McDonnell Douglas to Launch Another Round of Layoffs : Aerospace: Drive for $700-million reduction in annual operating costs may mean loss of up to 10,000 jobs. Huntington Beach unit may fare relatively well.
McDonnell Douglas Corp., facing serious technical problems on its military aircraft programs and financial difficulties on its commercial jetliner business, said Wednesday that it will attempt to cut $700 million from its annual operating costs--a move that could lead to an estimated 10,000 additional layoffs.
Such cutbacks would come on top of the current plan to lay off 7,000 workers at the Long Beach-based Douglas Aircraft unit, which is losing money and facing a cash squeeze. The new round of layoffs covers all divisions of the company, and the company did not specify the potential impact in Southern California. However, additional layoffs here are likely to number in the thousands.
The company’s crash effort to slash costs comes amid growing concern over the financial health of St. Louis-based McDonnell Douglas, the nation’s largest defense contractor and a major competitor in the commercial aircraft industry.
In a letter to employees entitled “The Hard Reality,” company Chairman John McDonnell said that the cost-cutting plan will be implemented by early August and that there will be no severance payments or incentives for employees to quit. He said the “layoffs are driven by ongoing unsatisfactory business results.”
The company is the second largest aerospace employer in Southern California, with an estimated 50,000 jobs here out of the company’s total work force of 129,000. McDonnell has plants in Long Beach, Torrance, Huntington Beach and San Diego.
Company spokesman Michael Burch said the Douglas Aircraft subsidiary would be required to absorb additional work force cutbacks. “Certainly, Douglas would get some credit for what it has already done to reduce employment, but it is clear that Douglas will have to take more,” he said.
Tom Williams, a spokesman for the 7,000-employee McDonnell Douglas Space Systems Co. in Huntington Beach, said Wednesday’s announcement will result in some staff reductions but no major cutbacks at the Orange County facility. “There are some areas where we need to tighten, but we don’t have any numbers available yet,” he said.
In his letter, John McDonnell said the company is not considering a restructuring or “the sale of component companies,” apparently referring to persistent rumors that the company will close Douglas Aircraft.
In addition to layoffs, the company intends to cut overtime, travel, new hiring, the use of consultants and other support activities. However, potential savings in these areas are considered to be minor compared to layoffs.
Aerospace analyst Howard Rubel of C.J. Lawrence, Morgan Grenfell, an investment firm, called the cutbacks “another missile from John McDonnell,” but added that the radical step is necessary to improve the company’s lackluster financial performance. Rubel said a successful cost-cutting effort could lift McDonnell Douglas’ productivity level to that of Boeing Co., when measured on the basis of sales per employee.
“They are shucking their paternalistic ways,” Rubel said. But the new atmosphere is also deeply undercutting morale at the company. One scientist remarked Wednesday, “The morale is about what you would expect--not too high, and those who remain here are under that much more stress.”
John Capellupo, deputy president at Douglas, issued a memo to workers this week, saying, “I will demand that my management test you and your team’s discipline to the limit of their physical and emotional stamina--but not beyond reason.” One C-17 worker complained, “Who does he think he is running, the Marine Corps?”
The McDonnell letter did not specify how many workers will be forced out as a result of the $700-million cost-cutting effort, but the cost savings include previously announced layoffs.
Information in the 1989 annual report indicates that at least 10,000 additional workers could have to be let go to achieve the company’s goal. Based upon figures in the annual report, employees earned an average of about $38,000 each last year. Thus, a 17,000 worker cut will save about $650 million annually and another $50 million could be saved from non-wage cuts.
Burch acknowledged that the outlook for McDonnell has turned more negative in the past two weeks. On June 8, McDonnell disclosed that it expects to take a charge against profits on the Navy A-12 attack jet, under development at its McDonnell Aircraft unit in St. Louis and its partner, General Dynamics.
Until the A-12 problems were disclosed, the program was considered a relatively trouble free program. Analysts estimate that it is rapidly approaching its cost ceiling of $4.8 billion, beyond which McDonnell and General Dynamics would be forced to pay for overruns.
In addition, McDonnell has significant cost overruns on its Navy T-45 trainer jet program, which has been transferred from Douglas Aircraft in Long Beach to the McDonnell Aircraft operation in St. Louis. The massive C-17 development program is at its $4.9-billion ceiling, beyond which the company would have to pay all costs.
The MD-80 commercial jetliner program is continuing to suffer from manufacturing delays that last year resulted in forfeiture of $20 million in penalties to customers. And the new MD-11 jetliner cannot be delivered to customers until government certification is granted. The company hopes to obtain certification by Oct. 31, but until then it must bear the heavy cost of financing the aircraft’s production.
The run of bad news at the company has dealt a sharp blow to McDonnell stock, which closed Wednesday at $39.50 per share, up 87.5 cents. Wednesday’s announcement came after the market closed. Within the last year, the stock has been as high as $79.625.
