Hughes Lost Big Gamble on FAA Contract

After investing four years and $250 million in a bid to revamp America’s air traffic control system, Hughes Aircraft’s Ground Systems Group in Fullerton has been left stranded on the runway by rival IBM.

On Tuesday, the Federal Aviation Administration announced that it was awarding the $3.6-billion air traffic control system contract to a team led by IBM.

The contract loss jeopardizes 240 existing jobs at Hughes’ 12,000-employee Fullerton operation, which had planned to assign as many as 700 people to the program.

The FAA decision also dashes Hughes’ plans to use the contract as a springboard to secure lucrative foreign business for air traffic control systems.

Moreover, it stalls the company’s efforts to capture a big-ticket civilian contract to lessen its heavy reliance on defense work during a time of stingier Pentagon budgets. As growth in defense spending has slowed, employment at the Fullerton division has shrunk to 12,000 today from nearly 16,000 in 1985.

But the selection of IBM, which built the nation’s current air traffic system, was good news for Computer Sciences Corp., an El Segundo company that is working as an IBM subcontractor on the FAA project.

Computer Sciences, which is developing computer software for the new system, said it will add 400 jobs during the next two years for the program. Only a handful will be in Southern California, though. Most of the hiring will be at a company facility in Silver Springs, Md., and an FAA operation in Atlantic City, N.J., said Jim Furlong, a company spokesman.

“There has been quite a bit of celebrating here today,” Furlong said.

IBM’s two subcontractors, Computer Sciences and Raytheon Corp. of Lexington, Mass., are expected to receive about half of the revenue from the 12-year FAA contract, or about $1.8 billion.

Not surprisingly, Hughes officials tried Tuesday to put the best face on the contract loss.

“The feeling is a mixture of disappointment and pride,” said C. Blaine Shull, a Hughes senior vice president and head of the Fullerton division. “We feel we did a pretty good job. We’re not dragging our chins on the floor.”

Hughes officials said the company has developed new technology in the areas of radar display panels and computer networks that will be valuable in future competitions for civilian air transportation and military air defense systems.

“In spending $250 million, we’ve learned a hell of a lot,” said Joseph A. Capobianco, Hughes program manager for the FAA project. “ We certainly should be in an excellent position to take that technology forward.”

However, Hughes has lost the advantage that it might have had in competing for foreign air traffic control programs expected in the 1990s.

IBM is expected to have the upper hand in capturing the lucrative foreign business because many nations are likely to buy versions of the FAA-approved air traffic system.

Nevertheless, Hughes still plans to bid for an upcoming project to modernize Canada’s air control network. That program is expected to be only 10% to 15% as large as the U.S. system.

“We’re still in the hunt” for foreign business, Shull said. “But we’ll be wary about how we spend our bullets.”

In going after the FAA contract, Hughes was venturing into an area in which it had little experience, industry experts said.

Although Hughes built the air traffic system in South Korea and the air defense system used by the North Atlantic Treaty Organization, it has never done business with the FAA.

“It wasn’t their normal line of business,” said Paul Nisbet, an aerospace analyst with Prudential-Bache Securities. “IBM was the incumbent. It would have been quite a feather in their cap to beat IBM at IBM’s game.”

Hughes, a unit of General Motors Corp., has been seeking opportunities to diversify its customer base to reduce its dependency on military contracts, company officials said.

Defense programs accounted for virtually all of the Ground Systems Group’s $1.3 billion in 1987 revenue. Altogether, more than 80% of Hughes’ business is tied to military work.

The FAA program “would have offered some balance,” Shull said. “That was one of the major reasons we were disappointed we didn’t get it.”

Despite its reliance on military customers, the Ground Systems unit is not dependent on any one defense program for the lion’s share of its business. The group has 25 major product lines and 425 different contracts, company officials said.

The group has 10 divisions producing military radar systems, electronic warfare systems, weapon control displays, battlefield communication systems, military training systems and other equipment.

Company officials said employment at the sprawling Ground Systems facility--Orange County’s largest private employer--is expected to stabilize over the next few years.

“Our forecasts are very healthy,” company spokesman Scott Rayburn said. “We don’t expect any traumatic shifts in our employment.”