McDonnell Says It Lost $84 Million on Douglas Programs

TIMES STAFF WRITER

McDonnell Douglas disclosed Friday that major production problems continue to dog its Douglas Aircraft unit in Long Beach, where transport aircraft programs lost $84 million on sales of $1.1 billion in the first quarter.

The firm blamed the loss primarily on its MD-11 jetliner development program, which is in production but has yet to be certified by the Federal Aviation Administration for deliveries. But Douglas experienced high costs and losses in other areas of its operation, as well.

The company is attempting to recover from a massive reorganization last year that was intended to address the Douglas operation's longstanding losses over the past two decades, but employees in recent interviews said severe morale problems and lack of training are evident at the factory.

Some top Douglas executives also are concerned. In a stinging memorandum to the general managers of the MD-80 and MD-11 aircraft programs earlier this year, Douglas Deputy President John P. Capellupo said conditions in the plant made him "sick."

He characterized the factory as filthy and said fewer than half of the employees in the plant appeared to be actually working, according to internal Douglas documents obtained by The Times. Capellupo was named deputy president in January.

Andrew Wilson, a McDonnell spokesman, said Friday that he had no direct knowledge of the Capellupo memo. He added: "I would doubt that anything like that exists. What you have may be based on some memo and distorts the language. That's what it sounds like to me."

Air Force officials also have been harshly critical of the Douglas reorganization. Earlier this week, a top Air Force official at the Douglas plant was quoted in the company's newspaper saying that the reorganization has led to "permissive management."

A production supervisor at Douglas said Friday that he essentially agrees that the management system, with its emphasis on worker motivation and participation, has resulted in abuses by some newer employees. Several veteran production workers have said the system provides inadequate control in the factory.

A ballyhooed partnership with Douglas unions is turning out to be far bumpier than expected, and managers have complained that the union is thwarting efforts to streamline the production system, according to the documents. Meanwhile, veteran Douglas workers and supervisors have said in a series of recent interviews that efforts to improve the corporate culture at Douglas are failing because new employees are poorly motivated or poorly trained.

In its earnings release Friday, McDonnell acknowledged problems in training and integrating new workers. Douglas employment in Long Beach has soared from 12,000 in the early 1980s to about 37,000 today, and employment at a parts production plant in Torrance has increased from 1,000 to 5,000 over the same period.

McDonnell said the MD-80 passenger jetliner, the largest production program at the operation, posted a loss in the first quarter resulting from a dip in deliveries at a time when the company is attempting to boost production to meet an expanding backlog.

Douglas said deliveries of MD-80 dipped to 25 aircraft, though 28 were actually produced in the quarter. The rate was well below expectations and raises serious questions about the feasibility of a Douglas plan to eventually boost production of MD-80s from 2.5 per week to 4 per week.

"Douglas has now produced over 700 MD-80s, and the plane has been built for over a decade. One would expect that costs and manufacturing processes would be fairly predictable," said Lawrence M. Harris, aerospace analyst at Bateman Eichler, Hill Richards. "The fact that the MD-80 program moved back into a loss position is a concern."

McDonnell identified the production of nose sections as one of the key elements in the MD-80 production delay. Almost a year ago, McDonnell officials said they had solved the problem with nose production and had reduced manufacturing time.

In its earnings statement Friday, the firm acknowledged, "The difficulties were especially acute in the assembly of MD-80 nose sections." Nose sections are critical because output of that section paces the entire production of the aircraft.

One bright spot for Douglas is the continuing strength in commercial aircraft orders. McDonnell's total backlog, including commercial aircraft, was $36.2 billion on March 31, a 30% increase from a year ago. Employment on that date was 131,097, compared to 121,556 a year earlier.

Across all of its business segments, McDonnell earned $2 million on sales of $3.8 billion in the first quarter, contrasted with a loss of $10 million on sales of $3.2 billion a year ago. In last year's first quarter, Douglas lost $37 million on sales of $949 million.

Meanwhile, McDonnell said performance in its combat aircraft segment, principally its McDonnell Aircraft Co. in St. Louis, improved substantially in the first quarter. Operating earnings increased to $104 million from $32 million the year earlier, resulting from higher earnings on the F-15 and F/A-18 fighter jets.

Operating earnings in the missiles, space and electronic systems segment dropped 68%, though the firm carried out three successful Delta II satellite launches in the first quarter.

McDonnell also disclosed that it took a provision for interest on a dispute with the Internal Revenue Service over the timing of income for tax purposes, but it did not disclose the amount of the provision.

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