McDonnell Fears Northrop’s Image May Hurt ATF Bid

McDonnell Douglas is apparently concerned that Northrop’s corporate image problems could undermine the two firms’ chances of winning a competition to jointly build the Advanced Tactical Fighter, according to securities analysts and industry sources.

A McDonnell session with analysts earlier this week left many of them convinced that the firm has entered discussions to significantly modify its agreement with Northrop, including the possibility of taking over Northrop’s leadership position.

A key industry source said McDonnell has broached the idea of switching roles with Northrop in the team effort. Northrop officials, however, denied that there have been any such discussions.

Northrop is the prime contractor and McDonnell a subcontractor to Northrop in the massive $64-billion Air Force ATF program. The two firms are competing for a future contract to build the fighter against prime contractor Lockheed and its team of Boeing and General Dynamics.

At a securities analysts meeting in New York on Tuesday, McDonnell Chairman John McDonnell was asked by analysts if he was concerned about Northrop’s ability to win the ATF program while the firm is embroiled in numerous federal criminal investigations and other public relations struggles.

John McDonnell declined to directly answer what some regarded as tough and even loaded questions, but he acknowledged that the two firms were “in discussions” on that issue, according to three analysts at the meeting.

“My sense is that McDonnell and Northrop are aware of the tarnish on Northrop’s reputation and how that might affect the outcome of the competition and they have had discussions about the issue,” said Howard A. Rubel, aerospace analyst at the securities firm C. J. Lawrence, Morgan Grenfell.

Peter Aseritis, analyst at First Boston, said that at the New York meeting McDonnell “left open the possibility that the two team members might modify the teaming agreement between them.”

McDonnell spokesman Michael I. Burch, who was at the New York meeting, said John McDonnell “intentionally did not rise to the bait” that analysts had set by asking about Northrop’s tarnished reputation. Burch declined to confirm that John McDonnell said discussions were occurring, but he acknowledged that the conclusion reached by analysts could be inferred from McDonnell’s comments.

Northrop President Kent Kresa said through a spokesman, “There have been no discussions.”

Northrop and Lockheed are each developing two prototype ATFs that will compete in a “fly off” over the Mojave Desert at Edwards Air Force Base starting next year. The jet fighters will cruise supersonically and feature Stealth designs.

It remains unclear how McDonnell could legally switch roles with Northrop in the program, since it was Northrop’s Stealth design that was selected as one of two winners. The technology in Northrop’s design is proprietary, and it is unlikely Northrop would cede what could be one of the most lucrative defense contracts of the 1990s, industry sources said.

Air Force officials, reached late Thursday, said they would not have any comment.

The Air Force has clearly fueled speculation in recent weeks, after it disclosed that it was planning to stretch out the ATF’s development schedule by six months. Although the service hasn’t explained that decision, analysts say it represents an effort to allow the Lockheed team to catch up.

Lockheed is believed to be at least six months behind schedule.

Meanwhile, Northrop last week shipped its completed ATF aircraft, minus its engines, to Edwards and is ready to begin flight testing early next year.

Industry sources told The Times that the Air Force will not allow Northrop to win by default. Senior Air Force officials have reportedly said they cannot politically keep the program alive without a competition.

But by stretching out the schedule for Lockheed’s benefit, the Air Force has sent a signal that many interpret as a bad omen for Northrop.

“Several analysts have come to the same conclusion that it appears the Air Force is stacking the deck against Northrop and McDonnell at this juncture,” Rubel, the C. J. Lawrence analyst, said. “It seems that Northrop and McDonnell have delivered on their promise and now that they are closer to the finish line, the Air Force wants to move the finish line six months away.”