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Mc Donnell Douglas: Flight Plans For A Much Altered Future


The Corporation

McDONNELL DOUGLAS: FLIGHT PLANS FOR A MUCH ALTERED FUTURE

For the nation's No. 1 and No. 2 defense companies--McDonnell Douglas and General Dynamics--the New World Order is a frightening vision. Pentagon spending is in a tailspin, and both companies are coping with wrenching change--yet in entirely different fashions.

McDonnell is counting on its commercial airline business for future growth, though it may need a powerful partner to help with development costs. Meanwhile, GD plans to stick it out in defense. How? By cutting employment, research and development, and capital spending. Here's a look at two strategies for corporate survival.

McDONNELL DOUGLAS: SQUEEZING INTO CIVVIES

You can hardly fault John F. McDonnell for waxing philosophical about the challenges confronting McDonnell Douglas Corp., the nation's No. 1 defense concern. The company wound up on the losing team for probably the last military megacontract of the century, the U. S. Air Force's $75 billion Advanced Tactical Fighter. It has been hit by a series of big defense write-offs, and its debt-laden balance sheet is among the weakest in the industry. In his letter to shareholders, McDonnell mused: "Adversity is what introduces you to yourself."

Talk about jarring introductions. With its key defense programs--the F-15 fighter, the Apache helicopter, and the Harrier jump-jet--all scheduled for deep production cuts or termination by late 1994, McDonnell Douglas now hopes to move forward on the wings of its commercial aircraft business. And it's scouring the globe for a rich partner to share its development costs.

It won't be a joy ride. Commercial aviation is solidly dominated by Boeing Co., which bagged a commanding 55% share of new orders last year. Upstart Airbus Industrie has benefited from newer technology--and subsidies from European governments. What's more, developing new jetliners requires tying up huge amounts of cash for years before revenue starts rolling in.

Consider McDonnell's new MD-11 widebody jet. Launched in 1986, the successor to the DC-10 brought in hardly a dollar until late 1990. In the interim, McDonnell spent more than $2 billion on development, tooling, and inventory. Since it was simultaneously investing more than $1 billion of its own funds in new military programs, such as the ATF and the C-17 airlifter, free-spending McDonnell faced a cash crunch in mid-1990, when it found itself locked out of the public debt markets by its poor credit ratings.

FADE-OUT. That sparked last summer's mass layoffs--15,000 jobs were iced in all--and a cost-cutting drive. Although the current $3.3 billion in nonfinance company debt is triple 1986 levels, many outsiders believe that McDonnell's development-cash needs may finally have peaked. And renegotiation of McDonnell's bank lines has given it breathing room through December, when McDonnell officials hope improved cash flow from increasing MD-11 deliveries will allow it to sell bonds or preferred stock.

Unfortunately, McDonnell must expand beyond the MD-11--and soon. Airlines now demand that airframe makers produce whole families of different-size jetliners with common spare parts and training. So McDonnell, with just two planes in its current product line, must develop new ones. Predicts Morgan Stanley & Co. analyst Philip W. Friedman: "If it doesn't broaden the product line, it fades out to being a distant third in the aircraft business."

That's why John McDonnell is barreling ahead with both the MD-90--a derivative of the company's bread-and-butter MD-80 narrowbody jet, set to make its debut in 1994--and a 747 challenger dubbed the MD-12X. While MD-90 costs should be manageable--its structure is similar to the MD-80--developing the stretched fuselage and new wing for the widebody MD-12X could cost as much as $4.5 billion.

NO TAKERS. That hefty bill has sent McDonnell in search of equity partners. Northrop CEO Kent Kresa concedes his company has held "technical discussions" about how it could work with McDonnell on the new jumbo jet, but Kresa says investment terms were never discussed. Saab-Scania's aerospace unit also took a look, and a pass, says a spokesman.

Expect the search to continue, because McDonnell has precious few options for growth. Its computer-services business has been downsized. Its profitable finance unit, which specializes in equipment leasing and aircraft finance, is now having trouble writing new business because of its parent's woes.

McDonnell's defense pains are worsening, too. In January, the Pentagon canceled the Navy's pricey A-12 attack plane, stripping co-developers McDonnell and General Dynamics Corp. of a $52 billion prize. In March, South Korea scrapped a $6.6 billion order for McDonnell's F-18 fighter in favor of GD's cheaper F-16. So, it seems McDonnell's grueling journey along the path of self-enlightenment may be just beginning.James E. Ellis in Chicago


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