Deal Seeks to Continue U.S. Leadership
Boeing Co.’s bid to take McDonnell Douglas Corp. under its wing reflects the determination of the U.S. aerospace industry, with the blessing of Uncle Sam, to lead the world in this critical field for years to come.
The merger proposal announced Sunday in Washington clearly has the Defense Department’s blessing and probably will get Justice Department approval. It recognizes that U.S. leadership in this field is vital for maintaining high-skilled jobs and the nation’s technology and military edge.
But because the competition is global, with government-backed rivals, large and financially strong U.S. standard-bearers are required. To put a 1990s spin on a 1950s truism, government and industry seem to be saying: “What’s good for Boeing is good for America.”
In commercial aviation, a bigger Boeing has a much stronger edge against its chief rival, the European government-blessed Airbus Industrie. A larger Boeing also will have a stronger position in limiting the extent to which the United States must share its technology, and farm out its work, to other nations as a price for getting their business.
In defense work, Boeing becomes one of two leading U.S. defense contractors, along with Lockheed Martin. In the new post-Cold War world--where technology is more important than mass weaponry--the Pentagon prefers fewer, but stronger, prime contractors that can share in the cost of research and development of new systems.
The proposed merger represents a conservation of resources. Rather than calling on the skills of some of McDonnell’s 64,600 workers, as Boeing is now doing in a joint venture begun only last month, the Seattle-based company will employ the great majority of those workers and use their know-how more efficiently.
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“Layoffs will not be significant,” Boeing Chairman Philip M. Condit said at a Washington news conference announcing the merger plan. He would not give specific predictions. But with airliner markets expanding, there is more commercial aviation work around than at any time in the last decade.
The bigger Boeing, with 200,000 employees and $48 billion in annual revenues, presents an even-more formidable rival against Airbus, a consortium composed of Daimler-Benz Aerospace of Germany, Aerospatiale of France, British Aerospace and Casa of Spain.
The stakes are high. The worldwide jetliner fleet is projected to more than double from today’s 12,000 in the next 18 years.
Moreover, the majority of orders will be international. Asia, with 2 billion people in 16 countries and air travel doubling every decade, is already the largest single market for new airplanes.
The new Boeing will have 66% of the large-jetliner market, with Airbus taking about 34%. The elimination of a struggling McDonnell from competition could produce a more secure and profitable industry by firming up prices that airlines pay for their jets. The battle for orders had become so fierce that Boeing, in one deal last year, sold planes to Scandinavian Air System at discounts of more than 40% under list price.
Boeing’s stronger position as a defense contractor is also seen as key for development of American technology and jobs.
Boeing recently has increased its defense contracting business, paying $3.2 billion to acquire the defense business of Rockwell International and qualifying last month as a finalist in the Joint Strike Fighter competition for the Pentagon.
McDonnell Douglas, previously the leading fighter maker for the U.S. military, lost out in the Strike Fighter competition and that helped seal its fate as an independent company. Its fighter expertise would now aid Boeing.
But more significant for international competition, Boeing’s growing defense business will give it access to Pentagon funding for aircraft research. The technology developed in shaping wings and jet thrusters for combat aircraft frequently can be translated into innovations in commercial planes.
Indeed, one of the most notable examples of such technology transfer was the 1950s competition for the KC-135 tanker plane for the U.S. Air Force. Boeing used its research for that competition to develop the 707 passenger jet, the plane that transformed global travel and made it the commercial aviation leader.
Technology transfer in the broader, international sense has become controversial. Countries that offer large markets for airplanes, such as China, demand to share in the work of building those planes and to share also in the knowledge of sophisticated electronic and manufacturing systems needed to build them.
The question of how much work to share has become a source of contention for Boeing workers. Also, some members of the U.S. Congress have worried publicly about U.S. technology leaking away through such joint-production arrangements.
The machinists union struck Boeing last year over the work-sharing issue and won a settlement after bringing the matter directly to the attention of President Clinton. In the resulting agreement, Boeing guaranteed the employees consultation about work transfers while both sides recognized the principle that such sharing is a necessary concomitant of international sales.
In the matter of technology transfers, Boeing traditionally had enough size and strength to fend off demands for sensitive technology. But McDonnell Douglas’ weakened competitive position was thought by industry analysts to have made it vulnerable to demands from customer countries.
As the merger confirms Boeing the winner in a long U.S. competition in commercial aerospace, the lessons of its victory should not be lost on other U.S. industries. Boeing won because time and again over the decades, it took competitive risks.
A notable example occurred in the late 1970s through the early 1980s, when Boeing invested $2.6 billion--30% more than its then-annual revenues--to develop the 757 and 767 airlines simultaneously. The move, more competitive than reckless, deterred the more-cautious McDonnell Douglas from developing a new plane.
And the final outcome of that competition occurred Sunday in Washington as Boeing announced the proposed acquisition of McDonnell Douglas.
