Mayday for Aerospace : Worldwide Slump Grounds Commercial Jet Makers

The staccato roar of rivet guns is echoing less frequently through McDonnell Douglas’ sprawling aircraft plant in Long Beach these days, a measure of austere times amid a global slump in jetliner orders.

Just a year ago, McDonnell’s assembly hangar for MD-80 jetliners was brimming with 22 aircraft. Today, the final assembly line is interspersed with empty gaps and as few as eight aircraft are winding their way toward the massive sliding door to the runway.

McDonnell has stopped talking publicly about its production rate, but output of MD-80s has been shaved to about 1 1/2 aircraft per week and may drop to a half a plane per week by next April, plant sources say. The MD-11 jumbo jet isn’t faring much better, undergoing a reduction to two per month.

The declines are but one measure of just how lean market conditions already have become, not only for McDonnell but for industry leader Boeing and the European consortium Airbus Industrie as well.

In Seattle, Boeing has slashed production by a third on its 737 aircraft line and by 18% on its 757 line. So far, its wide-body 747 and 767 programs have held up, but last week Boeing warned in a financial filing that it may have to cut back on those operations as well.

The downturn plaguing the commercial aircraft industry appears to be growing deeper and extending out much longer than anybody thought possible just a few months ago--bruising Boeing and Airbus while threatening the survival of Douglas.

The sluggish world economy and overzealous competition have left the airlines hemorrhaging. Worldwide, they will have posted an estimated $9 billion in losses in a three-year period.

GPA, the Irish leasing firm that had once placed $12 billion worth of aircraft orders, is running out of cash, while three U.S. carriers remain in bankruptcy proceedings. Meanwhile, desert parking lots in the Southwest are overflowing with surplus jets. Orders are fast being canceled or deliveries deferred and new orders are continuing at an anemic pace. Although aircraft industry executives are espousing optimism, outside experts and investors are worried that the industry is headed for a classic bust, with an upturn as much as three or four years away.

“If manufacturers think they can ride out this storm and good times are around the corner, that isn’t likely to happen,” warned Doug Hacker, vice president for fleet planning at American Airlines. “I don’t expect we will place any new orders or exercise options based on the expectation that we will need aircraft for growth.”

Aerospace analyst Jack Modzelewski of PaineWebber asserts that the industry is headed for a “precipitous downturn,” in which production will drop by a third from current levels and employment by a similar ratio--amounting to many tens of thousands of workers nationwide.

“Commercial aerospace is in a bigger free fall than defense spending, even though it was supposed to be a mitigating factor,” Modzelewski said. “What a revolting development. It was totally unexpected.”

When manufacturers booked a record 1,662 aircraft orders in 1989, it looked as if the 1990s would be a period of sustained growth for the volatile industry. But 1989 proved to be the peak of what many now regard as a speculative bubble, and orders have since plummeted an estimated 77% through the end of this year.

The industry is still loaded with backlogs accumulated during the fat years. Boeing has $90 billion worth of planes yet to deliver, Airbus $73 billion and McDonnell roughly $18 billion.

Just how long those backlogs will last--amid the raft of cancellations and coupled with continued high delivery rates--is subject to dispute. A number of experts believe all of the manufacturers will eat so deeply into their current backlogs that by next year or 1994 they will have to again cut production rates and furlough additional workers.

“Aircraft sales are going to be depressed a lot longer than anybody is owning up to now,” said Jerrold Lundquist, a partner at the consulting firm McKinsey & Co. “I don’t see another buying boom . . . until the late 1990s. You would start to see buying activity in the 1996 or 1997 time frame.”

By Lundquist’s reasoning, the boom in the late 1980s distorted the industry, because orders were overstated. The boom fed on itself, creating a speculative fervor in which airlines rushed to place massive orders out of competitive concerns and worry they might be shut out of the market.

Now, every major airline is busy rolling back some orders. Lundquist counted 138 cancellations in 1991, double the number in last deep industry recession in 1982. More are coming.

Delta Airlines, with losses of $439 million so far this year, has announced two major capital spending retrenchments, eliminating or delaying $5 billion worth of purchases. The details of those cutbacks have yet to be disclosed by aircraft producers.

United Airlines cut 122 aircraft out of its acquisition plan between this year and 1995. Earlier this month, it warned it may also have to defer 747 orders in 1996 and beyond. And American Airlines has put off $5 billion of options for new jetliners.

Compared to McDonnell’s woes, Boeing appears to be on relatively firm ground. But Boeing President Philip Condit dismisses the idea that his company will face a severe contraction.

“I don’t think there is going to be a collapse,” he said.

Condit said that Boeing increased production gradually in response to the 1980s buying frenzy, meaning that it will have to cut back far less in response to the downturn--unlike the crash landing the firm had in the early 1970s.

The cutbacks at Boeing have been fairly shallow so far and may not go significantly deeper, Condit said. Historically, it takes about one to two years after the economy recovers from a recession before airlines begin to place significant orders, so he foresees a recover much sooner than outside analysts.

“We are chewing into our backlog at about $3 billion to $4 billion per year. Now, you can chew into a $90-billion backlog at that rate for a long time,” he said. “We have done better than our competitors.”

No doubt Boeing is the best-positioned of the three manufacturers. But if conditions do not turn around soon and if airlines continue to cancel orders, Boeing may have much farther to fall than McDonnell or Airbus--a prospect that is fueling some deep concern in Boeing-dependent Seattle.

Since 1990, the firm’s backlog has withered by 20%, said Richard James, Boeing’s vice president of marketing. This year, Boeing has booked orders for 170 aircraft, but will deliver 437 aircraft.

“The backlog, which is sizable, is vulnerable at this stage,” said Richard Conway, who serves on the governor of Washington’s board of economic advisers. “If that backlog goes, a lot of employment will go with it.”

Boeing accounts directly for 10% of Seattle-area jobs, but a whopping 60% of the manufacturing payroll in the region--making the city as dependent as ever on the company, Conway said.

Boeing is cutting 3,400 jobs in commercial programs and another 5,500 in military programs this year. Without a strong U.S. economic recovery, Conway projects the state could lose 20,000 aerospace jobs by 1994.

McDonnell, meanwhile, would be only too happy to limit its losses at that level. Since its Long Beach employment peaked at 53,000 in 1990, the division has shed 20,700 jobs. It now has 32,300 employees, 20,500 of whom work on commercial programs.

Douglas Aircraft is having a tough time selling airplanes. Its order book posted a net loss of three aircraft in the first 10 months of this year--owing to cancellations and weak demand. The firm has lost a net of two MD-80s orders and four MD-90s, while gaining a net of three MD-11s.

Earlier this year, Douglas announced the closing of its Torrance and Columbus, Ohio, plants in an effort to cut costs and bring production in line with its shrinking business. So formidable are the commercial division’s problems that some experts are predicting that McDonnell will exit the business. McDonnell executives have said the company plans to remain in the business, but declined requests for interviews for this story.

“We are taking advantage of this lull in business to talk to our customers and refine our plans,” company spokeswoman Renee Handler said. “We hope we are at the bottom of the slump, but nobody has a crystal ball.”

The company expects its aircraft deliveries to fall this year and again in 1993, but is looking for an upturn in 1994. “The message that we are giving employees is that we are going down, but this is survivable,” she added.

Douglas has posted a profit in each of the last eight business quarters, but it may be forced to take big write-offs if it doesn’t improve MD-11 sales.

Industry experts don’t agree on Douglas’ ability to survive this downturn. Earlier this month, a Georgetown University researcher concluded in a study that McDonnell will get out of the commercial aircraft business in the 1990s.

“They are eating into their backlog at an extraordinary rate and they are getting nothing in terms of new orders,” said Loren Thompson, the report’s author. “They have the mistaken notion that they are in the commercial aircraft business until they decide to leave. Actually, they are in the business until they run out of backlog.”

Thompson projects that Douglas will begin losing money when its MD-11 delivery rate drops below 30 aircraft per year, a point that will be reached sometime next year. Thompson believes the company has already begun managing the business for cash, eliminating research spending and cutting plant improvements--all as a prelude to an eventual shutdown.

By contrast, Wolfgang Demisch, aerospace analyst at UBS Securities, believes Douglas will make it through even the most severe downturn in which orders basically collapse for three years.

Even delivering just 40 to 50 aircraft per year and servicing existing aircraft, Demisch said, will allow the unit to “eke out an existence,” not an attractive prospect but better than the alternative.

“Douglas Aircraft has had a lot of experience running very lean operations,” he said.

In a worst-case downturn, Boeing “will end up bleeding a lot more cash than McDonnell Douglas,” Demisch added.

Whether Douglas and the rest of the industry face a worst-case scenario depends in large measure on the extent to which airlines elect to replace their aging fleets. Prospects for a resumption of travel growth seem problematic.

In its long-range forecasts for this decade, Boeing projects that worldwide air travel will grow by 5.2% annually and that airlines will have to replace 4,200 aging aircraft. McDonnell’s projections are somewhat more optimistic, expecting 6.5% traffic growth and a replacement of 4,736 aircraft. Remarkably, Airbus Chief Executive Jean Pierson expects replacement of 7,200 aircraft in the next decade alone.

A lot of experts, including McKinsey’s Lundquist, think those growth estimates are way too high. World economic growth may remain more sluggish than expected. More troublesome is the possibility that air travel may be slower growing in the 1990s at any given level of overall economic growth, said Hacker, the American Airlines vice president.

Since the 1970s, traffic has grown at almost 8% per year, but the high growth was fueled by falling ticket prices during airline deregulation and the free spending consumer habits of the 1980s.

Today, financially depressed airlines need to rebuild their balance sheets and are waiting for their chance to raise ticket prices. And consumer debt, coupled with weaker U.S. growth, suggest consumers may do less flying.

“We think air travel will grow slower than it did in the past and much slower than the economy,” Hacker said.

One bright spot for the industry has been the Asian market, but there are signs that growth in that region is also slowing. Not unlike the U.S. market, airlines are losing money and struggling to meet growth targets.

Airlines will still have to replace some existing aircraft, as they become too old to economically operate and as federal regulations require more quiet operations. But some airlines are opting to install “hush kits,” devices costing a few million dollars that enable jet engines to meet federal noise regulations at a fraction of a new aircraft’s cost. And some airlines, such as Delta, will simply opt to let their fleets grow older.

Another factor weighing against replacement orders is the inventory of used aircraft parked in the California and Arizona deserts.

About 1,000 aircraft are idle, though many are so old that they will never fly again, said Louis Gonda, executive vice president of the Beverly Hills-based aircraft-leasing firm International Lease Finance Corp.

Still, at least 350 of the parked aircraft meet advanced federal noise regulations, Gonda said. That amounts to nearly half of the entire industry’s output this year.

Under any scenario, the years ahead are going to be leaner and that promises tougher competition for manufacturers. Airbus has taken some of McDonnell’s market share and more recently has successfully beaten Boeing’s 737 with its A-320.

At Boeing’s Renton, Wash., division, which produces narrow-body jets, general manager Ronald B. Woodard is aiming to cut his production costs by 15% in the next five years and create a manufacturing system that can deliver an aircraft six months after an order is placed.

So far, Woodard said his operation is now more flexible and has experienced little of the usual disruption resulting from the production rate cutbacks.

“We want to be so close to our market that customers can order whatever they want and get it when they want--and we will drive our competition to dirt,” Woodward said.

As for McDonnell, he added, “I hope they are around. Competition is good.”

Jet Lag

Commercial aircraft orders worldwide began an upward trend in 1982 and ended with a speculative boom by late in the decade that left manufacturers with a huge backlog. But orders have plummeted since then, while production is off only slightly. By some estimates, the market may not recover until 1996, when much of the backlog will be gone.

Manufacturer Scorecard

Boeing continues its dominance of the world jetliner market. McDonnell Douglas’ share has slipped while Airbus Industrie has jumped. Market share: Airbus Industrie: 32% Boeing: 52% Fokker/BAE: 5% McDonnell Douglas: 11%

Aircraft on Order: Fokker/BAE: 146 McDonnell Douglas: 311 Airbus Industrie: 901 Boeing: 1,475

Sources: Boeing, McDonnell Douglas and industry analysts.