McDonnell And Boeing: Merger Talk

Will a niche strategy work for building the most complex of machines? It won't be easy, but McDonnell Douglas Corp. will find out.

This week's partnership with the Boeing Company signals that, for now at least, the company is focusing its stronghold in narrow-body commercial jets. It has also renewed speculation that Boeing may end up buying McDonnell outright.

In the deal, announced Tuesday, the No. 3 manufacturer of commercial aircraft will team up with No. 1 Boeing to collaborate on Boeing's future wide-body jets. The agreement between the longtime rivals will save jobs at struggling McDonnell while helping Boeing cope with the opposite issue: a business boom.

"I think long-term, you have to have a family of airplanes" to succeed, says Bill Whitlow, an analyst at Pacific Crest Securities in Boeing's home city, Seattle.

Boeing and No. 2 Airbus Industrie, the European consortium, already dominate the business with their broad families of jets, while McDonnell has about 10 percent of the market. Still, the St. Louis company, with key production facilities in Long Beach, Calif., is not out of the running. Yesterday two Chinese airlines announced a $1 billion purchase of 20 158-seat MD-90s. And its defense-side business is huge, despite its recent loss of a big Pentagon fighter contract.

The deal with Boeing is expected to include both design work and parts subcontracting, not final assembly.

For now, it offers breathing room for McDonnell, which recently scrapped its hopes for developing a large jet of its own.

"It was a hard choice" but a wise one, says analyst Paul Nisbet of JSA Research in Newport, R.I. Even with the large plane, "the company still had sizable gaps in its product line."