McDonnell Douglas, Air Force Approach Impasse in C-17 Talks

McDonnell Douglas and the Air Force have become bogged down in negotiations for a critical production contract on the C-17 cargo jet amid a high-stakes showdown over wildly different cost estimates to complete the program, according to informed Pentagon sources.

A high-level briefing on the C-17 for Deputy Defense Secretary Donald Atwood was canceled last week because an expected agreement between the government and McDonnell on the price for building an additional four aircraft had not been reached.

But David Swain, McDonnell Douglas vice president for the C-17, said Friday that the talks are not stalled and that he expects a general agreement on the contract by March and a definitive agreement the following month.

The disagreements over the price of the C-17 have become a thorny issue, not only for the contract negotiations but also in light of the upcoming debate in Congress over the fiscal 1992 budget.

The Pentagon is seeking $1.8 billion in C-17 funding in the fiscal 1992 budget, which it will have to defend as early as next month in congressional hearings.

The Air Force, the Defense Department and McDonnell all disagree on the cost to complete the development and production of the first six aircraft, a less than ideal starting point to be asking Congress for $1.8 billion in additional funding, sources said.

Swain said the firm will not exceed its $6.6-billion contract to develop and produce the first six aircraft. But the Air Force has estimated that McDonnell will overrun its contract ceiling by $600 million, and a Pentagon cost analysis group has said McDonnell could exceed the ceiling by as much as $2 billion in the worst case.

Any overruns would be born entirely by the firm. If McDonnell acknowledges that it will overrun its contract, it will have to post a charge against profit to cover the loss. That, in turn, could jeopardize credit agreements supporting the firm.

The cost disparities also have undermined negotiations for the new production contract--because without an agreement on the current C-17 costs, any discussion of future costs are all the more imprecise, according to two sources knowledgeable about the C-17 program.

Maj. Gen. Stephen Croker, director of the Air Force’s strategic and airlift programs, said Friday that an agreement on the contract price had been anticipated by now, but he would not make any judgment about whether the negotiations have bogged down.

“We wanted to be able to go to Mr. Atwood and explain what the Lot 3 prices were going to be,” Croker said. He added that he did not know all the reasons the meeting was canceled, but that schedule conflicts were one reason.

As for the continuing lack of a price agreement, he remarked, “They are still haggling over this thing.”

Some sources have said an agreement hasn’t been reached because McDonnell is seeking a large enough profit to bail it out of earlier losses. But Swain said the firm is not seeking a bailout and that “we do have the expectation of earning a fair and reasonable return on future contracts.”

Croker said the estimated cost of developing and producing 120 C-17s has been revised to $35.2 billion, up from $31.2 billion last April. On that basis, the Air Force will pay $294 million for each C-17, including all development costs and future inflation. Excluding development and ground equipment, each C-17 will cost $206 million, Croker said.

The additional $4 billion resulted from three factors: inflation, a shortfall in funding for fiscal 1991 that will result in a production stretchout and a compromise with independent Pentagon analysts who projected higher costs than the Air Force, Croker said.

The Pentagon analysts, known as the Cost Analysis Improvement Group, or CAIG, have varied in their C-17 program cost estimate by as much as $5 billion with the Air Force, Croker said.

Meanwhile, Swain said, the C-17 program “is going fine.” He predicted that the aircraft would meet its current schedule to fly in June for the first time. Swain said the firm has completed 75% of the work to develop and build the first six aircraft under its current $6.6-billion contract. The program employs 10,000 in Long Beach. Swain said he does not expect layoffs but that assessment could change if the program does not receive adequate funding from Congress.