McDonnell Pins Project’s Hopes on Rich Partner : Aerospace: Nine cities are offering incentives to lure the company, but McDonnell Douglas also wants an ally that has deep pockets, a low-cost manufacturing capability and the wherewithal to market the MD-12X jetliners in Asia.
Residents of Shreveport, La., have adorned their homes with McDonnell Douglas banners. One woman even painted her home blue, apparently in honor of the company.
Sober Salt Lake City, meanwhile, has offered McDonnell a package of incentives totaling $500 million, spread over 32 years.
The big money and monumental hokum are part of the efforts of nine communities seeking to attract a new McDonnell Douglas plant that will produce the future MD-12X jetliner. The winner potentially gets 5,000 to 12,000 direct jobs.
The new jet is in the early planning stages, but it is shaping up as the occasion for a major restructuring at McDonnell’s Long Beach-based Douglas Aircraft division.
Besides working to identify a site for the new plant, McDonnell is trying to recruit an industrial partner for Douglas’ entire commercial aircraft operation and is seeking authority from its board to begin offering the plane for sale to airlines.
McDonnell is also examining the breakup of Douglas Aircraft into a military aircraft unit producing the C-17 cargo jet and a separate commercial aircraft unit building the MD-12X, MD-11 and MD-80 aircraft, according to financial industry sources, securities analysts and government officials.
The equity partners, which almost certainly would include Asian firms, would invest only in the commercial side.
McDonnell spokesman Michael Burch said such an arrangement is one of a number of possibilities under consideration. McDonnell officials have not identified possible partners, but Taiwan Aerospace is widely regarded as a leading candidate, according to internal company sources and financiers. Other aerospace firms in Japan, Korea and China are also under consideration.
The partner would be required to bring large amounts of cash, low-cost manufacturing capability and assistance in marketing aircraft in Asia. Securities analysts say McDonnell will seek to move substantial fabrication overseas as part of a strategy to drastically lower its costs--an assertion that the company does not deny. Boeing is also increasing its planes’ foreign content, but mostly to penetrate international markets.
The MD-12X would be based loosely on the MD-11 jetliner in production in Long Beach, but with a 35-foot longer fuselage and an all new 212-foot wing. (The MD-11 wing spans nearly 170 feet.) The aircraft, which would carry 375 passengers in a typical configuration, could cruise 9,200 statute miles, a longer range than any other jetliner.
Michael Rosen, an aerospace analyst at Smith Barney, said McDonnell would have difficulty attracting a partner just for the MD-12X program, which is expected to cost $4 billion to develop.
“It will be five years before you could deliver it, and then the returns will be smaller at the front end than later in production,” Rosen said. “It would not be attractive for someone to invest in just one program. You have to offer up the existing programs with their cash flow.”
The MD-12X is anything but a sure bet to happen, analysts say. And the company is especially unlikely to go forward without the deep pockets of partners.
The company has declined to say how big an investment it is seeking from equity partners. But in an interview last March, executives raised the possibility of getting as much as 90% of the development cost from partners. That may be on the high side now.
The idea of keeping the C-17 program separate would allay any potential concerns about foreign ownership of a Pentagon program.
Besides, McDonnell has an unknown liability hanging over the C-17. The Defense Contract Management Command estimates that McDonnell will lose $900 million on its current C-17 contracts, but McDonnell insists that it will break even.
McDonnell management is expected to seek authority from the board at its Oct. 25 meeting to make firm offers to prospective MD-12X customers. After that authorization, a partnership agreement would be concluded and a site finally selected for production.
The nine cities under consideration--Kansas City, Mo.; Belleville, Ill.; Mobile, Ala.; Ft. Worth and Houston, Tex.; Mesa, Ariz., and Tulsa, Okla., in addition to Shreveport and Salt Lake City--are pulling out all the stops to win the plant.
McDonnell wants 600 acres, substantially more than the existing 420-acre Long Beach site. In addition to the final assembly hangar, McDonnell wants its partners to locate a fuselage and wing assembly plant on the same parcel.
Douglas said last March it will not expand in Long Beach or anywhere in California, citing problems with environmental compliance, labor costs and the cost of living here. In addition, its Long Beach site lacks adequate open land for a new plant.
But the loss of the MD-12X has raised troubling prospects for the future of Douglas Aircraft in Long Beach. McDonnell asserts that it has no intent to shutter the operation, but it could be destined for gradual erosion.
Although the granting of large industrial incentives has waned in recent years, the nine communities are offering to make huge subsidized loans, issue bonds, abate taxes, improve the sites and provide training.
“Wholesale incentives ended years ago,” said Donald Borut, executive director of the National League of Cities. “Cities recognized that industrial growth comes not from bringing in new industry but from growing jobs within the community.”
But hard economic times and dire public fiscal realities have reignited the competition for industry, if the McDonnell case is any indication.
“It would be a major boost to our economy,” said Michael Hutchinson, assistant city manager in Mesa. “Everybody is trying to figure out who has the leading proposal. The rumors are rampant.”
Mesa has offered an overall package of $500 million, he said, including property- and sales-tax abatement, reduced utility costs and lease concessions.
Kansas City voters overwhelmingly turned down a proposition in August to raise property taxes for improvements to a potential McDonnell site.
But the city still figures it can put up a package worth hundreds of millions of dollars. The Missouri state treasurer has made available “Mo Bucks” for McDonnell--a low-cost loan plan--according to Peter Levi, president of the Greater Kansas City Chamber of Commerce.
Meanwhile, Salt Lake City also has offered a package worth $500 million, 60% of which is in the form of property-tax abatement over 32 years.
“We wouldn’t do this for 6,000 jobs in telemarketing because it would not have much economic impact,” said Russell Behrmann, a spokesman at the Utah Department of Community and Economic Development. “We think we are going to return to the state fund $200 million after subtracting out what we provide in incentives.”
McDonnell specifically asked the nine cities to keep the competition serious, but inevitably, some hoopla has permeated the bidding.
Kansas City residents held a community luncheon in honor of McDonnell Douglas. About 1,500 residents attended, along with U.S. Rep. Jim Slattery (D-Kan.) and Sen. Christopher Bond (R-Mo.).
Nobody from McDonnell was there. So a videotape of the event was sent to the company.
