McDonnell Douglas Faces Even Bigger Loss on C-17 : * Defense: The Pentagon estimates that it will cost $7.3 billion to complete a project that was supposed to cost $6.6 billion. The overrun is $200 million more than was calculated only a month ago.
The Defense Department has increased by another $200 million the estimated loss that McDonnell Douglas faces on the C-17 military cargo jet and reduced contract payments to the firm--indications that the program remains deeply troubled by rising costs.
According to government officials close to the program, the Air Force and other Pentagon agencies concluded last month that the firm’s Douglas Aircraft unit would spend $7.3 billion to complete its existing contracts to develop and build the first six aircraft, The government’s previous estimate was $7.1 billion to complete the contracts.
Originally, the contracts were supposed to be completed for a maximum of $6.6 billion. So with the latest overruns, McDonnell could be poised for a $700-million loss on the existing C-17 contracts--a huge sum that would cause severe damage to the firm, government officials said.
The latest developments fly in the face of strong earnings posted by the company last week and raise anew questions about the effectiveness of McDonnell’s efforts to solve longstanding problems at Long Beach-based Douglas Aircraft, where the C-17 is produced. Military and civilian government leaders are becoming increasingly frustrated with the firm’s performance.
“Douglas is managing this program on a day-by-day basis,” said one congressional expert. “When they lay out a schedule, it is meaningless, because it has no bearing on reality.’
Just this week, Air Force and Defense Department representatives said that Douglas had little chance of flying the first C-17 before the end of August and might not fly the aircraft until December in the worst case. The first flight is more than a year late.
McDonnell executives continue to assert that they will break even on the C-17 contracts, despite the latest government cost estimates.
Douglas spokeswoman Renee P. Handler said Friday that the firm expects the Pentagon will agree to pay more. Handler asserted that the Air Force has agreed to increase the maximum payment on Douglas’ initial C-17 contracts from the original $6.6 billion to $6.8 billion, because of changes in the “scope” of the program.
But Air Force Col. Charles Seifert, deputy program manager for the C-17, said Friday: “The ceiling is still $6.6 billion. There has been no change.”
It was also learned that McDonnell has increased its own internal estimate of the program’s cost to $7 billion--meaning that even by its own figures, the firm could face a $400-million loss if the contract ceiling is not raised.
Handler, however, said Douglas does not expect the higher costs to result in a loss. Beyond the hike in the ceiling, the firm plans to file claims for $125 million against the government and will recoup certain other expenses by billing the Pentagon under “overhead” accounts.
Meanwhile, it was learned Friday that a high-level executive review of the C-17 program found serious problems and made nearly two dozen recommendations for changes. Some problems need to be fixed within 30 days, the report said.
The review, headed by McDonnell executive Edward C. Aldridge Jr., found that Douglas has been making too many engineering changes on the design of the C-17, causing work to be done out of its proper position on the assembly line.
Handler said the review found “no serious concerns.” She said it concluded that the company was making progress in productivity on the C-17 program that is “as good as any other (Douglas) program.”
Douglas spokesman Jim Ramsey added that problems of doing work out of its proper position “is pretty normal for this stage of a program.” Separately, McDonnell got more bad news Friday, when Singapore Airlines notified the firm that it was canceling an order for 20 MD-11 jetliners, worth $2 billion, and instead buying 20 Airbus A-340 jetliners for $3.4 billion.
McDonnell stock closed trading Friday on the New York Stock Exchange at $54.25 a share, a loss of $2.125.
Singapore Airlines canceled the MD-11 orders because the planes failed to meet its range and payload requirements. McDonnell has long acknowledged that the MD-11 burns more fuel than originally advertised and has been working to improve its performance.
Larry Harris, a Kemper Securities analyst, said that while he is “concerned” about the cancellation, “these things happen.” A similar cancellation by American Airlines or Delta Air Lines would be “cause for greater concern,” Harris said
Handler downplayed the cancellation, saying the order was only a “reserve” purchase and was not included in the 160-aircraft firm backlog on the program.
