Some Investors Fear Prospect of Duel : Douglas Says Producing MD-11 Won’t Impose Drain on Parent

The president of Douglas Aircraft said Tuesday that there already are enough orders to “more than break even” on production of its new MD-11 tri-jets and insisted that the program will not drain the financial resources of its parent firm, McDonnell Douglas.

“We expect to finance this program from our cash flow,” Douglas chief James Worsham said at a news conference in Long Beach, where his unit is based.

Despite his comments, McDonnell Douglas shares fell $1.125 to $71.50 in trading Tuesday on the New York Stock Exchange as investors grew concerned that the company is entering a three-way shoot-out for the jumbo jet market with Boeing, the Seattle maker of the 747 aircraft, and Airbus Industrie, a four-nation European consortium that has proposed a plane similar to the MD-11.

McDonnell Douglas on Monday announced plans to launch the long-awaited MD-11 program after receiving 12 orders for 52 of the jetliners and options for an additional 40. The company said the orders and options for 92 planes are worth $9 billion. Worsham said each plane, a successor to the DC-10, will cost between $60 million and $100 million, “depending on how much negotiating was involved.”

The MD-11 is a stretched version of the DC-10 and is somewhat smaller than a Boeing 747 jumbo jet. It will be able to seat between 250 and 400 passengers and can be modified to serve as an air cargo carrier. McDonnell Douglas, which has been building the DC-10 since 1970, will discontinue the plane after it fills a backlog of orders for 20 of them.

Industry sources said McDonnell Douglas, based in St. Louis, needs the MD-11 to remain competitive in the commercial airline market.

“They needed a new airplane,” said J. C. Longridge, marketing vice president of Boeing Commercial Airplane Co. “They came back with a derivative of the DC-10. They picked a good market and are doing a good job getting it launched.” Worsham said McDonnell Douglas believes there is a market for 1,400 jumbo jets through the year 2000. He said he believes the company can sell at least 350 MD-11s to capture 25% of the jumbo jet market, compared to McDonnell Douglas’ present 20% share.

Reflecting the prospect of intense competition for that market, Airbus on Tuesday issued a statement declaring that it will go ahead with plans for its own wide-bodied A-340 aircraft.

Airbus said it believes that there is a market for 1,800 long-range aircraft in the A-340 class through the year 2005 and that it can capture 15% of that market. It has asked the British and West German governments to put up around $1.5 billion in loans to fund development of the aircraft.

Worsham discounted the competition. He said the MD-11 is not a direct competitor of the larger 747 aircraft and that “Airbus is at least two years behind us” in developing the similar A-340 jumbo jet.

Earlier Duel Recalled

Longridge, the Boeing marketing vice president, said the potential battle between the MD-11 and the Airbus A-340 “was reminiscent of” the duel between the DC-10 and Lockheed’s similar L-1011 during the 1970s. The competition almost bankrupted Lockheed, which eventually discontinued the L-1011.

Paul Nesbit, aerospace analyst with Prudential-Bache Securities in New York, said the MD-11 “may hurt Airbus, but it’s not a direct competitor of the 747.”

McDonnell Douglas, based in St. Louis, had said initially that it would not launch the MD-11 program unless it received orders for 20 planes, including an order from a large domestic carrier. But Worsham said Tuesday that the company’s board decided to go ahead with the program after receiving sizable orders from foreign carriers.

Orders From Abroad

McDonnell Douglas disclosed the identities of 11 of the companies that have placed orders for the new aircraft. The 12th, the company said, did not want to be identified.

All 12 are foreign except Federal Express, a Memphis, Tenn., air freight carrier. However, Worsham said that McDonnell Douglas is continuing its discussions with several domestic passenger carriers, including United Airlines and American Airlines.

The airlines he identified as purchasers are Alitalia, British Caledonian, Dragonair (a start-up airline based in Hong Kong), Korean Air, Scandinavian Airlines System, Swissair, Thai Airways International and Varig, the Brazilian airline. The company also received orders from Guiness Peat Aviation, an airline leasing company based in Ireland, and Mitsui, a Japanese conglomerate that also intends to lease out its MD-11s.

“It’s not that important that they don’t have a (large) domestic customer in the short term,” aerospace analyst Nesbit said. “The company seems to expect that domestic orders will follow, and there’s no reason to believe they won’t.”

McDonnell Douglas expects to invest $500 million in developing the aircraft, Worsham said, and several companies that manufacture airplane parts have also invested in development of the MD-11. He identified them as Sperry Flight Systems, General Dynamics, Aeritalia and CASA but declined to say how much they are investing.

Prospect of 6,000 Jobs

Worsham said that the $5 billion in orders it has received for its new MD-11 tri-jets will result in creation of 6,000 jobs at McDonnell Douglas and a “significant number” of additional jobs at aviation subcontractors in Southern California involved in the massive project.

Worsham said most of the hiring will occur in 1989 and 1990, when the company expects to step up production of the wide-bodied MD-11 aircraft.

Among the Southern California aerospace subcontractors that will benefit from the MD-11 program is San Diego-based Rohr Industries, which already provides parts for other McDonnell Douglas aircraft. Rohr expects revenue of at least $300 million from its contract to design, build and install portions of the engine pylons for McDonnell Douglas’ first 200 MD-11s.

Rohr will manufacture portions of the pylons in its Chula Vista and Foley, Ala., factories. However, company officials on Tuesday said no additional jobs will be generated by the MD-11 contract. Other Southern California subcontractors on the project were not identified.