McDonnell to Divide Its Aircraft Unit : Aerospace: The move will split its Douglas unit into separate commercial and military segments.

McDonnell Douglas will split its Douglas Aircraft Co. unit into separate commercial and military segments by year-end--a likely prelude to recruiting a foreign partner to buy a substantial portion of its struggling commercial aircraft business in Long Beach.

The reorganization, disclosed Wednesday in an internal “administrative bulletin,” will separate the firm’s Air Force C-17 cargo jet program from work on its commercial jetliners, the MD-11 and MD-80 programs.

The severing will also mean assigning employees and physical assets to separate organizations--a major task that will have an important bearing on what eventually is held by an outside investor. Those details are still being worked out, according to the bulletin, a copy of which was obtained by The Times.

For much of this year, McDonnell Chairman John McDonnell has been seeking an equity partner, either for the entire Douglas commercial business or for its next-generation MD-12 aircraft.

McDonnell has held extensive talks recently with aerospace firms in Taiwan and South Korea, as well as with some European and American firms. It is widely believed, however, that an equity partner would be Asian, because that would help open markets for Douglas and provide a potential source of low-cost parts for aircraft.

David O. Swain, executive vice president for Douglas’ government business, said the reorganization is being undertaken in large measure to improve employee performance and productivity in the commercial and military businesses.

But since the company “never considered” allowing a partner to share in the C-17 program, Swain acknowledged that a reorganization was necessary if Douglas was to take on a domestic or foreign partner in its commercial business.

The firm has declined to say how much cash it expects to receive from prospective partners or what percentage of Douglas they would eventually own. But in its third-quarter report, McDonnell said a partner would hold a “substantial but minority position.”

Although McDonnell has made significant strides in cutting its debt this year, the firm faces a difficult task in generating the estimated $4 billion it would need to develop a new derivative of its existing aircraft, such as the MD-12, or the much larger sums needed for an entirely new plane.

Douglas spokeswoman Renee Handler said the firm is examining a range of alternative partnership agreements, including separate equity partners for the overall commercial business and other “risk-sharing” partners for the MD-12. The equity partners would hold a share of ownership in the business, while the risk-sharing partner would simply participate in the success or failure of a specific program.

Lawrence M. Harris, an aerospace analyst at Kemper Securities Group, estimated that Douglas would seek an equity partner for 25% to 40% of its commercial business, in hopes of generating $750 million to $1.2 billion in cash. He estimated that Douglas Aircraft has a book value of $3 billion, excluding the assets and liabilities of the C-17 program.

Douglas is separately seeking financial incentives from local governments for a new aircraft plant for the MD-12. Nine communities are bidding; some have offered packages valued at $500 million.

Even with the cash and government assistance, McDonnell Douglas would need an additional $3 billion in cash for research and development, inventory and equipment before the first delivery of an MD-12, Harris said.

The Air Force has estimated that Douglas could lose as much as $900 million on its existing C-17 contracts, although the company asserts that it will break even. That dispute has created a cloud over the program, probably making it a risky investment--even assuming that political obstacles to foreign investment in a military aircraft could be overcome.

Yet Swain said there was “no connection” between any potential loss and the decision to separate the C-17 program from the rest of Douglas’ operations: “We don’t want a partner for the C-17. It represents a cornerstone of our defense business for the next 20 years. It is going to be extremely profitable.”

The “administrative bulletin” announced that John D. Wolf will be executive vice president for commercial operations and that Swain will be executive vice president for the government segment. Robert H. Hood Jr. will remain Douglas president.