Aircraft Firms in Southland Face Dual Blows
The Southern California aircraft industry is heading for tough times--and the rest of the region’s economy is likely to suffer because of it.
Defense Secretary Dick Cheney’s proposal Thursday for massive cutbacks in four major military aircraft programs will slash employment in the sprawling defense sector and reverberate throughout Southern California’s business community, including Orange County, where scores of subcontractors work on the projects.
Deepening the gloom in the aerospace sector, McDonnell Douglas disclosed Thursday that it would cut 3,000 white-collar jobs in commercial and military programs at its Douglas Aircraft operation in Long Beach. The company attributed the layoffs to continuing problems in the production of commercial and military aircraft.
The slowdown in the military programs proposed by Cheney will bring home to Southern California the harsh reality of the cost of peace: fewer jobs and greater economic uncertainty. Three of the four aircraft marked for cuts Thursday are to be produced in Los Angeles County.
Although Cheney’s proposal is far less severe than outright program cancellations might have been, there is more slashing to come. The layoffs that have occurred so far reflect congressional spending reductions enacted one to three years ago, not any immediate effect from the ebb of the Cold War.
“These cutbacks in defense have just begun, and they raise some troubling questions about the future,” said David Hensley, an economist with the UCLA business forecasting project. “Deep cuts could push us into an outright recession, but in any case we will experience significant pain.”
The cutbacks unveiled by Cheney amount to $34.835 billion, including $16.835 billion from 1991 through 1994 and an estimated $18 billion from 1995 through 1997.
Although Cheney did not address the job impact of his decision, the cuts could affect as many as 35,000 jobs nationwide over the four years starting in 1991, an estimate based on ratios for the average sales per employee in the industry. California would bear the brunt of those losses.
The job cutbacks will not come immediately, and the prime contractors may feel them last. The first firms to be affected will be small vendors and subcontractors that populate aerospace industrial parks in communities like Torrance, El Segundo and Anaheim. An estimated 80,482 of these small firms already have failed or left the industry, owing to Defense Department policies and overcapacity in the industry.
Orange County has several large subcontractors that work on the target programs. But several firms contacted Wednesday said they expect to be either unaffected by the Cheney proposals or were uncertain of the impact yet.
For Parker Bertea Aerospace, an Irvine-based subcontractor on the B-2, A-12 and C-17 programs, the proposed cuts will have no immediate effect on the 3,000 employees in Orange County, spokesman D.E. Logan said. The cutbacks would likely effect the company’s sales in the mid-1990s, but he said most of the company’s investment in the programs has already occurred, and a worst-case scenario would be a reduction in future hiring.
“We’re balanced about 50-50 between commercial and military revenues, and increasing demand for commercial products could compensate for any declines on the military side,” Logan said. He added that the company makes heat-exchange devices, gas turbine fuel nozzles for aircraft engines, and hydraulic and pneumatic equipment for moving aircraft flaps.
The two largest aircraft programs targeted by Cheney, the Northrop B-2 bomber and the McDonnell Douglas C-17 cargo jet, face cuts of nearly half of their total production quantities.
The two programs account for 20,000 direct jobs in Los Angles County and thousands more at subcontractors. Northrop, for example, subcontracts 70% of B-2 work. Although Cheney set out annual production schedules for each program, it remained uncertain how much the work forces will be slashed.
Cheney would cut total B-2 production from 132 aircraft to 75 and reduce the peak production rate from 24 per year to 12 per year. Northrop officials said they could not assess how those rate reductions would affect their 12,000 employees on the program. Northrop announced earlier this month that it was laying off 500 B-2 workers.
Under the original plan to produce B-2s at a rate of 24 per year, the Northrop work force would have grown to 13,000 by the mid-1990s, a Northrop spokesman said.
Now, the total work force is likely to shrink, though probably not as severely as might be expected. The 50% cutback in the production rate will not mean a 50% cutback in employment, Northrop officials said.
Hughes Aircraft Co.’s Ground Systems Group in Fullerton has a small software subcontract on the B-2 program, but spokesman Dan Reeder said company employment will not be affected by the proposed cuts because the project is not dependent on the number of aircraft ordered.
The implications for the C-17 program are less clear. It now employs 8,000 workers, who will not be affected immediately, a Douglas spokesman said. Still, any future buildup would be reduced or eliminated.
Under the Cheney plan, the total procurement of C-17 planes will be cut from 210 to 120 and the peak production rate would fall from 29 aircraft per year to 24. Thus, the program will end much earlier under Cheney’s plan.
Cheney also announced a delay in production of the Air Force’s advanced tactical fighter, pushing back the start of production from 1994 to 1996. The program is in competition between teams led by Northrop and Lockheed, which have invested hundreds of millions of dollars of their own funds on the money-losing design phase in the hope of recovering profits during production.
The delay in ATF production raises serious doubts that those companies will ever earn back their investments, not to mention whether the delay will make the technology obsolete by the time the fighter gets into operation.
In addition to the delay, production of the Navy version of ATF was decreased from 618 to 546 aircraft. And the Navy A-12, which is being produced by McDonnell Douglas and General Dynamics in Tulsa, Okla., will be cut, along with an Air Force version. These cuts will also hurt the the subcontractor industry in Southern California.
Meanwhile, Douglas Aircraft attributed its cutback of 3,000 jobs to “poor financial performance,” a reference to major losses posted through last year in commercial aircraft programs and production problems on military programs. The firm is losing money on each MD-80 jetliner it builds and is investing massively in its new MD-11 jetliner, which has yet to begin deliveries.
A Douglas spokeswoman said the jobs to be eliminated are in the support and administrative areas. Those losses could be partly offset, the company said, by possible growth in production jobs during 1990. Douglas employment has grown from 13,000 in 1984 to 50,000, including operations in Salt Lake City, Utah; Columbus, Ohio; Macon, Ga., and Canada. Local employment includes about 37,000 in Long Beach and 5,000 in Torrance.
The spokeswoman said a majority of the job reductions will occur locally, as will the majority of any job growth. Employees who will lose their jobs are to be notified by June and the jobs eliminated by August.
Douglas has failed in its wide-ranging efforts during the past year to restore its financial health. A company announcement said cuts in such areas as utilities, supplies, and facilities have failed to cut costs enough, forcing the job terminations.
Some employees, who have long complained that Douglas was operating inefficiently, were not convinced that the new cutbacks would help. “They probably have another 3,000 they could get rid of if they really sharpened their pencils,” one veteran worker said. “The productivity just isn’t there.”
Kathleen Cooper, chief economist for Security Pacific Bank, took a more upbeat view of the disclosures Thursday, saying that California should weather the cutbacks much better than in past downturns.
“We are only half as dependent on defense as we were 20 years ago and that helps us,” she said. “There is no state in the country that has as diverse an economy as California. I am sure these events will affect Southern California, but it is going to be less severe than it was in the late 1960s. The cutbacks will be a good deal less than they were after the Vietnam War, and we are more diversified.”
She said the state might even attract additional defense work in the downturn. “We have a work force that is highly technically oriented that does not exist in other parts of the country. I would not be surprised to see greater concentration in jobs and research in Southern California.”
But Hensley, the UCLA economist, takes a more guarded view of the future. He believes that defense is “one of the state’s biggest vulnerabilities.” If Pentagon budgets drop annually by 10% in 1991 and 1992, Hensley said, the state could lose 150,000 jobs, which includes secondary effects outside the defense industry. Such cutbacks would go much further than just the aircraft programs affected by Cheney’s announcement Thursday.
Robert D. Paulson, director for aerospace activities at the consulting firm McKinsey & Co., agrees that the industry could face an uncertain future.
“The industry has lost backlog,” he said. “We are again lowering the expected utilization of the industrial base. So now, every program will be more expensive.”
Overall, the cutbacks “will certainly drive more people out of the industry. It is going to hurt efficiency and, to the extent that new programs are where new technology is developed, it is going to age the technology of the industry.”
Still, the reductions were not unexpected, said John Harbison, a defense procurement expert at Booz Allen & Hamilton.
“There is an awful lot of change in the world and at some point that change has to be reflected in our procurement strategy,” Harbison said. “We are facing a change in the nature of the threat unlike anything we have seen for 50 years.”
Some companies and local governments have already begun planning for the conversion from defense work to other kinds of activities. The Irvine City Council has created a committee of government, labor, citizen and business officials to study ways to wean the city from its dependence on military contracts.
“This is how we might plan for the changing priorities over which we have very little control,” Irvine Mayor Larry Agran said, referring to Defense Department budget cuts that have severely impacted businesses relying on military contracts.
The changes are likely to hasten the massive industry consolidation that has been widely expected, but long delayed. “There is only so much pain these companies can suffer before they say: ‘Do we need all of these facilities and do we need all of this infrastructure?’ ”
The stock market seemed unfazed by the cutbacks. The shares of Northrop, McDonnell Douglas, Lockheed and General Dynamics were all changed by less than $1 in trading Thursday, though they were already depressed on expectations of the cutback.
“If we build 75 of the B-2s, that will be a hell of a lot more than people were expecting,” said Paul Nisbet, an analyst at Prudential Bache Securities.
Times staff writers Dean Takahashi and Wendy Paulson also contributed to this report.
