John McDonnell’s Bumpy Ride : Pentagon Contracts Are Evaporating, Thousands Have Been Laid Off, the Competition Is Stepping Up the Pressure--Is the Family Heir the Right Man to Pilot McDonnell Douglas Through the Storm?
“HELLO AGAIN,” SAYS THE WIRY MAN with a closely trimmed beard. He’s wearing metal-rim glasses and holding a book as if ready to begin a college lecture. “I am John McDonnell and thank you for letting me into your home.”
It is the stock opening scene of McDonnell’s personal video show, repeated four times a year and mailed on videocassettes to the 113,000 McDonnell Douglas “teammates” under his command.
“No question about it,” McDonnell said in a video last March, “we are experiencing our share of adversity, and in adversity it is easy to overlook our accomplishments and, worse, lose sight of our vision.” But he vowed not to let his agenda for change collapse.
As a talk show host, McDonnell may lack charisma, but he is no lightweight. He confronts his troops with philosophical lectures about “petty competition, jealousy and fear of losing turf” in the workplace. He quotes author Alvin Toffler on “the future shocks” his workers will face and counsels them on how to deal with them.
In an era of increasingly impersonal corporate management, McDonnell is trying, sometimes a bit awkwardly, to personally touch his workers and drive them to overcome troubled times. But it is a tall order for the son of James Smith McDonnell, known to everyone as Mr. Mac, the company founder who was perhaps the greatest aerospace businessman in history. Mr. Mac was legendary for his pep talks delivered over the public address system at the factory in St. Louis. But the McDonnell now in charge is among the most reticent and private of executives.
John, 50, the younger of Mr. Mac’s two sons, is the last chief executive of a major aircraft producer with his name on the front door and a portrait of his dad in the company lobby. This close-knit clan of Scots, some of whom have been known to don kilts on holidays, has had a profound impact on American security and on the American economy. McDonnell Douglas Corp. is the nation’s largest producer of combat aircraft--mainly fighters and attack helicopters--and its second-largest maker of commercial jetliners.
Introverted, intellectual, difficult to know, secretive about his relationship with his father, John McDonnell faces the daunting task of turning around the fortunes of America’s biggest and, many critics contend, one of its most troubled defense firms. Eleanor Spector, the Pentagon’s procurement director, testified to Congress in October that McDonnell remains in “severe financial” shape, and criticized the company for management “sloppiness,” a reference to its failure to deliver key weapons on schedule and within budget.
A brilliant Princeton-educated aeronautical engineer, McDonnell has the presence of an accomplished scholar, an eminent scientist or a powerful government bureaucrat. Yet, he seems improbably cast as a powerful executive of an American corporation, and even less so as chairman of the world’s biggest arms manufacturer.
“John isn’t like most chief executive officers,” notes William Ross, a retired president of McDonnell Aircraft in St. Louis, which makes the company’s jet fighters. “John is reserved. One of the crosses he has to bear is that he doesn’t lean on social interface with his counterparts.” Indeed, one of those counterparts, former Undersecretary of Defense Robert Costello, was left decidedly unimpressed by him. “John isn’t street smart. He doesn’t know to deal with things beyond his own personal frame of reference. He has led a relatively sheltered life. He never faced competition,” Costello says.
This year, in a Fortune magazine poll of executives asked to choose the most admired U.S. corporate managements, McDonnell Douglas came out near the bottom--265th out of list of 306 major firms. Despite McDonnell’s intense intellect, his critics question whether he understands the fundamentals of the market: how to sell products and make money. He is universally described as a “nice guy,” the most unflattering adjective in the business world when it comes from your critics.
The unconventional changes he has wrought during his three-year tenure as chief executive--some of them approaching a corporate cultural revolution--are not easy to assess. The company has always had its quirks. For instance, McDonnell’s father crusaded for world peace and became a lone voice in the industry supporting the United Nations. The company still offers workers a holiday on United Nations Day.
John McDonnell’s own brand of culture may yet set the firm on a course of long-term success. But in the short run, there’s no denying that McDonnell Douglas has had a bumpy course. “It takes a couple of generations of management following a founder to get things sorted out,” observes John C. Brizendine, a retired president of the Douglas Aircraft operation in Long Beach. “The progeny of the founder does not necessarily fit the bill. Lord knows, that has happened many times in the past. In this case, the jury is still out.”
Although McDonnell Douglas managed to avoid insolvency earlier this year, it has not fixed the fundamental problems that affect its long-term future. As international competition grows ever tougher, McDonnell Douglas’ productivity often lags behind the rest of the industry. Its products are showing their age, and managers have lost important new competitions. And hanging over everything is the demise of the Cold War, which will drastically shrink its market.
Since McDonnell took over, the company has staved off one misfortune after another. It entered the ‘90s in its worst shape ever--a cash-flow crisis in its military and commercial businesses forced McDonnell to secretly ask for $1 billion in special financing from the Pentagon last January, a request perceived later as a bailout. He was turned down.
Other setbacks quickly followed. Even while the company’s F-15 fighters were blasting Iraqi jets in the Persian Gulf, the corporation lost competitions to build the Air Force’s next generation of jet fighter and the Army’s new attack helicopter, failures that may undo its long industry leadership. Worse yet, the Navy cancelled the A-12 attack jet after the company and its partner, General Dynamics, fell behind schedule and incurred big cost overruns. Pentagon officials demanded they repay $1.35 billion but backed off rather than bankrupt the firms. Meanwhile, the Securities and Exchange Commission is investigating whether McDonnell Douglas was overly optimistic in its accounting practices on the A-12.
Its commercial aircraft business in Long Beach is no longer losing money but has relinquished market share this year to strong competitors, Boeing and a European consortium, and garnered a measly 10% of worldwide orders. To help finance its next commercial jet, this most American of companies just negotiated a tentative deal for an infusion of money from Taiwanese investors. The strategy could revive its international competitiveness, but critics fear it would spell a retreat for the U.S. aerospace industry.
The hardships have taken a heavy toll, resulting in 20,000 layoffs, more than half in Southern California. The cumulative problems were so severe that there were serious doubts earlier this year whether McDonnell Douglas could pay its bills.
The company did, however, and now John McDonnell has an upbeat line. “The worst is definitely over,” he said during an interview at the company’s headquarters. He had resisted an interview for months; when he finally consented, it was held in a bland conference room rather than his office, said to be a modest place equipped with a standard steel desk. He answered questions courteously, quickly and with little elaboration.
An ever-present smile on his face, hands resting on the table and feet planted squarely on the floor, McDonnell says: “Of course, we never like to lose any competition, but the nature of the business we’re in is that you win some and you lose some. And in the past we’ve lost some seemingly very critical ones, and managed to survive and thrive beyond it.”
Summing up the company’s prospects, he adds: “We’re definitely on an up-trend. We have made a lot of progress in the last year.”
McDonnell points to the company’s success in cutting its aerospace debt, which dropped from $3.3 billion to $2.7 billion by the end of September. And, in recent quarters, its profits have improved. Wall Street has responded by sharply bidding up the firm’s shares, tripling them in price, in part the result of “short” buyers who had earlier bet on the stock’s crashing, and a remarkable counterpoint to the view from the Pentagon.
But McDonnell still has a long way to go. With its $18 billion in annual sales, the company is among a handful of corporations that will play a pivotal role in defending U.S. aerospace leadership at a time when every other developed nation in the world wants to grab a larger share. Whether McDonnell is the man for this task is a matter of debate.
“(John) is very effective,” says Dr. William H. Danforth, a member of the McDonnell Douglas board who typifies the powerful St. Louis business circle that backs McDonnell. Danforth, brother of Sen. John C. Danforth, is chancellor of Washington University in St. Louis and a family friend. “John uses other people to develop consensus and lead. He has developed extensive ways to give people decentralized control and more participation in decision making.”
But on Wall Street, although investors have turned bullish on the company stock, McDonnell himself rarely wins praise. Even after the stock began going up last summer, aerospace analyst Howard Rubel at C. J. Lawrence said: “If John stepped aside and they brought in somebody from the outside, the company stock would have a remarkable jump up.”
ON A COLD DAY IN FEBRUARY, 1989, JOHN MCDONNELL unexpectedly called his 5,200 managers at Douglas Aircraft to a paint hangar. He told them they had all lost their supervisory titles. If they wanted new management jobs, they would have to reapply. They would also be assigned to “Discovery” classes, where they would learn about the latest in a long line of corporate cultural initiatives--the Total Quality Management System.
Discovery became a major operation, so big that the company leased a vacant grammar school in Long Beach. Neighbors began complaining about the hundreds of cars that were spilling onto their streets. If the action outside seemed a wee bit odd, the process inside was gut-wrenching. James Douglas, a strategic planner and the son of Douglas Aircraft founder Donald Douglas, was sent to Discovery to determine whether he would be a team player within the new corporate culture. He underwent a number of role-playing sessions, where judgment was passed by a panel of undergraduates from Cal State Long Beach.
“In the Vietnam War, they would roll a hand grenade under the tent flap, and that’s what happened to us at Douglas,” Douglas says. “We were fragged.” Douglas was eventually laid off last year, the last member of the proud Douglas family at the company. Afterward, he wrote a personal letter to McDonnell, asking him to reconsider the decision ending his 30-year career. “He never wrote back,” Douglas says. (McDonnell says the letter was “handled satisfactorily,” adding, “As far as I am concerned, neither the Douglases nor the McDonnells are in any special position in this corporation.”)
The supervisors and hourly workers were dumbstruck by the massive changes. Some jobs went unfilled for months. Production fell behind schedule. Financial losses of $344 million over two years followed. But McDonnell was not about to back off. “It has been said that the darkest hour is just before the dawn,” the chairman advised workers in the company magazine a year later.
He was, after all, just following a family tradition. While other defense firms such as TRW and Litton Industries are the epitome of corporate blandness, the McDonnells have invested tremendous time and effort creating a company identity. The first and foremost was that of McDonnell’s father, who ran the company with an iron hand until his last days in 1980.
Mr. Mac was a character of legendary proportions, the contemporary of such industry Titans as Donald Douglas, Howard Hughes and Jack Northrop. He founded McDonnell with 15 employees in 1939, making parts for the major aircraft firms during World War II. By the end of the war, the company managed to break into the aircraft design business when the Navy issued it a contract to build a jet-powered aircraft, designated the FH-1. Before starting the company, Mr. Mac had laid out a 30-year plan to rise to the top of the industry, in which he sought to “serve the creative evolutions of life on Earth,” according to a 1935 letter to himself. He succeeded.
He called himself a “practicing Scotsman,” complete with stereotypical Scottish thrift. He once gave his executives egg-timers to keep their long-distance calls short. And his eccentricities didn’t stop there. McDonnell senior held a lifelong fascination in paranormal phenomena--which prompted the unconventional names of his aircraft, such as Voodoo, Phantom, Demon and Banshee--and generously funded parapsychology research at major universities.
During the 1950s, McDonnell senior built a succession of moderately successful aircraft. Then he came upon the one design that would turn his company into an industry giant--the F-4 Phantom II. The jet, sold both to the Navy and the Air Force, became the hottest jet fighter used during the Vietnam War. The company eventually built 5,057 of the planes, yielding such prodigious wealth that it changed the fortunes of McDonnell Douglas and landed Mr. Mac on the cover of Time magazine.
Sanford McDonnell, the son of Mr. Mac’s brother, was named chief executive officer in 1972, but by all accounts his uncle continued to run the firm as chairman of the board. “Once, I was in the Skyroom (the company’s Astro Suite reception room) at corporate headquarters and I recall Mac telling Sandy, ‘You may be the chief executive officer, but I am the chairman and don’t you forget it.’ Well, that didn’t build Sandy up in anybody’s eyes,” recalls Donald Fuller, who was the chairman of a computer firm McDonnell acquired. The death of the tough-minded but widely respected leader in 1980 left a deep vacuum at the company that his heirs have struggled to fill.
Like his uncle, Sanford McDonnell had his own outside interests, and he brought an unusual social agenda into the corporation. In 1988, for example, Sanford sent a memo to the executive staff seeking opinions on a system of voluntary contributions that he had developed to cut the federal deficit. Participants would be rewarded with “Modern American Patriot” certificates, lapel pins and medallions bearing a facsimile signature of President Ronald Reagan.
“I sent mine back demanding a statue of Reagan that glowed in the dark as my prize,” says C.W. Bradshaw, the former human resources director at the McDonnell Douglas Helicopter Co. in Mesa, Ariz. “The St. Louis corporate mentality is amazing. They are suckers for anyone with a new fad they hope will put them in the forefront of corporate culture and make the business magazines. The bottom line is that the incompetence of the corporate McDonnell people is the real reason behind the current disaster.”
Sanford’s ultimate crusade was the “Five Keys to Self Renewal,” which focused on productivity, management and ethics. They seemed like fine ideas for business, but they became a virtual litmus test of loyalty, some executives complained. There were contests for the best examples of self-renewal, and posters listing the five keys were expected to be posted in each executive’s office. “Since the whole thing was so airy-fairy it faded away,” Bradshaw recalls.
The Five Keys paved the way for the more revolutionary Total Quality Management System when John McDonnell succeeded Sanford in 1988. Under orders from McDonnell, the system was planned in the basement of executive Robert Hood, who was later promoted to president of Douglas Aircraft. The sessions were orchestrated by Senior Vice President James Henry MacDonald, a former Presbyterian minister who has emerged as one of McDonnell’s closest business advisers. At one point, the program was to be called “The Way,” but that was abandoned because of its religious overtones, says a former executive.
The focus of Total Quality is “worker empowerment,” which is described in different and vague ways, but generally espouses the idea that workers should be motivated by enhanced responsibility and authority. Some workers have another name for TQMS--Time to Quit and Move to Seattle, a reference to Boeing. Such doubts represent more than the dark humor of a few malcontents. “Worker empowerment” was interpreted by many as management permissiveness. In Long Beach last year, 19,000 workers threw out their former union president, who supported Total Quality, and elected a staunch foe of the system. St. Louis union officials have refused even to sign a system “partnership agreement” with the company, saying it “hasn’t earned one.”
Company officials declined to be interviewed about Total Quality. But in a tape-recorded show for employees, Hood allowed that the corporation “didn’t do everything right the first time” but contended that the system had made Douglas a better place.
Massive layoffs haven’t helped morale either. Just last month, the company announced another 1,500 at Douglas Aircraft, in addition to the 20,000 jobs eliminated in the past year. Some remaining employees are losing faith in McDonnell’s push for worker empowerment. “The concept is good, but it is hard to initiate responsibility in hourly workers,” says a production supervisor on the C-17 aircraft program. “I understand you get more out of expression than oppression in the workplace, but this has nearly bankrupted us. I still have the force of intimidation, which seems to me to work better.”
Still, McDonnell tries to reach workers, sometimes sitting down unannounced at the company cafeteria. But most employees know of John McDonnell through his video show and his column in the company magazine, The Spirit. Their judgment is that all too often their leader takes on a preachy tone. In one letter, McDonnell told of how he discovered a groundskeeper using a rake with 25 of its 30 teeth broken off. “Obviously, that person was not being very productive,” he lectured. “If you were at home, would you put up with a rake in such poor condition?”
AT THE FRONT OF ALMOST EVERY CORPORATION’S ANNUAL report is a flattering formal photograph of the chief executive officer, along with a letter to shareholders. In the McDonnell Douglas report this year, that cornerstone of corporate America is replaced by a photo of 15 smiling executives (all white men) in their shirt sleeves. John McDonnell is sitting inconspicuously in the middle of that crowd.
If his father stood out for his autocratic and eccentric ways, John McDonnell seeks to extinguish any emphasis on his personality. “Mr. Mac was the boss,” recalls Courtland Perkins, former secretary of the Air Force and former chairman of the aeronautical engineering department at Princeton University, where McDonnell earned both his undergraduate and master’s degrees. “Mr. Mac had great instincts in getting people to work for him. Now John is 180 degrees opposite. He is not the dynamic extrovert that his father was.”
McDonnell’s mother, Mary Elizabeth Finney McDonnell, died when he was 11 years old, leaving her husband to raise his two sons, John and James, on his own until he remarried seven years later. “He really was mother and father,” says David Lewis, company president under Mr. Mac. “He never shirked or complained. He would have clear and precise rules that the boys would have to understand. They were very close, the three of them.”
From early on, John downplayed his family connections--though many question whether he would be chairman of the corporation without them. As the scion of the man building the Mercury space capsule and the Phantom jet, he could have strutted about the Princeton engineering school like anointed royalty. But that wasn’t his style. He was a self-effacing, studious kid, hard to pick out of the crowd. “I was several weeks into sharing an office with him as a graduate student before it dawned on me that he was a St. Louis McDonnell,” recalls David Ellis, who become McDonnell’s friend.
McDonnell rose to the top of his undergraduate class and was easily accepted into the Princeton graduate school. “I strongly advised him to go for his Ph.D, which his father thought was nonsense,” recalls Dunstan Graham, McDonnell’s graduate adviser at Princeton, now retired. “His father wanted to get him started in the company. I told him ‘your dad is Mr. McDonnell and your brother is Mr. McDonnell and your cousin is Mr. McDonnell, but you could be Dr. McDonnell.’ ”
It was one of many times when McDonnell senior seemed to meddle a bit in his children’s affairs. Lewis, the company president, recalls that he was always watching over his son’s development after Princeton. “When John worked in the engineering department at McDonnell, Mr. Mac wanted to know how much of a raise John was getting. He wanted to make sure he wasn’t getting any bigger a raise than the others in the department,” Lewis says. Mr. Mac groomed his son in a variety of jobs after his graduation in 1962, including stints as a strength engineer in St. Louis, an assistant to the vice president for finance at Douglas Aircraft in Long Beach and a vice president at the McDonnell Douglas Finance Co.
Although McDonnell is no longer involved in the company’s day-to-day technology efforts, he remains a quintessential engineer. “John can be looking at you, listening to you, talking to you and holding a calculator in one hand, pushing the buttons with his thumb, and all the while come up with the right answers,” says James Worsham, who was president of Douglas Aircraft before retiring.
By the time John McDonnell and his older brother, James Smith McDonnell III, had reached adulthood, their father was just arriving at the zenith of his career. He was no less a boss at home. When James was involved in a difficult divorce in 1964, Mr. Mac promptly called Irvin Dubinsky, the attorney who represented James’ wife, Lois.
“I got this call from Mr. Mac and he said he wanted to know what kind of trouble Jimmy had gotten himself into,” Dubinsky recalled. “I said it really wasn’t proper for me to be talking about the case. But Mr. Mac was such a gentleman that we chatted for a while. At that time in 1964, the St. Louis Cardinals were in the World Series. And Mr. Mac sent his chauffeur down and gave us two tickets to the game.” So Dubinsky went to the World Series with Lois.
Whether McDonnell’s personality is a product of a domineering father is a matter of great speculation among company executives. “John was in awe of his father, maybe in fear of his father,” says one close associate. “He could never achieve what his father did. So, he wants to leave his own imprint on the company with this cultural revolution.”
Ross, the former McDonnell Aircraft president, says that while McDonnell is an effective leader, he is still not in his father’s league. “Mr. Mac was a farsighted genius. I don’t see that in John--that brilliance and long-range thinking. It would be astounding if John had those same traits. There are only so many Mr. Macs.”
IN THE UPPER CLASS OF ST. LOUIS, SOCIALLY CONSERVATIVE values play a big role. Boy Scouts, country clubs, churches and social clubs define a family’s position. For all of John McDonnell’s divergence from his father’s ways, he shares much common ground. “To his credit, he has been smart enough not to emulate his father’s style at the same time he was preserving his father’s values,” says Robert Jahn, a Princeton professor and friend.
Indeed, McDonnell abides by many of his father’s values--emphasizing ethics in an industry with a reputation tarnished by fraud. McDonnell Douglas stands apart from such major primary contractors as General Electric, Northrop and Rockwell International, just to name a few, in not having a single criminal conviction, although the firm is under intensive investigation by a number of federal agencies.
McDonnell also seems to hold true to his father’s thrifty values. When Mr. Mac died, he owned a 17-year-old Lincoln Continental, according to Probate Court records. Earlier this year, McDonnell purchased a used 1985 Datsun, apparently to replace a 1984 Oldsmobile, according to Missouri government records. His other car is a 1986 Toyota. He could certainly afford better--he holds McDonnell stock worth $103 million and drew a salary of $577,000 last year. His wife, Anne, has her own business redeveloping St. Louis property.
“Everybody in the family is very straight and unpretentious,” says David Forney, McDonnell’s stepbrother through his father’s second marriage. Forney, a vice president at Motorola, says the McDonnell family remains close and vacations together regularly.
McDonnell’s thrifty ways are, of course, sometimes annoying. Fuller, the former company executive, recalls one occasion when McDonnell called him on the carpet over a 50-cent expense reporting dispute. It was a classic clash between conservative Midwest values and those at the high-flying subsidiary in Newport Beach. “Whenever you had lunch at St. Louis headquarters, you had to put down $2.50 and you got one pat of margarine with the roll,” Fuller says. “It was that kind of place.”
Outside of business, McDonnell has few passions. “John’s whole life is dedicated to the company,” says Michael Burch, McDonnell Douglas’ vice president for public relations. “He has very few interests outside of the company. He takes work home. He works on the weekend.” McDonnell and Anne live in the same Frank Lloyd Wright-style house that he built several decades ago on Serendipity Lane; they have four daughters and a son.
A fit and trim man, McDonnell plays a ferocious game of tennis, according to former Hughes Aircraft Chairman Albert Wheelon, who recalls him as a “perfect gentleman” on the court who does not try to crush an opponent with his superior ability. And when McDonnell has a few spare moments, he ascends into a glass tower that he built at his home, where he can ponder the stars in solitude.
The McDonnell family has not been untouched by tragedy, however. In 1977, James’ daughter, Leslie Louise, was brutally murdered in rural New Mexico when a drug deal she was involved in went awry. To the conservative and insulated McDonnell family, the murder was shocking; according to some friends and colleagues, the tragedy deeply affected James and contributed to the derailment of his career.
James, 55, retired earlier this year, though he remains on the company’s board of directors. His final job at the firm was corporate ombudsman, typically a last-stop job. The circumstances of his departure are unknown, though shortly after leaving he declared his intention to sell a substantial block of his McDonnell stock. McDonnell will say only that his brother left voluntarily. James, widely known as an easier-going person than John, inherited more stock than John and would have been the logical successor to his father as the elder son. He declined to be interviewed.
No doubt, Mr. Mac laid out many of these succession plans before his death. The family retains an iron grip on the corporation. The two brothers and two family trusts own 14% of the company’s stock. In addition, an employee stock ownership plan holds 36%. The combination has given the family undisputed control, backed by a board of directors that includes three members of the family, company President Gerald A. Johnston and four other Midwesterners.
“The board had a lot of confidence in John, having worked with him and known him socially,” recalls Michael N. Chetkovich, a UC Berkeley professor who sat on the McDonnell board for nine years in the 1980s. “He was the logical choice to be the next chairman.”
Whether the next chairman will also be a family member is less certain. John McDonnell insists that the family enjoys no special privileges and is not trying to establish a dynasty. His 28-year-old son Jeffrey works as an engineer at the company, along with the son of Sanford McDonnell. John McDonnell says his goal is “to get every body at McDonnell Douglas to act like an owner.”
Within the ranks, however, there are different views of family control. “It was apparent to me that they were grooming family members by moving them through jobs for which they had no obvious qualifications,” says Bradshaw, the former human resources director. “How long this will go on I don’t know.”
McDonnell’s critics point out that his biggest management responsibility prior to becoming chairman, which involved the firm’s diversification into computer manufacturing and information processing, was a huge flop. In the mid-1980s, McDonnell boasted that the operation would hit revenues of $4 billion by 1990 and would someday rank second only to IBM, recalls Bert Novack, a former McDonnell executive. Novack, now president of Santa Ana-based Novadyne Computer Systems, says, “We all looked at each other and said, ‘How are we going to do that?’ There needed to be strong medicine and it was not taken.”
The diversification cost McDonnell Douglas cumulative operating losses of $361 million. It was the sort of performance that might have killed other executives’ careers. “John in his own way was a nice guy but he didn’t have any personal dynamism,” says Fuller, former chairman of Microdata, another computer firm McDonnell Douglas acquired and subsequently merged with other operations. “He had very little in the way of charm. He wasn’t a motivator. He wasn’t the sort of guy you could see running a company.”
McDonnell acknowledges that the computer venture went badly, but says the operating losses were fully offset by large capital gains on the subsidiaries that the company is now selling. To be sure, McDonnell Douglas wasn’t the only company to blunder into commercial electronics--Northrop, Boeing and Lockheed all lost money the same way.
Still, the corporation might be far different today were it not for the family’s control. Lewis, the highly regarded former company president, eventually tired of waiting for Mr. Mac to retire and left for the top job at General Dynamics in 1973. “He was not in any way decrepit,” says Lewis, now retired himself. “By then, I was pretty old and I decided I might not have another opportunity.” It was a turning point in McDonnell Douglas’ history, because Lewis was widely regarded as one of the most able aerospace executives in history. Under Lewis, General Dynamics quickly won the contract for the F-16, which today is the best-selling jet fighter in the world.
AROUND THE PERIMETER of Lambert Field in St. Louis, the McDonnell Aircraft complex sprawls for miles. It is perhaps the greatest single armament factory in the world, completing a new jet fighter nearly every other day. The Navy’s F-18, the Air Force’s F-15 and the Marines’ AV-8B all roll out of a massive hangar that dominates the airport. In the surrounding plants, McDonnell Aircraft makes the Navy’s Harpoon missile and the Air Force’s cruise missile. The hulking facility, built during World War II, is jammed with noisy machinery, giant iron fixtures and teams of workers scurrying around millions of aircrafts parts that are moved about by cranes and forklifts. The wings, fuselages and tail sections of aircraft are joined together in one packed corner of the plant, then the three different models of completed aircraft leave through giant sliding doors.
Military aircraft have always been the corporation’s cash cow. But the end of the Cold War bodes badly for the company. The F-15, a cornerstone of the firm’s military business, will end production in a few years. “We’re in a declining market,” McDonnell says. “If you are the largest contractor, you are likely to decline.”
But the company can’t blame the market for all of its problems. In the past 20 years, a McDonnell-designed combat jet has not won a single competition. In the 1980s, the company missed the Stealth technology revolution, eclipsed by much-smaller Northrop and Lockheed. McDonnell’s design for the advanced tactical fighter, the aircraft that will succeed the F-15, was judged by the Air Force dead last among the proposals from seven competing aerospace firms in 1986.
“I don’t think they were bold in the concept of their designs,” says Welko Gasich, the technology chief at Northrop during much of the Stealth development. Eventually, Northrop teamed up with McDonnell and reviewed its losing proposal for the advanced fighter. “They were out in left field as far as we were concerned,” Gasich says. “They hadn’t done their homework. It took us 15 years of technology development to get Stealth into a fighter design, and they hadn’t done it.”
In the aircraft industry, a company can rest for decades on its laurels because product cycles are extremely long. But with the loss of both the Navy and Air Force fighters this year, time is running out for McDonnell Douglas to retain its industry leadership. Paul Nisbet, the respected aerospace analyst at Prudential-Bache Securities, observes that McDonnell “just got a little bit too self-assured.”
John McDonnell does not seem overly concerned. “I would point out that even given the fact that the F-15 was the last design entirely of our own, we’ve managed to do quite well since then,” he says. The company will be producing a new version of the F-18 through the next century that will give it one of the few active U.S. fighter programs left. Another new program is the Navy’s T-45 trainer jet, though it is over budget and may result in a loss.
The risks are even greater at the Douglas operation in Long Beach. This year will mark the first time that Douglas Aircraft revenues will surpass the firm’s combat aircraft income, but strong profits remain elusive. Douglas’ largest military program, the Air Force’s C-17 cargo jet, stands to lose $900 million on its existing contracts, according to Pentagon estimates. The company signed a risky $6.6-billion contract to develop and build the first six aircraft; recent estimates put the actual cost at $7.5 billion, leaving the company to pay the difference. The company disputes those estimates.
Moreover, the optimism espoused by the corporation has riled Pentagon officials, who believe the company has yet to address its fundamental weaknesses--including its inability to lay down and follow well-defined production plans. A team of top Pentagon officials went to St. Louis in October to discuss their concerns with McDonnell and insist that the company tighten management of its diverse operations, according to defense spokesmen.
Douglas Aircraft’s commercial programs face just as difficult a future. The firm’s commercial aircraft backlog has actually shrunk this year, while Boeing has taken orders for more than 194 jets. The European consortium Airbus Industrie has surpassed Douglas as the world’s second-largest commercial aircraft producer with a far newer and more complete lineup of products. Douglas’ newest plane, the MD-11 jumbo jet, first delivered to airlines in late 1990, has not yet made money. The company needs to add 150 firm orders, nearly double its current number, to break even on the program. But orders have been scarce during this year’s recession.
It is questionable whether McDonnell will ever have the financial strength to build an entirely new commercial jetliner, which would carry a price tag of $5 billion or more. The company’s tentative solution, announced 10 days ago and subject to government approval, is to sell 40% of Douglas to Taiwan Aerospace for $2 billion, enabling it to launch a new jet dubbed the MD-12. By taking on Asian investors, McDonnell hopes to send substantial manufacturing out of the United States to cut costs. The firm is in final negotiations to set up a new production program, for the twin-engine MD-95, in China. It will be the first time McDonnell has produced entire aircraft in another country for export.
The real slippage in both McDonnell’s military and commercial businesses, many observers of the company say, was during Sanford’s reign. McDonnell says he would not “duck responsibility” by blaming Sanford. “What we’re going through now is a challenging time . . . at the same time it’s one where we are positioning ourselves to be very competitive in the future,” he says.
Among other people, opinions on the firm’s long-term future are mixed. Nisbet, the aerospace analyst, believes the company can outlast its problems, continue to cut debt and gradually improve its profits in coming years. But at a congressional hearing in September, the Pentagon’s chief auditor, William Reed, said the firm’s “ongoing operations are threatened,” an assertion immediately dismissed by the company. Still, the credit rating on the firm’s debt remains just a notch above speculative grade securities, following four downgradings in recent years.”This is not a muddle-along type of company,” says Jack Modzelewski, a PaineWebber aerospace analyst. “This company is either going to make it with big success or not make it, not meet payroll and fall apart. Just because the light bulb is getting bright doesn’t mean it isn’t going to burn out.”
