Top Management Puts McDonnell at Risk

What’s wrong with McDonnell Douglas? It has a record order backlog for commercial jets, in the midst of an historic boom in the aircraft industry. Yet its management seems confused and uncertain.

Two weeks ago, the St. Louis-based aerospace firm, scrambling to conserve cash, announced the layoff of 17,000 employees--many of them hired only last year to help increase aircraft production.

Last year, McDonnell turned its Douglas Aircraft division in Long Beach into an audition studio, abruptly dismissing 5,000 managers and telling them to reapply for about 4,000 jobs. The intent, Chairman John F. McDonnell told shareholders, was to introduce a management system “based on trust and support.”

The shock treatment inspired fear and confusion instead and contributed to production delays and massive losses. “We have made some mistakes in the course of our reorganizations,” acknowledged McDonnell, the 52-year-old son of the company’s founder, as he announced this month’s mass layoffs.

Such management fumbling would be laughable if the company were less important. But a lot of people pay for McDonnell Douglas’ mistakes. The nation’s largest defense contractor, with $14.6 billion in annual revenue, McDonnell Douglas is one of only two remaining U.S. manufacturers of commercial airliners. Its success or failure in international jetliner markets--where total sales run $40 billion a year--means a lot for U.S. jobs, exports and technical progress in the 1990s.

Competition is stiff, not only from Boeing but from Europe’s Airbus Industrie, the consortium that has grown in the last 20 years on $10 billion of subsidies from the French, German, British and Spanish governments. Airbus managers are confident these days. Richard Evans, the head of British Aerospace, was quoted recently in Forbes saying, “Airbus is going to attack the Americans, including Boeing, until they bleed and scream.”

And McDonnell is faltering. The company is behind schedule with the MD-11, a new plane derived from the old DC-10, that must pass U.S. and European government airworthiness tests this fall. Expenditures on MD-11 are running $2 billion this year, with no income until the planes can be delivered next year, so the company is in a cash bind.

Meanwhile, its defense business, which accounts for more than 60% of sales, is due for sharp declines as weapons programs end. And McDonnell may face writeoffs of cost overruns on some programs, as the Defense Department, in a cash bind itself, makes life harder for defense contractors.

So McDonnell Douglas’ future depends for the first time on the commercial jetliner business. And that’s a problem because the Douglas part of the company, though it brings in one-third of company sales, has been an often unprofitable and generally unloved stepchild for most of the 23 years since McDonnell Aircraft rescued cash-strapped Douglas Aircraft in 1967.

The McDonnells were reluctant owners. Founder James S. McDonnell, who died in 1980, never liked the commercial plane-building business. He believed that the airlines had too much power over producers and so argued with his customers.

The family--the McDonnells own about 15%--was reluctant to risk its own money in the high stakes game of designing and building new jetliners, which even 20 years ago demanded $2 billion in development expenditures. McDonnell economized by developing derivative planes from old Douglas designs--saving money but offering less innovation to customers. That’s one reason its profit margins are less than half those of Boeing, notes analyst Phil W. Friedman of Paine Webber.

The McDonnells missed opportunities--to steal a march on Boeing with a new plane 10 years ago, or to enter a joint venture with British Aerospace in 1980 that might have throttled Airbus in its cradle. In each case, the McDonnells shrank from the hefty investment.

Most pertinently for the present, the company believed that its mainstay would always be defense work and so never made the effort to tighten production efficiency at the Douglas division. Instead it was left overstaffed and undermanaged. Thus, John McDonnell’s attempt to reform the management structure at Long Beach was understandable and overdue--but incompetently executed.

Meanwhile, competition keeps moving in today’s world. Airbus has developed a new system that cuts the costs of aircraft assembly by 20%. And as the boss of British Aerospace says, it is prepared to “attack the Americans.”

Can McDonnell Douglas meet the assault? Of course it can . The company has over $20 billion in orders for commercial planes--running neck and neck with Airbus. If it can get through this crisis year and start delivering the new MD-11, Douglas could take in $4 billion from that plane alone next year. In the future, sales of commercial planes already in the backlog could reach $10 billion a year. It shouldn’t require genius to wring good profits and competitive success from such a backlog of business.

But that’s the point: Despite subsidies for competitors and two decades of indifferent management, McDonnell Douglas still has a competitive position and bright potential. What it seems still to lack is management with the determination and common sense to bolster the position and realize the potential. And so the jobs of a lot of people, and the competitive standing of a great U.S. industry, remain at risk.