Decision on Jet Is Harsh Blow to McDonnell

In a lounge atop the National Press Club in Washington two weeks ago, the chief executives of Northrop Grumman Corp. and McDonnell Douglas Corp. confidently predicted their team would succeed in the high-stakes Pentagon program to build a new generation of jet fighter.

The two men--whose companies now produce the world’s most lethal combat aircraft--brushed aside questions about what they might do if they lost the competition.

“I haven’t given it any thought,” said McDonnell chief executive Harry Stonecipher.

But now Stonecipher has plenty to worry about, after the Pentagon’s stunning decision Saturday to drop McDonnell and Northrop from the competition for the new jet, known as the joint strike fighter.

The two firms chosen as finalists in the program, Lockheed Martin Corp. and Boeing Co., are now in a position to assume leadership of the elite business that remains a coveted symbol of military and technological prowess.

The rejection marks a stunning setback to McDonnell, the St. Louis-based firm that has dominated the world market for combat jets ever since the Vietnam War with its F-4 Phantom jet fighter.

“It is a loss, a devastating loss, no question about it,” said Fred Hill, the company’s senior vice president of communications.

Stonecipher vowed to reporters Saturday to “pull up our socks and get on with life.” But the loss of a program touted as being worth more than $200 billion will leave some huge holes in those socks.

The defeat for Northrop is less than devastating, since the company in the last two years has focused increasingly on the defense electronics market and appears headed to overtake Hughes Electronics as the nation’s second-largest contractor in that industry, according to Loren Thompson, a defense expert at the de Tocqueville Institution, a conservative think tank in Washington.

But the loss represents what may be a final defeat to Northrop’s 15-year-old ambition and heavy investment to be in the aircraft business’ top tier.

The long-term outlook for McDonnell is considerably bleaker, since the company has elected to not diversify during the defense industry consolidation of the 1990s.

“This loss is devastating for McDonnell,” Thompson said. “There has never been anything like the joint strike fighter and probably won’t be in our lifetimes. Not to be a part of it is not to be a big part of the aerospace industry.”

The Pentagon plans to order more than 3,000 of the new fighters to replace five current aircraft types. Never before has the Pentagon planned to use a common aircraft in the Navy, Air Force and Marines.

Aerospace analyst Wolfgang Demisch said the total worldwide market for the jet may reach 5,000 aircraft. With spare parts and lifetime support, the value might eventually approach a trillion dollars.

The massive impact of the program on the industry is clear, but it will take more than a decade to unfold. Actual production is not scheduled to begin until 2008.

No doubt, the biggest unknown is whether the fighter program will pass political hurdles.

In the past, joint programs to produce aircraft for the Navy and Air Force have failed, particularly in the case of the F-111 in the 1960s. The new effort includes three military services and will force contractors to develop the plane on a lean budget.

Whether the Pentagon can even afford the new aircraft is even more doubtful. It has created so many jet fighter and other tactical aircraft programs that by 2005, it will need to spend an estimated $16 billion to $18 billion annually, compared to a budget of just $2 billion today, according to Rep. Curt Weldon (R-Pa.), chairman of the research and development subcommittee of the House National Security Committee.

Unlike any other industry, aerospace firms can ride on their laurels for decades. McDonnell still produces more jet fighters than any other company, but it has not won a design competition for a combat jet since the F-15 fighter in the late 1960s.

The company missed the stealth technology revolution in the 1980s and consistently produced designs that were considered unimaginative or overly conservative. The management style of the McDonnell family, which ran the company from World War II until last year, had turned stodgy.

“These fighter designs are created by a handful of very creative engineers, so the size of a company doesn’t mean anything,” said Sherm Mullin, retired president of Lockheed Skunk Works and an expert in fighter development. “You can have a ton of resources, but if you don’t have the creative people who give freedom, you lose.”

The McDonnell entry for the joint strike fighter was judged by outside analysts as neither radical nor conservative, but a middle-of-the-road approach that appealed little to the Air Force.

Hill, the McDonnell spokesman, said defense officials told the company that its design for the Marine Corps version, which features a second engine for vertical takeoffs, was judged as high risk.

Although McDonnell has repeatedly stumbled in recent years, the loss of the joint strike fighter still left experts surprised.

McDonnell and Northrop were the only two companies with any experience in building jets capable of operating on aircraft carriers, for example.

“You would have expected them to get this new contract,” said analyst Demisch. “It is a material setback and will force them to take some radical measures.”

Demisch said the company will be forced to again consider a merger or acquisition or become far more aggressive in funding internal growth.