Merger Could Stabilize Industry in Southland

By JAMES F. PELTZ

Dec. 16, 1996 12 AM PT

TIMES STAFF WRITER

The proposed merger of Boeing Co. with McDonnell Douglas Corp. carries with it the ironic prospect that the nation’s aerospace upheaval, which once seemed to be wrecking Southern California’s economy, could now bring the region a measure of economic stability.

The reason is that powerful Boeing, one of the winners of the survival struggle in the nation’s aerospace industry, would in two bold strikes become the largest aerospace contractor in Southern California and one of the region’s largest industrial employers with about 42,000 workers.

Boeing’s proposal to buy McDonnell Douglas Corp. for $13.3 billion comes just days after Boeing bought the space and defense assets of Rockwell International Corp. for $3 billion. And it comes as the Southland aerospace industry already has begun to show signs of a comeback, with several major employers adding jobs in recent months.

“If I was in Long Beach, I’d probably feel more comfortable about my future than I did a couple of months ago,” said Byron Callan, aerospace analyst at Merrill Lynch & Co. in New York.

“Yes, you’re going to get a paycheck from somebody else now, but it’s clear that Boeing is looking for people, and they’re going to be a survivor,” he said.

The new Boeing work force would include about 20,000 people in Long Beach, who build McDonnell Douglas’ commercial jetliners and its C-17 military cargo planes, and another 5,600 at McDonnell’s space operations in Huntington Beach.

Boeing’s merger plan is part of the rapid consolidation of the U.S. defense industry in the post-Cold War era, a consolidation that began with massive layoffs and plant closings in Southern California in the early 1990s. Those actions, in turn, were key contributors to California’s severe economic recession during that period.

The consolidation also has spawned a wave of aerospace mergers. And Seattle-based Boeing, by acquiring the McDonnell and Rockwell assets, would be securing its role as a dominant long-term player in aerospace--and therefore shoring up the prospects for its Southern California workers and the region’s overall aerospace industry.

McDonnell Douglas, by contrast, had remained on the sidelines during the industry’s merger frenzy, failing to buy other companies that could help it grow. It also lost some key Pentagon contracts to develop the new fighter planes that the U.S. armed forces will use in the next century.

The most recent defeat came last month, when it wasn’t chosen to compete for the Joint Strike Fighter.

To be sure, Boeing’s invasion of Southern California does not preclude more aerospace layoffs in the region. In announcing the McDonnell deal, Boeing Chairman Philip M. Condit said no sizable layoffs were planned, but he didn’t rule out some cutbacks, either.

And Boeing is no stranger to layoffs, because it’s constantly having to adjust its work force to the ups and downs of the airline business.

Boeing’s relationship with its employees also has had rough spots. Last year, the company was hit by a 69-day strike by its production workers, in part because of disputes over job security.

But Lockheed Martin--the other aerospace giant that has been created from several mergers--has shown how consolidation can eventually generate new jobs as well. After consolidating its nationwide satellite-production work in Sunnyvale, Calif., the company last week it said the plant expects to hire about 3,000 people over the next three years.

The aerospace industry in Southern California had been regaining some strength even before Boeing’s announcement Sunday.

Companies such as Hughes Electronics Corp. and TRW Inc. have been enjoying strong orders for satellites and other space equipment. Northrop Grumman Corp.’s Los Angeles-area plants have been busy making fuselages for Boeing’s 747 jumbo jets and subassemblies of McDonnell’s F/A-18 fighter jets.

Even McDonnell’s Long Beach operation had stabilized, after the company secured a major order from the Pentagon for 120 of its C-17 cargo planes.

But McDonnell’s commercial jetliner operation in Long Beach, Douglas Aircraft Co., remains a big question mark.

Douglas’ business has continued to shrink in recent years in the face of stiff competition from Boeing and Europe’s Airbus Industrie. Douglas now has less than 10% of the worldwide market for big jetliners, and McDonnell recently pulled the plug on its once-ambitious plan to develop a bigger family of Douglas jetliners that would help the unit better compete.

For the time being, Boeing said it plans to retain Douglas as a separate line of jetliners, rather than immediately folding the operation into its own jetliner group. That could enhance Douglas’ sales prospects, because the world’s airlines would presumably have more confidence ordering Douglas jets with the knowledge that Boeing’s resources are behind them.

Boeing’s presence also bodes well for the hundreds of Southern California firms that make components and provide services for Douglas’ production line.

Still, analysts said it seems likely that Boeing eventually would absorb the Douglas operation, which is now focused mainly on its MD-90 narrow-body line of aircraft. If if does, would Boeing then use the Douglas facilities in Long Beach for its own production needs?

It’s possible. Boeing right now is enjoying surging sales for jetliners, and is getting orders faster than it can build airplanes. Indeed, in announcing a separate alliance with Douglas recently, Boeing hinted that it might eventually use Long Beach for some production or tooling work.

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Biggest U.S. Defense Contractors

As defined by the value of 1995 fiscal year Pentagon awards (The combined Boeing and McDonnell Douglas company would still rank second on the list):

1. Lockheed Martin Corp.: $10.5 billion

2. McDonnell Douglas Corp.: $8 billion

3. Tenneco Inc.: $3.7 billion

4. General Motors Corp.: $3 billion

5. Northrup Grumman Corp.: $2.91 billion

6. Raytheon Corp.: $2.89 billion

7. General Electric Co.: $2.1 billion

8. Loral Corp.*: $2 billion

9. Boeing Co.: $1.78 billion