Missile Delays Cost Hughes $100 Million : Pentagon Sends New Team to Evaluate Tucson Facility
The damaging and costly problems at Hughes Aircraft’s missile operations have dragged on for more than a year, generating an enormous financial burden and prompting recent Air Force dissatisfaction over the firm’s progress in restoring full production.
Hughes Missile Systems Group, based in Canoga Park, has lost $100 million in out-of-pocket expenses and forgone profit and will close 1985 with its third annual financial loss, according to group President D. Kenneth Richardson. These losses have substantially reduced earnings for its parent, El Segundo-based Hughes Aircraft.
Air Force Lt. Gen. Bernard P. Randolph said in a recent interview that Hughes has demonstrated substantial progress in improving its quality standards and workmanship--the original source of the problem--but the company is unable to meet Air Force schedules in delivering tactical missiles.
As a result, the Pentagon dispatched Monday a high-level team to conduct a four-day evaluation at Hughes’ Tucson missile factory. The evaluation is just the latest in a series of Pentagon reviews that began in mid-1984 when the Navy disassembled a Phoenix missile and claimed that the firm was delivering defective products.
85% of Normal Payments
The Navy, Army and Air Force all suspended missile deliveries and contract payments to Hughes through the latter half of 1984. Most of those payments have resumed, but the firm is still receiving only 85% of normal payments on the Maverick missile, an air-to-ground anti-tank weapon.
Richardson said in an interview that meeting Pentagon quotas on missile output “is a lot harder job than we thought,” but the firm now expects to recover quickly. Hughes is about four months behind its own recovery schedule.
Hughes shut down all production for six months, starting in August, 1984. Richardson said that restarting missile production after the hiatus and maintaining strict quality standards have caused the difficulties in meeting delivery schedules. Hughes also has hired 3,200 new workers at the Tucson plant this year, necessitating additional training and raising costs.
In the case of the Maverick, Hughes delivered 63 missiles between October, 1984, and August, 1985, while its Air Force contract called for 634 deliveries in that period, an Air Force spokesman said Monday.
Hughes plans to be producing 100 missiles per month by January, 250 missile within one year and 300 missiles by the end of 1986, Richardson said.
Technical Success
Despite the problems with deliveries, Hughes has had some notable technical success with its products. The Maverick scored 17 successful hits out of 18 recent test firings that were conducted to evaluate recent changes in the missile.
Moreover, the Air Force’s new Advanced Medium Range Air to Air Missile (AMRAAM) has made four successful initial flights, all demonstrating new technological capabilities. In the latest test, the missile made a direct hit on a drone target at supersonic speed from a head-on direction.
Hughes has borne enormous costs to satisfy these Pentagon requirements, unprecedented in the defense industry. Richardson said earnings provisions have been made for all such costs, and he anticipates a profit for the missile group in 1986.
The cost of the shutdown, repairs to existing missiles, retraining of employees, forgone profits and other out-of-pocket expenses have cost Hughes a staggering $100 million, Richardson said. Those expenses cannot be recovered under defense contracts, he said.
Hughes also is investing $200 million in plant and equipment improvements in Tucson, including new automated machinery, improved lighting and additional capacity. Most of this expense can be billed to the Pentagon, but full recovery will not occur until far into the future, Richardson said.
In addition, Hughes will have to pay for a substantial overrun--estimated at $200 million--for the development of the AMRAAM.
The Air Force plans to buy 17,217 AMRAAMs at a cost of $5.2 billion, ranking it as one of the largest tactical missile programs in history.
Hughes is under contract to develop the missile for no more than $556 million but encountered technical difficulties that delayed the program schedule. It will bear all costs over the $556-million ceiling price specified in the contract.
Richardson acknowledged that it will be difficult for Hughes to recoup through future AMRAAM profits the $200 million of its own money that it is spending to complete development.
“The fact that it is costing them money is their problem,” said Randolph, U.S. Air Force director of research, development and acquisition. “They signed a contract, and we expect them to complete their contract at no higher than the agreed-to cost.”
“We are honorable people who stand up to our contracts,” Richardson said.
