General Dynamics, McDonnell Clash on MD-11 Output

McDonnell Douglas has become locked in a dispute with General Dynamics over production rates and payments that threatens to interrupt deliveries of fuselages for the MD-11 jetliner program, industry and financial sources said Wednesday.

The clash grows out of an effort by McDonnell to cut future MD-11 production rates, because of weakness in the airline industry, problems with suppliers and internal efforts to improve quality. The firm’s Douglas Aircraft unit in Long Beach began producing MD-11s just last December and is pinning its future financial health on the program.

McDonnell had planned to build the jetliners at a rate of one per week or 52 per year but last year decided to increase the production rate to 1.25 per week or 65 per year. In recent weeks, however, the firm has reduced its planned production back to a rate of one jet per week and is considering going even lower.

The rapid changes in production schedules have left General Dynamics producing more fuselages than McDonnell will need. That has resulted in a dispute over whether McDonnell will accept the additional fuselages and pay for them, according to knowledgeable industry sources.

General Dynamics’ 1989 annual report indicates that the firm sells the fuselages for roughly $10 million each, so a reduction of 13 per year--and the resulting loss of $130 million in sales--would amount to a considerable financial setback for St. Louis-based General Dynamics.

In response to inquiries by The Times, the two firms issued identical statements Wednesday acknowledging: “There are some issues that are being discussed. They concern production, deliveries and payments. We expect those issues to be settled to the satisfaction of all concerned. There is no significant impact on the MD-11 program at either company.”

The firms declined to confirm or deny that either has threatened to suspend delivery or acceptance of fuselages. But a McDonnell spokesman noted that General Dynamics delivered fuselage sections last week as scheduled and that no deliveries were scheduled to be made this week.

Industry sources said McDonnell’s trimming back of production rates was forced by weakness in the airline industry, which has resulted in a slowdown of orders for MD-11s. In addition, Douglas is experiencing the same types of supplier problems on the MD-11 that it had on the MD-80 several years ago.

And American Airlines’ recent expressions of dissatisfaction with its MD-11s has prompted new efforts by McDonnell to improve quality.

“General Dynamics is at the very front end of the production line, so they are affected more quickly by changes in final production rates,” one source close to Douglas said. “General Dynamics can’t respond.”

The two firms have been teamed since the 1970s in producing fuselages for the MD-11 and its predecessor, the DC-10. General Dynamics builds the giant, barrel-shaped sections in San Diego and transports them to Long Beach on ocean-going barges.

But in a telling break with that past partnership, McDonnell said in recent weeks that it will throw open to competition the future contracts for fuselage production on its MD-12X jetliner, the planned successor to the MD-11.

A Wall Street aerospace analyst said the relationship between the two firms over the fuselage business has long been strained. “General Dynamics takes them to the cleaners every time they negotiate a new contract,” the analyst said. “There’s no competition for the business.”

Another analyst said he suspected that McDonnell was having trouble paying General Dynamics because of cash flow problems.

McDonnell, whose credit rating was recently downgraded for the third time in little more than a year, denied the assertion. Aerospace suppliers in Southern California say McDonnell has been paying its bills more slowly than in the past but is seldom delinquent.