NEWS ANALYSIS : Series of Missteps at McDonnell Raises Questions About Survival

For McDonnell Douglas, the clock is ticking.

When company executives unveiled the new MD-12 jetliner about six weeks ago, it was hailed as a revolutionary aircraft that would enable the firm to leapfrog Boeing and Airbus Industrie. But McDonnell leaped nowhere when customers quickly rejected the design. The company was forced to put the project on ice.

The episode is another in a series of missteps that have eroded confidence in the St. Louis-based aerospace firm’s ability to execute its strategic plans at a time when it can ill afford mistakes.

After more than a decade of losing market share, McDonnell sorely needs to broaden its commercial product line or, someday, face extinction in the industry it once dominated. Yet McDonnell’s latest MD-12 delay, in the eyes of some analysts, might even be part of a broader agenda to eventually liquidate the commercial aircraft business.

That isn’t what the company says it’s doing, of course. Chairman John McDonnell has projected commercial aircraft operations as a counterbalance to revenue erosion in the post-Cold War defense market.

But the strategy--and the strategist--faces increasing questions. Investor confidence, measured by the firm’s stock, soared last year and plummeted this year. The shares are near their 1992 low, closing at $38.75 Tuesday.

“The McDonnell board is probably soft on management because the family owns a controlling share of the stock,” said Peter Aseritis, First Boston aerospace analyst. “Maybe the family should come in and say, ‘John, you are wrecking the company.’ ”

The McDonnell family owns directly and through two trusts about 15% of the company’s shares. An employee stock plan holds a 36% block of stock.

Questions about John McDonnell’s style apparently are widely shared among the company’s critics, who say he has made a number of errors since taking the reins three years ago.

They include invoking a disruptive management reorganization at the firm’s Douglas Aircraft unit in 1989 and striking a flawed deal with Taiwan Aerospace to sell 40% of Douglas last year. That $2-billion plan has faced repeated delays.

Although he is credited with good strategic vision, some outside investors say he has failed to execute it. An analyst at an investment firm who asked not to be quoted said that a key senior McDonnell executive has grumbled directly to Wall Streeters about John McDonnell’s leadership.

Still, his task in turning around the firm founded by his father, James Smith McDonnell, has been huge. Lacking the financial size to compete directly with Boeing and Airbus Industrie, the firm has attempted repeatedly during the past decade to find a foreign alliance that will work.

It held protracted talks with Airbus, Fokker and Lockheed, all of which failed, leaving the firm without resources to build a new aircraft. Meanwhile, new orders for its existing products have dried up.

“McDonnell Douglas has been shut out of the world aircraft market for the last five quarters,” Aseritis said. McDonnell lost a net of 35 orders while Boeing won 315 orders. Airbus won 110.

Now Alaska Airlines, one of two major customers for the new MD-90 airliner, may be preparing to cancel orders for 20 planes, Salomon Bros. analyst Julius Maldutis said.

After several robust years, it appears that production of McDonnell’s bread-and-butter MD-80 jetliner will fall from 140 aircraft in the past two years to 45 in 1993. MD-11 production will stabilize at about 35 aircraft per year.

Still, McDonnell Douglas has survived worse. In the early 1980s, it considered shutting down Douglas, but decided to give it one last chance.

Against all odds, by the late 1980s it was flush with commercial orders and a huge Air Force program, the C-17 cargo jet. But it couldn’t produce planes on time and on budget. It was an inauspicious environment in which to launch the MD-12.

The latest postponement has shaken investor confidence.

“I would have understood such a quick turnabout on the MD-12 program if the original announcement had been made on the first of April,” said Howard Rubel, an analyst at C. J. Lawrence, Morgan Grenfell. “So, this clearly says that the company’s strategy lacks a unified vision.”

John Harbison, an aerospace specialist at Booz, Allen & Hamilton, said the way McDonnell had structured the MD-12 program made it “inevitable that it was going to have an indefinite postponement.”

But analyst Paul Nisbet at Prudential Securities has reaffirmed his buy recommendation and said the MD-12 delay was a prudent step that buys time. Meanwhile, McDonnell has a healthy backlog.

“A lot of people wrote them off in the early 1980s and I was among them,” Nisbet said. “But they came roaring back.”