. By 1957, the RCAF had halved its requirement for Arrows and the St. Laurent government, unnerved by the steeply rising costs, ordered the entire project reviewed every six months and development slowed and scaled down until test flights could prove the Arrow's airworthiness.
Despite the warning signs and its precarious dependence on military contracts, Avro appeared to prosper under the leadership of Crawford Gordon, President and General Manager of A.V. Roe Canada Limited. The parent corporation had become the third largest corporation in Canada, a diversified industrial giant comprising nearly forty companies and directly employing over 41,000 people. Then, on June 10, 1957, Canadians went to the polls, and to the surprise of virtually everyone, the twenty-two-year Liberal dynasty was shattered. A Progressive Conservative minority government was elected, and John Diefenbaker became Canada's Prime Minister.
Production of the Canuck was barely underway when the RCAF issued specifications for an advanced successor that could shoot down the next generation of Soviet supersonic nuclear bombers. An RCAF evaluation team again concluded that no suitable aircraft were to be found in the US or Britain. An RCAF evaluation team again concluded that no suitable aircraftwere to be found in the United States or Britain. In 1953, the St. Laurent government awarded Avro a $27 million, five-year contract to design two prototypes of a long-range, two-seat, twin-engine, supersonic, all weather interceptor - the Avro CF-105 Arrow. The RCAF anticipated that 500-600 Arrows at $1.5-2 million each would be needed to replace both the Canucks and the Sabre Jets in service. Because of the lack of a suitable jet engine, in 1954 the PS-13 Iroquois, a new and powerful jet engine that Orenda was pursuing as a private venture, was chosen as the power plant for the proposed fighter.
In 1955, the growing Soviet bomber threat led to the acceleration of the development of the Arrow. Avro was awarded a revised $260 million contract for five Arrow I aircraft powered by Pratt and Whitney J-75 engines to be followed by thirty-five Arrow II aircraft fitted with the as yet unavailable Iroquois engines. Contrary to standard industry practice, which was to produce a custom-built prototype, exhaustively test it, and then set up an assembly line, Avro decided to eliminate this expensive and time-consuming process through intensive and thorough preliminary research and model testing. Avro would construct and experiment on full-scale mock-ups of the Arrow and its individual systems, and wind tunnel and rocket-mounted free flight models were to be tested. Both prototypes and pre-production aircraft would then come directly off the assembly line, and it was felt that any increased research and development costs would be more than offset by savings in time and labour which would reduce manufacturing costs.