McDonnell Douglas' decision to shelve plans to develop its MD-XX long-haul jet leaves the way open for the company's Douglas Aircraft division to forge a partnership with Airbus or Boeing. Since talks about a merger with Boeing stalled earlier this year, Airbus appears to be front-runner.
Airbus Industrie's senior VP commercial John Leahy will not say whether Airbus plans to talk to Douglas, but says he hopes the US company will become a risk-sharing partner in the $8 billion A3XX programme. 'It would be an excellent way to use the $2-3 billion they've just saved on the MD-XX,' he remarks.
Airbus has accelerated development of its 550-seat A3XX and is now making firm offers to airlines, with a list price of $198 million in 1996 dollars, in-service date of 2003, performance promises, and discounts for launch customers.
In the first detailed study on Airbus' proposed transformation into a single corporate entity (SCE), Lehman Brothers recommends that Airbus should acquire Douglas Aircraft. 'We believe that Douglas would make an important addition to the Airbus family, and that Airbus would make a good partner for DAC.'
Advantages suggested by Lehman Brothers include an immediate market share of around 50 per cent, reductions in capital spending, dollar-based manufacturing, and economies of scale in product support, engineering, sales and financial support. The New York investment bank thinks the MD-95 could become Airbus' 100-seat contender, possibly with an Airbus cockpit.
Flexibility to do deals like this is just one reason why Lehman Brothers urges the Airbus partners to move quickly in converting the enterprise into a single corporate entity. It says that the Airbus SCE could be worth $15-18 billion, and forecasts that the company would remain profitable every year for the foreseeable future despite the A3XX launch costs.
Lehman says that in 2003 the Airbus SCE will make a pre-tax profit of $863 million on sales of almost $18 billion; the bank's pro-forma estimate for 1995 is a pre-tax profit of $161 million on sales of $9.5 billion.
In a remarkable about-face, MDC chief executive Harry Stonecipher has conceded that the company's future is solely as a niche player. He told analysts that he could not justify the cost of developing new aircraft when pricing pressures kept margins so low.
The MD-XX, a derivative of the MD-11, was being proposed as a 375-seat replacement for the Boeing 747-200/300, with a longer range 310-seat version planned to rival the A340 and B777. Earlier this year McDonnell Douglas had predicted it would start taking orders on both models in October and launch by early 1997.
R&D costs for the new aircraft were pegged at only $2 billion, mostly for a new wing, but Stonecipher said the bigger expense was upgrading operations and facilities. He said MDC would need 'in the order of $15 billion . . . over 10 years to keep new planes and derivatives coming down the line.'
Thus, his decision to shelve the MD-XX was really a decision to forego expanding McDonnell Douglas' current line of aircraft. Stonecipher confirmed by stating that McDonnell Douglas would not be developing new commercial jets as a major manufacturer. 'Fundamentally,' he said, 'this was not an MD-XX decision.'
R Whitaker/D Knibb
Source: Airline Business