McDonnell Says Aircraft Unit Is Viable : Officials Offer Detailed Plan in Six-Hour Session

From the depths of a commercial aerospace bust, senior McDonnell Douglas executives Friday proclaimed the long-term viability of their Douglas Aircraft unit and laid out a detailed strategy to survive the next several years.

The firm has trimmed $750 million in annual overhead costs at the Long Beach-based commercial aircraft unit and could remain profitable through 1995 based solely on existing orders for aircraft, they said. The unit has reported profits for the last nine quarters.

“McDonnell Douglas is committed to the commercial aircraft business,” Chairman John F. McDonnell said. “We like this business because we think we have a fine future in it.”

The spirited defense was mounted as some experts and securities analysts have begun to question whether the firm has the marketing and financial strength to endure the current downturn.

Airlines are canceling and deferring orders to cope with their own cumulative losses of $10 billion over the last three years. In response, aircraft makers are slashing output, firing workers and delaying new products.

McDonnell officials said that by carefully controlling costs and improving efficiency at the sprawling Douglas facility, they will be able to wait out even the worst expected airline recession. The firm anticipates that airlines will order 14,000 new aircraft worth $1 trillion by 2011.

The remarks came on the eve of the rollout of the firm’s new MD-90 jetliner, a successor aircraft to its MD-80 and DC-9 aircraft, which have been in production for nearly 30 years.

In a six-hour press briefing, the company opened the books on information that has been held confidential in the past.

John Wolf, Douglas Aircraft’s executive vice president, said the firm’s MD-80 program could remain profitable through the third quarter of 1996 based on existing orders; the MD-11 would remain profitable until the third quarter of 1995.

Douglas has cut the labor hours needed to produce its aircraft by as much as 50% in the last two years, Wolf said. On its MD-11 line, the firm has trimmed the labor involved in assembling an aircraft to 150,000 hours from 300,000, while the hours required to build an MD-80 have dropped to 47,000 from 78,000.

“We are a different company today than we were three years ago,” Douglas President Robert H. Hood said.

But to remain a player in the worldwide aviation industry, Douglas still must reverse its plunge in sales. A rash of cancellations and deferrals, coupled with a relative trickle of new orders, is eroding the firm’s backlog and shrinking its world market share.

Wolf insisted that the loss in market share to rivals Boeing and Airbus Industrie resulted in part from Douglas’ refusal to go after “bad business,” which he defined as orders that would result in losses.

McDonnell executives said Douglas has reacted more quickly to the industry’s woes than either of its rivals, which one executive sought to portray as the bloated IBMs or General Motors of the aircraft business.

But many analysts say it is still too early to say whether Douglas will emerge as the resuscitated Chrysler or the defunct Studebaker of the aircraft business. Wolfgang Demisch, an analyst for UBS Securities, said he believes that McDonnell has several years to assess whether it can remain in the business.

Wolf acknowledged that competitors are attempting to exploit speculation about the firm’s survival: “I believe our competitors have been running all over the world saying not to buy our planes because we are not going to be in business.”

On the contrary, Douglas has about 1,500 workers assigned to new aircraft programs, according to Walter Orlowski, vice president for development programs--a significant investment in the firm’s future. The firm disclosed, for example, that it is planning a stretched MD-11 that would carry as many as 363 passengers. Such an aircraft would require a newly designed wing and billions of dollars in investment.

The recruitment of foreign firms to buy a 49% stake in Douglas remains a centerpiece in the corporation’s strategy. To that end, John McDonnell said, demonstrating the firm’s viability and profitability is crucial.

McDonnell said his dictum last year that the firm would divest units that did not rank first or second in their industries was not meant to limit Douglas’ prospects. It might take 10 years or longer, he said, for Douglas to surpass current No. 2 producer Airbus, the European consortium.

“I would not put any time limit,” McDonnell said. “It could well take longer than a decade. It would depend on the progress we are making.”

But executives said Douglas will not be subsidized by McDonnell’s military business as was past practice; instead, it must pay for future development out of its own income.