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Aviation History
1994
1994 - 0071.PDF
NEWSMAKERS RELATIVE PRESSURE MDC's fight to avoid being the most spectacular casualty of the post-Cold War aerospace shake-out has stepped up the pressure on chairman and chief executive officer John McDonnell. Alittle over two years ago, the perception of McDon nell Douglas (MDC) was of a company in crisis, perhaps on course to become the most spec tacular casualty of the post- Cold War industry shake-out. The group was not helped by the slide in sales and collapse in profits in 1992, which left it with net earnings of only $161 million before accounting charges were made. One result was a whispering campaign questioning the lead ership of chairman and chief executive John McDonnell. As the latest member of the family (he is the son of founder John McDonnell) to head the world's largest defence con tractor, McDonnell is inevitably under enormous pressure to justify his position. On the eve of 1993, he had promised the sceptics that MDC would "...increase earn ings, reduce debt and regain a reputation for financial strength". By the end of the year, MDC had gone a long way towards achieving the aims. McDonnell now says that cashflow is on track to exceed $1 billion for the full year, which should allow MDC to reduce its aerospace debt to below $1.8 billion — its lowest for five years and almost half of the March 1991 peak. Despite the continued slide in sales, the company expects an operating-profit margin above 6% for the first time since 1978, after it slumped to only 2% in 1992. The recovery helps vindicate the often pain ful cost-cutting and re-structur ing campaign launched by McDonnell in mid-1990. McDonnell, who holds a master's degree in aeronautical engineering from Princeton University, took over as chair man in 1988, after joining McDonnell Aircraft as a stress engineer in 1962. By the time he assumed the chairmanship, the company was already committed to the series of development program mes which McDonnell blames for its subsequent financial troubles. MDC had been awarded fixed-price develop ment contracts for the US Navy's A-12 attack and T-45 trainer aircraft, plus the US Air Force's C-17 transporter, and was teamed on (losing) bids for the Advanced Tactical Fighter (ATF) and the US Army's Light Helicopter (LH). McDonnell says: "By about early 1990, it was becoming evident that all three of our and certification of the MD-11. The USN cancelled the A-12, alleging default, while the T-45 is now in production. The C-17 has caused more heartburn, with MDC writing off $650 million in cost over runs on the original contract. MDC has now accepted a set tlement of all claims from and against the Department of De fense (DoD), under which it will spend an additional $456 million on programme im provements, while the DoD may increase its aircraft order from 40 to 120 in 1996. MDC also faced unprece- John McDonnell "As the latest member of the family to head the world's largest defence contractor, McDonnell is inevitably under enormous pressure to justify his position." Government fixed-price con tracts were getting up towards their ceilings or going over their ceilings, so we were in a situation where we basically had to invest $5 billion in cash to cover those programmes." He adds: "What we have done in the last four years is to generate that $5 billion — $1 billion came from selling assets such as the Information Sys tems division, $1 billion from increasing our debt, and the other $3 billion we did by generating cash." The critical factor was the completion or cancellation of the three fixed-price contracts, together with the conclusion of the ATF and LH competitions, dented cutbacks in government and commercial markets. In response, it had to make dras tic cuts in overheads, to reduce capacity in line with demand, and "...to hold down our costs ahead of our revenues coming down", McDonnell says. He adds: "We did it the hard way, basically by tightening our belts, by consolidating, by cutting out expenses wherever we could." The major actions were to reduce the payroll by more than one third between 1989 and 1992, and to re-structure MDC into three basic operating units — MDC Aerospace East and West, and Douglas Aircraft as a stand-alone operation. The result has been a major improvement in efficiency and "focus", McDonnell says, add ing that "...we are now doing everything smarter and faster and cheaper. Basically, this year it has all come together". MDC is left with a solid business base on the military side, with the F-15 and F-18 still in production, along with the AV-8B Harrier, the C-17, the T-45, the AH-64 Apache and the Delta II rocket, plus the Harpoon, SLAM and Toma hawk missiles. It is also devel oping the F-18 E/F. This should provide a solid revenue base of at least $10 billion a year until 1997, with the prospects of more opportu nities overseas, particularly in Asia. MDC has clinched the first sale of F-18s to Malaysia ("...the biggest eight-aircraft deal we've ever signed", McDonnell says) and is discussing a sale to Singapore. The outlook is less rosy on the commercial front, but McDonnell believes that Douglas has demonstrated "staying power". He says that the business has shown an op erating profit in every quarter over the past three years. In vestment in new models, be yond the upgraded MD-90, has virtually stopped, but McDon nell says that work on program mes like the MD-12 and the MD-XX twinjet will resume "...when the market returns".' This would still require a major strategic partner to share the investment, and the search continues, despite the chasten ing collapse of its proposed deal with Taiwan Aerospace in 1992. McDonnell says: "We learned our lesson with Taiwan and we are not going to an nounce anything until we have a firm deal, but, from a timing point of view, it's not needed until the next upturn." BY JOHN BAILEY a FLIGHT INTERNATIONAL 12 - 18 January, 1994 21
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