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Douglas Is Struggling For Altitude


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DOUGLAS IS STRUGGLING FOR ALTITUDE

The list of once-proud builders of commercial airliners that have faded from the scene is long, and the names are venerable: Lockheed, Dassault, Convair, North American, and Republic. Now, as the worst aircraft-sales slump in at least a decade drags on, many people are asking: Is Douglas Aircraft Co. poised to join that roster?

Decades ago, the aerospace giant sold nearly half the world's civilian aircraft. But failure to expand its line sufficiently has taken a toll. Today, Douglas' share of the commercial airliner backlog has shrunk to a scant 12%, making it a distant third globally behind Boeing Co. and Airbus Industrie. The work force at Douglas has been slashed by a third since mid-1990 to cut costs. Recently, sales of its new MD-11 widebody have stalled. And a much-needed $2 billion investment in Douglas by Taiwan Aerospace appears to have crash-landed.

Many observers think the crunch could push McDonnell Douglas Corp. out of making commercial airliners. "I certainly don't worry about Airbus or Boeing," says John C. Pope, president of United Airlines, a big Boeing customer. But "you have to wonder what will happen to McDonnell Douglas." Bertrand d'Yvoire, president of France's Consultair, says it's "hard to believe Douglas will survive."

DEFENDERS. Deliveries have tumbled. In the third quarter, the number of planes delivered fell 40%, driving earning from commercial aircraft down 43%, to $52 million. And orders are weak. First Boston Corp. analyst Peter L. Aseritis notes that in the first half of 1992, Douglas booked net new orders of only one plane--compared with 111 for Boeing and more than 50 for Airbus. General Dynamics Corp.'s Convair Div., which supplies the fuselages for the MD-11, last month announced it will cut its work force by 40% to match looming production-rate cuts by Douglas. "McDonnell is buying time by lowering the production rate and stretching out its backlog," says Aseritis, "but you can't get one new order every six months and stay in business."

To be sure, Douglas has defenders. Thomas J. Roeck Jr., chief financial officer at Delta Air Lines, a major Douglas customer, argues that despite a liquidity crunch in late 1990, McDonnell Douglas assured the future of its commercial-aircraft business when it successfully launched the MD-11 that October. "In my mind, the issue now is how big the company will be," says Roeck, "not whether the company will be in the business."

John F. McDonnell, chief executive of parent McDonnell Douglas, argues that Douglas survived an even worse crunch in the early '80s. It maintained production then by "renting" airplanes to American Airlines Inc. on short-term leases. "This is a cyclical business, and so far it's not as bad as it was the last time around," McDonnell says. "It hasn't affected our long-term support for Douglas Aircraft."

But optimism is becoming difficult. McDonnell's defense business has solid prospects, thanks to President Bush's decision to allow the sale of McDonnell F-15s to Saudi Arabia and Bill Clinton's call for a more mobile U.S. military. But McDonnell's stock has nose-dived 40% since January--in part because of concerns that costly new spending on commercial planes could strangle the financially strapped parent.

Few observers believe an investment by Taiwan Aerospace can be revived, especially after TaiAero's recent plane-building deal with British Aerospace PLC. And the Taiwanese money was critical to funding Douglas' planned MD-12 double-decker widebody. John McDonnell is trying to put the best face on a bad situation. "The pressure is off," he says. "With the MD-12 not being imminent, the need for cash is not imminent." Not the most persuasive argument for a promising future.James E. Ellis in Chicago


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