McDonnell Douglas to Curb Commercial Jetliner Plans

Abruptly reversing a course he set only two years ago, McDonnell Douglas Corp. Chief Executive Harry C. Stonecipher said Monday that his company has abandoned its effort to be a leading builder of commercial jetliners.

Stonecipher said McDonnell’s Douglas Aircraft Co. division, which makes the planes in Long Beach, will no longer develop the new aircraft that it would need to compete with industry leaders Boeing Co. and Europe’s Airbus Industrie.

Some experts interpreted Stonecipher’s message as a death knell for 75-year-old Douglas Aircraft, which today has a paltry 10% of the global jetliner market. Douglas builds the MD-90 and MD-80 single-aisle jetliners, the MD-11 wide-body and the new 100-seat MD-95.

“They’re exiting the commercial business, there’s no mistaking it,” said Richard Aboulafia, an analyst with Teal Group, an aerospace research firm in Fairfax, Va. McDonnell Douglas also is one of the nation’s largest defense contractors.

Douglas has defied predictions of its demise for decades, but the fact that Stonecipher is pulling back the throttle just as the commercial aircraft industry is enjoying a resurgence only underscores how Douglas has been unable to keep pace with its huge rivals, experts said.

To be sure, the decision does not mean that Douglas is going to shut down soon or that will lay off its 10,000 employees. Douglas has a backlog of orders to build more than 200 aircraft.

But without developing new families of jetliners, the plant’s future beyond the next decade is very dim. Stonecipher’s remarks also could prompt the airlines to order fewer of the planes already in production.

Stonecipher made his stunning remarks in a teleconference call to bankers and Wall Street analysts, and even he admitted that the decision was good news for his competitors.

“I expect with this announcement today that the Boeings and Airbuses . . . will be running rampant all over the world,” he said.

Stonecipher became the first person outside the McDonnell and Douglas families to run the company when he took over as president and chief executive officer in 1994. He proclaimed in full-page newspaper ads last year that “if we weren’t already in the commercial-aircraft business, we’d get into it” because it looked so promising.

But in the conference call, Stonecipher said that the staggering costs of developing new lines of airplanes, the savage price-cutting in today’s market, and Douglas’ poor market share had changed his mind.

“Contrary to many of my earlier remarks and plans, I do not see McDonnell Douglas Corp. as a major, stand-alone player in the commercial airliner business,” he said.

The jetliner market, he said, “may be too tough for us to battle through.”

“I still like the [commercial] market,” Stonecipher said. “I don’t like the pricing, and I don’t like our position in the market. So we’re going down a path of maximizing the support of our [existing] customers and our existing products.”

St. Louis-based McDonnell will evaluate potential mergers, joint ventures and other moves for Douglas, he said, adding that the company “might be interested in having a partnership” with another plane maker. He offered no details, however.

Stonecipher made his comments after confirming that Douglas had shelved plans to build a new plane dubbed the MD-XX, which was to be a larger version of the MD-11. The report first appeared in Monday’s Wall Street Journal.

The MD-XX was intended to seat between 300 and 375 people, and provide stiffer competition against Boeing’s 777 and 747 wide-bodies, and similar planes made by Airbus. But developing the MD-XX would have cost $2 billion or more, and Stonecipher said McDonnell worried that profits from the plane would be depressed by the industry’s fierce price-cutting.

But his broader comments that Douglas overall would remain a mere “niche player” stunned the industry--not because anyone misunderstood Douglas’ problems, but because Stonecipher had been so intent on returning the airplane builder to glory.

“It was a surprise for [Stonecipher] to make an about-face this abruptly, after [he made] such a strong foray back into the market,” said Byron Callan, an analyst with Merrill Lynch & Co. in New York. “They had started talking about commercial aircraft much more positively.”

But there were warning signs even before the MD-XX got the ax.

Douglas launched the new MD-95 with a 50-plane order from ValuJet Airlines. But that order is now in limbo because of ValuJet’s safety problems in 1996, and Douglas has yet to land another MD-95 order.

Also, Douglas has not been producing sizable profits for McDonnell, although it has won analysts’ kudos for being profitable at all as the firm has gradually lost market share to Boeing and Airbus. In the first nine months of this year, Douglas had operating income of $60 million on sales of $1.9 billion.

Some experts praised Stonecipher’s move. Thomas J. Gallagher, head of the aerospace group for the investment firm CIBC Wood Gundy, said that “rumors of their death are greatly exaggerated,” and that the MD-95 remains “a very attractive offering.

But to become “a full-fledged major player,” Stonecipher said, McDonnell would have to invest $15 billion in the next 10 years, “and while we were making that investment, certainly our competitors would not be standing still.”

Using a golf analogy, he added: “That’s a longer putt than I think I can make, or I want to make.”