Air Force Accused of Speedup in C-17 Payments : * Aerospace: It did so to save the troubled transport plane program and help its builder, McDonnell Douglas, defense auditors say.
The Air Force, seeking to aid cash-strapped McDonnell Douglas Corp. and save its troubled C-17 transport program, improperly accelerated payments to the aircraft maker, Defense Department auditors said Thursday.
In House testimony, the auditors also said that McDonnell Douglas executives, including Chairman John McDonnell, exerted “undue influence” on the Air Force to speed up the payments, totaling more than $100 million, and to permit the “unjustified” shift of $172 million from the development portion of the C-17 program to the production budget.
Separately, the Wall Street investment firm Standard & Poors said it has changed it outlook on McDonnell’s financial condition to “developing.” That means that the firm’s credit rating could be raised or lowered depending on whether it finds foreign equity investors.
The St. Louis-based company said this week that it wants to sell 40% of its commercial aircraft business to a foreign investor for $2 billion. S&P; did not change McDonnell’s triple-B rating, which is a notch above speculative-grade securities.
Robert J. Lieberman, an auditor in the Pentagon’s office of inspector general, told a House subcommittee that, after McDonnell’s pleas, the Air Force showed “an extraordinary amount of concern” that payments to the company be made rapidly, even before formal requests were submitted.
Lieberman said the early payments did not increase the cost of the contract or result in illegal charges. “They did, however, result in charging costs to the wrong appropriations and accelerating the flow of funds to the contractor without justification,” he said.
The result, other government officials said, was to reduce Air Force leverage over the C-17, which is being built by McDonnell’s Douglas Aircraft unit in Long Beach, and to lessen the aircraft maker’s incentive to meet cost-control goals. The Air Force’s plan now is to buy 120 C-17s at a cost of $35.3 billion.
Members of the legislation and national security subcommittee of the House Government Operations Committee also heard two former McDonnell Douglas employees testify that the C-17 faces “catastrophic failure” because of improperly installed rivets in its wings.
David S. Barton Jr., a structural mechanic who was fired last June, and James Pashley, a former McDonnell Douglas internal investigator who looked into Barton’s charges, alleged that company officials engaged in a systematic cover-up of the defects and threatened their lives for telling the FBI about the problems.
Allegations regarding the faulty rivets were reported earlier this year by The Times.
The former employees also alleged that McDonnell Douglas’ new MD-11 civilian transport has the same riveting flaw and is unsafe.
McDonnell Douglas has acknowledged that certain wing rivets on the C-17 did not meet specifications but said that it has corrected the problem and that the Air Force is satisfied with the plane. Douglas President Robert Hood said Thursday that Barton’s allegations were “outrageous,” alleging that Barton is not “technically competent to make judgments on the integrity” of Douglas products.
Hood added that the company has different processes and equipment for MD-11 production and termed allegations about the MD-11’s safety “ludicrous and highly irresponsible.”
Weak profits, looming future losses and heavy debt are some of the ingredients that have led to four downgradings of McDonnell’s $2.7 billion in debt.
Roman Szuper, a Standard & Poors analyst, said his assessment of the aerospace firm will turn more positive if the company can succeed in its efforts to sell a minority stake in its commercial aircraft business. McDonnell is discussing a partnership with a number of Asian firms, including Taiwan Aerospace and companies in South Korea and Singapore, The Times reported last month.
Without such a deal, McDonnell’s financial condition will remain weak, Szuper said. Already, he said, several key financial measures have fallen below McDonnell’s triple-B rating.
That assessment is far more negative than the line that company executives have taken in recent months. McDonnell executives have asserted that they have “turned the corner” on their past problem, cut debt and are now looking toward improving profitability.
A partnership agreement would substantially cut McDonnell’s heavy debt and provide the company with a source of low-cost parts for current and future aircraft. Meanwhile, Tassos Phillippakos, an analyst at Moody’s Investor Services, said he has no intention of changing his rating on the firm. Although McDonnell has cut its debt and boosted its profit during 1991, he said he had anticipated those events at the start of the year.
McDonnell stock slid $2.125 to $77 Thursday on the New York Stock Exchange.
John M. Broder reported from Washington and Ralph Vartabedian from Los Angeles.
