The decision to drop the MD-XX raises fresh questions over a future for Douglas Aircraft
Graham Warwick/ATLANTA
McDonnell Douglas (MDC) has dropped the MD-XX not because of the $2 billion over four years that it would have taken to develop the MD-11 derivative, but because of the $15 billion over ten years it would have required for Douglas Aircraft to compete equally with Airbus Industrie and Boeing.
"Fundamentally, this was not an MD-XX decision," president Harry Stonecipher told analysts shortly after the MDC board's 25 October decision, not to proceed with the aircraft. "This is a decision about how far, and how fast, you can move with a business, from the point at which we are with Douglas," he says.
Stonecipher still maintains that MDC could have launched the programme with orders for 40-50 aircraft from five or six airlines - which would be a substantial launch, both in quantity and quality of customers, he says - "-but a broader decision had to be made".
If Douglas had a market share of 20-25%, then it would have been an "easy call" to launch the MD-XX, he says. The truth is that Douglas' market share is now barely in double digits, and many investors (and some airlines) believe that it is too late for the company to embark on a programme as large as that required to develop the MD-XX.
MDC had planned to launch the MD-XX in early January 1997, and needed board approval to offer the aircraft by the beginning of November if it was to meet the timetables of airlines, which wanted to make decisions in December. Rather than delay the programme and continue to spend money, MDC decided to quit.
The MD-XX decision has darkened the shadow over Douglas' future, which had been only partly lightened by Stonecipher's repeated reassurances that MDC wanted to be in the commercial-aircraft business. "I still like the market," he told analysts, "but I don't like the pricing and I don't like our position in the market."
Pricing was the bogey that killed the MD-XX, and it remains an issue for Douglas. Stonecipher says that the challenge for Douglas now is to drive costs down on its existing aircraft "...and demonstrate that we can sell them in quantity, at a price that people are willing to pay."
MDC hired an independent consultant to look at the prices it might expect to realise for the MD-XX, and its current aircraft, and reached the conclusion that it could launch the MD-XX and achieve "OK" margins, "...but nothing we'd be happy with", Stonecipher told analysts.
The outspoken MDC president believes pricing in the commercial-aircraft market to be "absolutely silly-we're in a situation of rapid growth in orders, yet the pricing is still marginal. Certainly it is for us." He suspects Airbus and Boeing are not happy with pricing, either.
MDC hopes that, as Airbus and Boeing reach capacity, opportunities will emerge for Douglas to sell its existing aircraft "-at prices that we like". The company expects to continue to sell the MD-11 as a freighter; it still has "great expectations" for the MD-10 cockpit upgrade of the DC-10; it expects to launch the MD-17 outsize-freighter version of the C-17 military transport, with sales of 30-35 over ten to 11 years; and has a low-level preliminary-design effort under way on a blended-wing-body very-large aircraft which could emerge as a commercial and military freighter.
Also still in the plans are a new wing for the MD-90 and a stretch of the MD-95. Stonecipher re-assured analysts, that the 100-seat MD-95 will go ahead, despite ValuJet Airlines, still being the only customer. "We've had lots of interest in that aircraft, but we've been unwilling to sell them at the price that people want to pay," he says.
Stonecipher's statements that Douglas will continue as a niche player and that MDC is once again open to a commercial-aircraft partnership have rekindled the rumours that the division will be sold. Mergers, joint ventures, even acquisitions, will all be looked at, he told analysts, but MDC has stopped short of putting up a "for sale" sign over Douglas.
"To me, it doesn't really matter how big the niche is, so long as we improve profitability. My view is that we're in the business to make money, and the number of aircraft that are sold is kind of incidental. Selling 100 aircraft and making $1,000 is less attractive to me then selling ten aircraft and making a million dollars," he says.
Douglas was digging in to become a niche player before Stonecipher came to MDC in 1994 with plans to grow the commercial-aircraft business.
"Contrary to my earlier remarks and plans, I do not see MDC as a major stand-alone player in the commercial-airliner business," Stonecipher told analysts. "The investment required to make us into a full-fledged major player is probably in the order of $15 billion over the next ten years," he says.
Douglas' advantage is that, in its efforts to be a successful niche player, it has demonstrated the ability to build aircraft economically at low production rates.
Production rates are now increasing. Stonecipher says: "So, it's not as though we've got a shrinking business - it's just not growing at the rate the other two guys' business is growing. We can sell 50 to 100 a year and have a very nice business. The others would be jumping off bridges if they got down to 50 to 100 aircraft a year."
Source: Flight International
