Thinner Military Budget Could Cut Grumman by Half
Grumman Corp., whose F-14 Tomcat fighters zoomed, swooped and nearly stole the show from Tom Cruise in “Top Gun,” is hoping to pull off some dazzling acrobatics of its own to evade an attack from Administration budget-cutters that could cut the size of the company almost in half.
The Bethpage, N.Y.,-based defense contractor-- which over the past 6 decades has made some of the Navy’s best-known carrier-based aircraft, from the World War II-era Hellcat to the A-6 Intruder-- suddenly has found itself in danger of losing both the F-14 and A-6 because of budget cuts proposed by Defense Secretary Dick Cheney.
The loss of those two contracts would shut Grumman’s mainstay business, forcing the company to lay off thousands of workers and shrink itself from a $3.6-billion diversified aerospace conglomerate to a firm with about $2 billion in revenue and a focus on the crowded and highly competitive fields of space and military electronics.
Although Grumman was blind-sided by Cheney’s proposal to cancel new production of the F-14--which came on the heels of decisions last year to end both the A-6 program and that of another Grumman plane, the EA-6B Prowler--aerospace-industry analysts say the company made itself particularly vulnerable to the cuts.
They say Grumman failed to maneuver through the tougher contracting and political environment of recent years to position itself to build the next generation of tactical aircraft. A series of management missteps, including some ill-fated diversification efforts, also hurt the company.
Grumman is not the only big defense contractor expected to get bruised in the battle to slice $10 billion out of the fiscal 1990 defense budget. But no company apparently will be hit as severely.
“We’re in a climate now where the Defense Department is basically making decisions about what businesses stay alive and which businesses don’t,” said David Smith, an investment-banking consultant and defense-industry analyst.
Throughout the defense industry, companies are expecting to face the loss of major contracts because of the end of the Reagan-era military buildup and efforts to find ways to cut the federal budget.
They also are grappling with rising costs as the result of procurement policy changes that put more of the risks of developing costly and sophisticated new technologies onto companies.
In some cases, including that of Grumman, these costs are leading to massive debt loads: Interest payments on the company’s debt in 1988 totaled $85 million, eating up almost 40% of operating profit, and this year interest is expected to top $100 million.
Many analysts say Grumman’s plight is the natural result of overcapacity in the military aircraft industry, which has resulted in many plants operating at far below their optimal volume.
For instance, Grumman can most efficiently produce the swing-wing, twin-engine Tomcat at a rate of 40 a year but next year was due to build only 12 under the Reagan budget plan. In canceling the F-14, Cheney said the low volume would push the costs of each fighter up to $75 million, a figure Grumman disputes. It maintains that it can build the planes for two-thirds that amount.
Under its recently appointed chairman, John O’Brien, Grumman is fighting mad and fighting back.
O’Brien argues that the company was, in effect, led on by the Navy. Grumman went into debt to make a $160-million investment in the development of new versions of the F-14 and A-6, believing it had a commitment from the Navy to buy 127 F-14Ds and at least 140 new A-6Fs.
But the Pentagon canceled the A-6F project last year, and Cheney brought the ax down on the F-14D after only 19 were ordered.
“How is it that when the industry fails to live up to its commitments, we are liars, thieves, cheats, bandits and greedy industrialists, and when the Defense Department fails to live up to its commitments, it’s good planning?” O’Brien asked in an interview last week after a meeting with the Long Island delegation to Congress.
Analysts say that if anybody can steer Grumman through its current crisis, it is O’Brien, who took over from John C. Bierwirth last August. But they say that what the company really needs is help from the government.
“Given the situation the man has been placed in, he’s done an admirable job,” said Phil Friedman, a defense analyst with Drexel Burnham Lambert Inc., who noted that O’Brien already has made efforts to cut costs. “But what the company needs now is a lobbying effort to save the F-14 and the A-6.”
In recent days, Grumman officials and members of Congress from the company’s home base on Long Island have been meeting with members of the House Armed Services Committee in an effort to get money put back into the defense budget to pay for 12 new F-14D fighters and keep the assembly line running.
Grumman and its supporters are arguing the company’s case on two of Congress’ favorite grounds: national security and industry competition.
“There is a national-security reason to have Grumman, to preserve that technological base in case our nation might need to have more F-14s,” said Rep. Norman F. Lent, R-N.Y., whose district includes the company’s headquarters.
Rep. George J. Hochbrueckner, a Long Island Democrat and former Grumman engineer, argues that the Defense Department’s budget proposal places too much faith in the eventual development of the expected replacements for the F-14 and the A-6, naval versions of the Air Force’s Advanced Tactical Fighter and the Navy’s Advanced Tactical Aircraft. In the meantime, the Navy plans to renovate older aircraft rather than buy new planes from Grumman.
Hochbrueckner said the track record of producing military systems based on such new technology makes it a risky gamble to cut production of a proven aircraft in anticipation of a new one.
Other congressional sources call that argument valid, but added that the budget deficit is forcing the government to take some calculated risks.
Grumman officials also argue that if the company leaves the aircraft design and construction business, McDonnell Douglas Corp. will have a monopoly in the business of building aircraft for the Navy.
“If the F-14 stays cancelled, Grumman will no longer be a viable competitor in the fighter design and construction business, and the Navy finds itself in a position of dealing with a monopoly called McDonnell Douglas,” O’Brien said.
“A very fine corporation, but if you’ll recall, the Navy just spent billions of dollars to get Newport News (Shipbuilding) able to build submarines because they were stuck with one supplier, billions of dollars to get GE and Pratt & Whitney viable competitors for engines . . . millions of dollars to get Phoenix missiles built by more than Hughes (Aircraft Co.), and now . . . they are going to eliminate the only other competent supplier of naval aircraft.”
The possibility of a monopoly on building planes for the Navy alarms some in Congress, but others say they believe that other aerospace companies would simply hire naval-aviation engineers to fill in any gaps left by Grumman.
Even congressional sources skeptical about the arguments being made on Grumman’s behalf say that there is widespread sympathy for the impact the termination of the F-14 could have on the economy of Long Island.
That sympathy, they say, could translate into some sort of a deal to help the company, at least in the short term.
Cheney already has said that Grumman should get the contracts to do any modernizing work on older F-14s, but company officials say that might not help Long Island much, since the work likely would be done at lower-cost plants in Florida.
Even if the work was done on Long Island, Grumman says it would not bring in enough money to support the design and manufacturing team in Bethpage.
Should Grumman fail to win a revival of the F-14, the company will have to go through a painful and radical restructuring.
In addition to the expected shrinkage in revenue, Grumman’s employment rolls would be reduced by nearly one-third of its 30,000 employees. The cancellation of the F-14 would cost 5,600 jobs, and the company already had announced layoffs of 3,100 workers this year in anticipation of some of the budget cuts announced by Cheney.
To substitute for the lost aircraft business, Grumman probably would look to the space and military electronics businesses for future growth-areas in which it already has tried to make inroads.
Grumman has won an Air Force development contract for Joint STARS, a battlefield management system that is designed to detect, track and classify enemy formations at long range. The contract could eventually be worth as much as $10 billion.
In addition, Grumman is competing with Lockheed Corp. for the Air Force’s Boost Surveillance and Tracking System, a Strategic Defense Initiative-related contract for a military space sensor designed to give early warning of an intercontinental ballistic missile attack. Whichever company wins the contract stands to get about $10 billion worth of business.
