Pentagon Warning Raises Threat of C-17 Cancellation

The Pentagon issued a stern warning Tuesday to McDonnell Douglas about its troubled management of the C-17 cargo jet program, raising a serious possibility that the $37-billion project could be canceled later this year.

Undersecretary of Defense John Deutch demanded that the company take “immediate aggressive action” to correct many deficiencies and the spiraling cost of the aircraft production program in Long Beach, which accounts for 9,700 jobs in Southern California.

Such admonitions have resulted in eventual cancellations in most previous cases. The General Dynamics A-12 attack jet program, the Lockheed P-7 patrol plane and the Ford Motor Sgt. York gun system all were terminated after they became objects of public embarrassment.

In testimony before the House Armed Services Committee, Deutch said Tuesday that he was ordering a team of high-level experts to “look into every aspect of the C-17” and report back on the status of the program by July 15.

It is unclear what McDonnell could do in the next few months to dramatically change perceptions about the program. Only last week, McDonnell Chairman John McDonnell told Congress that the company already had taken strong action to install a new management team and that the program was showing improved results.

But Deutch has disagreed. He also sent a memo Tuesday to the secretary of the Air Force that rejected an assessment by the Air Force that the C-17 program is improving. He ordered the service to revise its optimistic view.

The C-17 is more than a year behind schedule and it is about $1.2 billion over budget. Moreover, production costs continue to soar, prompting calls in Congress for its cancellation. The most recent Air Force order was priced at $380 million per aircraft.

McDonnell spokesman Larry McCracken said the company will provide “our full cooperation” with a C-17 review ordered by Deutch and that the company “remains confident that the McDonnell Douglas C-17 program is viable.”

In a letter addressed to John McDonnell and released by the Pentagon, Deutch said: “Unless there is strong resolve on the part of McDonnell Douglas corporate management to meet contract requirements, particularly schedule, specifications and testing requirements, the C-17 program cannot be continued.”

Deutch concluded the letter by saying that without a full commitment from the company to improved efficiency, the Pentagon would have to fulfill its cargo transport requirements “with an alternative to the C-17.”

Such an alternative is being offered by Lockheed Corp. It recently told Congress that 74 of its jumbo jets could do the same job as 120 C-17s and save taxpayers $11 billion. Lockheed Chairman Daniel Tellep insisted Tuesday, however, that “Lockheed is not out to kill the C-17. We support the C-17 because it is needed.”

Air Force officials have reportedly told Tellep not to attempt to undermine the program.

After the Deutch letter was released at a hearing before the House Armed Forces Committee, McDonnell shares dropped $1 to close at $61.875 on the New York Stock Exchange.

Loren Thompson, director of the Georgetown University Global Security Project, said the warning to McDonnell “sounds like a setup.”

“The letter from Deutch could be creating a requirement for McDonnell Douglas to do something in the next few months that is not possible, as a prelude to a termination of the program,” said Thompson, author of an analysis of the C-17 program.

“You are looking at a program whose problems are rooted in a decade of mistakes by the contractor and by the Air Force,” he added. “It is hard to believe that could be turned around in a few months. This could be the beginning of the end.”

But Wolfgang Demisch, aerospace analyst at UBS Securities, dismissed much of Deutch’s letter as “standard boilerplate” for a bureaucrat trying to deal with angry members of Congress who have demanded a cancellation.

Demisch said the C-17 has a “pretty good probability” of surviving, based on the critical need the military has asserted for more air transport capacity.

Although the Lockheed C-5 alternative might be cheaper, it would not give the military an agile aircraft that could use unimproved airports with short runways in places such as Bosnia, Demisch said.

Whatever the plane’s merits, Deutch’s warning is the most serious public statement yet by the Pentagon about the C-17’s cost.

In its fiscal 1994 request to Congress, the Air Force asked for $2.3 billion for six aircraft, about $380 million each--an increase of $50 million a plane from the year before. When the aircraft was in early development, it was supposed to cost less than $150 million each. In the early phase of aircraft production, unit costs are supposed to go down.

Senior Air Force officers testified recently that the final design of the C-17 will not be determined with completion of the fifth aircraft, as originally expected, and may not occur until much later--a development that threatens to continue to hike the cost.

McCracken, the company spokesman, blamed the cost increases on congressional cutbacks in the number of planes ordered. The reductions drive up the price because the company’s fixed costs must be spread over fewer aircraft each year.

Deutch also expressed concern about $425 million in claims McDonnell has filed against the Air Force and additional claims that are expected. He said the claims will be included in a “cost-effectiveness assessment” of the C-17--which will put McDonnell under intense pressure to hold back its future claims, analysts said.