McDonnell Faces Major Cut in C-17s : Defense: Pentagon official says order for jet transport will probably be trimmed from 120 to 40. Company is offered $400 million to settle claims.

McDonnell Douglas’ C-17 cargo jet program is likely to be trimmed back to 40 aircraft from 120, and the Pentagon will offer $400 million to settle the company’s claims against the government, a senior defense official said this week.

John Deutch, undersecretary of defense and the Pentagon’s acquisitions chief, made the surprise disclosure Monday before a closed-door congressional panel debating next year’s funding for the controversial program.

Deutch had been considering whether to kill the troubled $44-billion program, so the decision could have been far worse. Nonetheless, scaling back production to only 40 planes would deliver another blow to Southern California’s aircraft industry and its ailing economy.

The severity of the cutback, however, will hinge largely on the manner in which the C-17 purchases are reduced. If current annual production rates of the plane are maintained, the program could continue for four or five years.

But if the annual production rate is increased, as currently planned by the Air Force, the full fleet of 40 aircraft could be produced in as little as three years, triggering the layoffs of about 11,000 McDonnell employees in Long Beach, where the plane is built, and many more at supplier firms.

A McDonnell Douglas spokesman declined to comment on Deutch’s remarks, saying: “I don’t know what he has told people . . . or hasn’t told people. From our standpoint, his decision process is still going on.”

At one time, the Pentagon planned to produce 240 C-17s, but, like many other weapons programs, its budget has been trimmed repeatedly. The Pentagon has sunk $10 billion into the program for research, equipment and production. McDonnell is already under contract to build 20 planes, eight of which have been completed.

Though the Pentagon insisted in recent days that no decision had been reached, congressional sources say Deutch disclosed details to eliminate 80 aircraft and restructure the long-troubled program. A final decision is scheduled to be made public in November.

Deutch made his remarks to a joint House-Senate panel on the fiscal 1994 defense budget, which is debating whether to fund production of six additional C-17 aircraft next year. Deutch told other defense officials that the plan was favorably received by the panel members, a Defense Department official said Wednesday.

Deutch also indicated that a C-17 cutback would leave the Pentagon with the option of buying additional aircraft in the future, depending on the progress McDonnell makes in correcting technical deficiencies and cost problems. But a reduction in the program now may be difficult to reverse in future years, when Pentagon spending is likely to be even tighter.

The C-17 has strong support from the military services, which assert that they need the plane’s capability to take off and land on short airfields and the ability to move heavy combat equipment.

But McDonnell has been dogged by several years of major cost increases and has been stung by technical setbacks, including the failure of the C-17’s wing to pass a key strength test last year. In addition, the aircraft is highly computerized, and its software development is far behind schedule.

By the company’s own estimate, the C-17 is $1 billion over its development budget, and some government estimates are even higher.

A high-level civilian review committee appointed by Deutch reported last month that the program still has very serious cost and technical problems, but noted that comprehensive management reforms could solve them.

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The committee of outside experts also strongly recommended that Deutch reach a so-called global settlement of all cost claims raised by the company so that the dispute could be laid to rest and not further impede the program, according to a source close to the committee.

Sources knowledgeable about the $400-million settlement characterized it as an “investment into the program,” in which the Pentagon would agree to help improve the company’s efficiency.

“This plan is worked in such a way that you can hold the company’s feet to the fire and see how it goes,” a defense official said. “This is not a wholesale backing of the C-17 program.”

But a congressional staff member said the $400-million settlement suggested by Deutch received a mixed reception at the hearing. “The crowd was not terribly receptive because of the appearance of a bailout,” he said.

McDonnell has submitted several hundred million dollars in claims and told the Defense Department it plans ultimately to file well over $1 billion in claims, blaming the Pentagon’s management of the program and congressional funding cutbacks for many of its cost overruns.

One expert said a fleet of just 40 aircraft would not make any sense, since the cost of operating a small fleet, creating a spare-parts supply system and training pilots would be nearly the same regardless of the size of the fleet.

And the Army has argued that it needs at least 80 C-17s to airdrop a brigade of fully armed soldiers into a battlefield, one of the key missions of the plan.