Cheney Cancels Navy’s $57-Billion Attack Jet : Defense: He says McDonnell Douglas and General Dynamics mismanaged the contract. 9,000 to lose jobs.

In the largest military contract termination ever, Defense Secretary Dick Cheney on Monday canceled the $57-billion A-12 Navy attack plane, charging that the aircraft’s builders had so badly mismanaged the program that they could never meet the government’s contract terms.

Cheney rejected pleas from the Navy and the two prime contractors--McDonnell Douglas Corp. and General Dynamics Corp.--to restructure the program and build fewer planes for unspecified billions of dollars in additional funds. The government already has spent an estimated $5 billion on the A-12 program, which employs 10,000 workers in 42 states, including California.

“This program cannot be sustained unless I ask Congress for more money and bail the contractors out. But I have made the decision that I will not do that,” Cheney said Monday evening in a statement issued after the financial markets closed.

“No one can tell me exactly how much more it will cost to keep this program going. And I do not believe a bailout is in the national interest. If we cannot spend the taxpayers’ money wisely, we will not spend it,” the defense secretary said.

He said that the contract was being terminated for “default”--under punitive terms based on the “inability of the contractors to design, develop, fabricate, assemble and test A-12 aircraft” under the contract’s performance and schedule terms.

Cheney said that the Navy still needs an all-weather, carrier-based attack plane to replace the 25-year-old A-6 Intruder. But he did not say whether the A-12 Avenger could be resurrected under new terms or whether an all-new plane would have to be developed.

The move stunned Navy officials, contractor executives and financial analysts, all of whom had been expecting the plane to be saved under revised contract terms. The Navy had been counting on the radar-evading A-12 to form the backbone of its carrier-based air fleet for the next 30 years.

McDonnell Douglas and General Dynamics said that they would begin immediately laying off as many as 9,000 workers employed on the project at the two firms, mostly at their plants in St. Louis; Ft. Worth, Tex., and Tulsa, Okla. Thousands of additional workers would be affected at subcontractor firms around the nation.

Cheney had warned Navy senior officers three weeks ago that A-12 cost increases and schedule problems were “intolerable” and that he would kill the warplane unless they could give him good reasons why he should not. Clearly, he was not satisfied with their reply.

The Navy had plans to build 620 of the bat-wing aircraft for a total of $57 billion. But congressional auditors reported last month that delays in the program and likely changes in the aircraft design would be likely to push the cost above $62 billion, or more than $100 million a copy.

The Pentagon early last year had scaled back the program from 858 planes to 620, in part because of rising costs and also because the Navy’s carrier fleet was being reduced from 15 ships to 12.

The severity of the financial blow to the two contractors may take years to measure, since both firms are expected to enter what could be an epic legal battle to reverse it. If the firms are unsuccessful, their losses could easily exceed $1 billion.

“What you have is a monumental contractual dispute that is going to take years to resolve,” said aerospace analyst Paul Nisbet of Prudential-Bache Securities. “The companies’ stocks will have a cloud over them for years.”

Under default, the Pentagon could seek another contractor to build the A-12 and charge McDonnell Douglas and General Dynamics for any expenses above their original contract. Rather than default, Cheney could have terminated the A-12 for the “convenience of the government,” which would have meant that all of the expenses borne by the contractors would have been paid.

But Nisbet said that the default will not affect either firm’s ability to borrow money or conduct other business. Rather, the termination of the A-12 will help relieve both firms’ outflow of cash on the money-losing program.

Cheney reached the decision to kill the airplane after five hours of meetings on Saturday with Deputy Defense Secretary Donald Atwood; Gen. Colin L. Powell, chairman of the Joint Chiefs of Staff; representatives of General Dynamics and McDonnell Douglas, and other senior aides.

He was told that the program could be saved only by rewriting the contract and pumping in more money.

But Cheney was adamantly against any form of a bailout of the companies. They are the nation’s two largest defense contractors, with a total of more than $15 billion in Pentagon business in fiscal 1989, according to Pentagon spokesman Pete Williams.

“The fact that this was a fixed-price contract was clear the day the contract was signed in 1988,” Williams said. “These contractors, who have long experience in building aircraft, knew what the terms were.”

Cheney’s action follows the pattern set so far under the Bush Administration, in which the Pentagon is staunchly refusing to bail out contractors who have losses on fixed-price contracts. The contracts, which have been decried by the defense industry as ruinous, were signed during the 1980s.

Nisbet was harshly critical of the decision, saying: “The Navy cannot buy its highest-priority system. It has a multibillion investment in the A-12 and now it is trashing it. It is a disgraceful waste of taxpayers’ money. These fixed-price contracts have been an unmitigated disaster.”

General Dynamics spokesman Peter K. Connolly said that the two firms were prepared to make significant financial concessions in the restructuring plan rejected by Cheney, including absorbing $1.5 billion in cost overruns and waiving $1.6 billion in claims against the government.

“This is not a bailout,” Connolly said. “If this was to be a bailout, it was going to be the contractors doing the bailing.”

He said that the company was “profoundly disappointed” and intended to protest the default and seek to recoup all its costs incurred on the program.

McDonnell Douglas said in a statement that it was “deeply disappointed” by Cheney’s action. The company insisted that it was not in default on the A-12 contract and would pursue unspecified financial claims against the government.

The A-12 development contract, signed in January, 1988, required the two contractors to build eight test planes for a fixed price of no more than $4.8 billion. After receiving repeated assurances from the Navy that the terms of the contract were being met, Cheney was embarrassed to learn last spring that the plane was more than $1 billion over budget and 18 months behind schedule.

A subsequent investigation revealed numerous additional cost, schedule and management problems with the aircraft. In December, the Navy fired Vice Adm. Richard C. Gentz, commander of all Navy aviation programs, and demoted two other senior naval officers, for their roles in the program.

Late last month, the Pentagon’s chief acquisition executive, Undersecretary of Defense John A. Betti, abruptly resigned, in part because of fallout from the A-12 fiasco.

Defense officials speculated Monday night that Navy Secretary H. Lawrence Garrett III, who was in charge of Navy acquisition programs in the early months of the A-12 contract, may be the next victim of the troubled program. Navy officials declined to comment and Garrett was not available for an interview.

The investigation report, prepared by Navy and Defense Department officials, said that the A-12 program had spun out of control because of contractor mismanagement and lax oversight by Navy officers assigned to monitor it. The study also cited the program’s secrecy as contributing to its problems because so few officials were allowed access to data on its progress.

The A-12 cancellation could be a powerful boost to the Northrop B-2 and McDonnell Douglas C-17 programs, which are both multibillion-dollar aircraft projects that were competing for scarce federal funds, a congressional source said. “Until the A-12 scandal broke last month, it looked like the B-2 was the most vulnerable program. It’s not invulnerable now but a lot has changed.”

A Navy audit conducted last year found that both McDonnell Douglas and General Dynamics had fallen into a weak financial condition because of losses on the A-12 program and other contracts. But Connolly said that it would be “premature to speculate what effect this cancellation will have on our earnings or cash flow.”

Broder reported from Washington and Vartabedian from Los Angeles.