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McDonnell Douglas, fighter-jet giant, gets new lift from commercial aircraft sales

In the old days, James S. McDonnell used to walk the floors of his fighter aircraft assembly building with a stopwatch, checking each station for efficiency. When there was a particularly nettlesome problem, ``Mr. Mac'' -- founder of McDonnell Aircraft Corporation, which in 1967 merged with Douglas Aircraft Company -- slept on a cot in his office. He sometimes appeared on McDonnell's production line in his bathrobe in the early-morning hours of the third shift.

Though such personal involvement is hard to come by these days, McDonnell Douglas, one of the top three defense contractors in the United States, has in recent years adopted a system aimed at energizing employees to higher productivity and involvement in the company.

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That's important for this sprawling aerospace producer -- especially at a time when procurement scandals among weaponsmakers have sullied the industry's reputation. After five years of unprecedented peacetime military spending, those scandals, plus the Gramm-Rudman deficit-reduction measure, make the future of high United States defense spending questionable.

Still, with some 95,000 employees, and sales that have grown from $7.4 billion in 1982 to an estimated $11.5 billion in 1985, these are good times indeed at McDonnell Douglas (MDC).

The company has taken advantage of the prosperity created by three major fighter aircraft contracts (F-15 Eagle, F/A-18 Hornet, AV-8B Harrier II) to push for productivity gains. It is also doggedly battling Boeing for a chunk of the commercial aircraft market. And it has moved aggressively (and expensively) into the computer information systems arena. A military-commercial balance

But the cost of battle has been high.

To remain in the commercial transportation market, the company gulped $121 million of red ink from 1982 through 1983 before rebounding into the black by $56 million in 1984.

Also costly was its 1983 decision to expand dramatically its computer information services.

In 1984 it bought Computer Sharing Services for $69 million and Tymshare (a data communications network) for more than $300 million. Losses by MDC's Information Systems Group were $45 million in 1984 and are expected by some industry analysts to approach $100 million when 1985 figures are released.

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In the 1960s, defense work made up more than 90 percent of the company's business, its officials say. In 1984, however, only a little more than 68 percent of its sales were defense related, according to a report, based on pretax income, produced in August by Robert R. Gigliotti for the US Navy.

Do risk-taking and commercial ventures make sense for a traditionally conservative miltary aircraft builder?

``We never want to be a Curtiss-Wright, or Republic, or Fairchild,'' says Thomas August, a corporate planner at MDC. ``Each of those [defense aircraft] companies built a lot of airplanes and who remembers them? The fear is not that you'll take a loss [with defense contracts] -- but that you'll go out of business all at once.''

Such concerns may help explain McDonnell's stubborn refusal to yield its toehold in the commercial aircraft market. Only two years ago it was forced to cancel development of its MD-90 and MD-100 airliners because of lack of interest by airlines.

As a result, ``the airlines were convinced we were going to get out of the business,'' Mr. August says. ``The way we countered was to provide five-year leases of our aircraft at favorable rates to Trans World Airlines and American.''

That calculated risk worked.

Today the company's commercial aircraft business has rebounded, with 120 MD-80s delivered or on order through 1991. In addition, 25 MD-80 kits have been sold to China. The company is pursuing development of a larger airliner, the MD-11, which is expected to contend with Boeing's 747.

``A lot of the investment community would have applauded a few years ago if they'd just written it [commercial aviation] off, but by showing they could make it they've brought some people into their camp,'' says David Garino, an analyst with the Midwest Research Group of A. G. Edwards & Sons Inc. A wary eye on defense budgets

Both MDC's protection of its commercial aircraft niche and its push into information systems apparently stem from a ``conviction that we have the expertise to be successful in both areas,'' says MDC president John F. McDonnell, son of the founder.

``If we can get greater productivity relative to our competitors, then we think through combining more business and a greater market share we can easily take care of reductions,'' Mr. McDonnell says.

But industry analysts say it is likely, too, that MDC may well be worried about a new fiscal environment that may offer fewer and slimmer government contracts.

``The problem of overall impact of Gramm-Rudman and other factors is the very high likelihood future defense budgets will be flat at best and probably down during the next few years,'' says Wolfgang Demisch, a defense industry analyst at First Boston Corporation.

``The good news for McDonnell Douglas is that all of their existing programs are going to continue. The bad news is that even though the C-17 [military transport plane] project just received a slug of funding, I think its long term survival is questionable.''

Many people say that defense spending could easily enter a multiyear period of little or no growth. A downturn is also possible.

Although McDonnell Douglas earnings from military aircraft contracts are relatively secure, Congress might opt to stretch out contracts over a period of years and trim a few aircraft from the total, Mr. Garino says.

``Right now the defense companies are taking a first-pass examination of Gramm-Rudman and are concerned about the massive pressures to cut the deficit,'' says George Brown, executive vice-president of Data Resources Inc.

Mr. Brown believes the defense budget could be increased in 1987 and says both the administration and Pentagon will push for 3.3 percent real growth in the defense budget, with the possibility of a $310 billion budget request this month.

``I think Congress will probably push toward very small real cuts,'' he says. ``But after all is said and done there will probably still be 1 percent real growth. ``A lot depends on what happens in foreign policy.'' Information systems

A big question mark for MDC future earnings is just how well management will be able to stem losses at its information systems group (ISG) and push into the commercial aircraft market.

ISG chief Robert A. Fischer says that losses had been expected from the ISG division through 1986 because of rapid amortization of its acquisitions, but that several factors made those losses worse than expected.

The computer industry slump hit ISG hard as its newly acquired pieces were being shuffled, he says -- that, plus a loss of productivity because the reorganization took longer than planned, combined with the slowdown to produce sales growth in '84 that was only 14 percent, not the 26 percent planners expected, Mr. Fischer says.

``We cut our costs significantly [250 laid off and $20 million trimmed] in the third quarter of 1985. There are opportunities we were planning to pursue that we have set on the back burner for future years,'' Fischer says.

Despite the uncertainties, First Boston's Mr. Demisch says he thinks the company will do even better this year than in '85. The strength of the aircraft market and the fact that management is paying more direct attention to short-term earnings is encouraging, he says.

Still, ``what has been seen so far doesn't allow one to be optimistic that the difficulties [at ISG] are contained. It's not clear that things are fully in hand.''

With commercial aircraft sales taking off, ISG still working to gain ground, and future military contracts up in the air, top brass at MDC is pushing for productivity gains to make the company more profitable. A relatively unblemished image

Some of the company's top officers recently held 37 question-and-answer meetings at 17 locations with the aircraft division's 29,000 employees. That meant holding a few meetings at 5:30 a.m. to accommodate the early shifts. Nearly 800 questions about operations or employee benefits were answered in writing.

The company believes this type of communication will enhance productivity. ``Since about 1980 we've been trying to create a new culture that will promote productivity,'' says John McDonnell. ``We are trying to push this throughout our corporation. . . . Productivity techniques and ethics apply to everyone.''

Still, public cynicism has gathered over the US defense industry like a Midwest thunderstorm. McDonnell has not been without criticism, though it has remained relatively unblemished, compared with competitors.

The Navy was criticized in 1983 for paying too much for the F-18 Hornet, and audits were ordered. The price of each Hornet was dropped from $22.5 million in 1982 to $18.7 million this year in 1985.

The St. Louis Post-Dispatch reported in October that the Justice Department was investigating the company on possible excess stockpiling of materials for the F-15 program which cost the government millions.

``Any system as massive as the defense procurement system is going to have all sorts of inefficiencies,'' says John McDonnell. ``Clearly it can be improved. The question is how do you go about improving it?''

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