Boeing Likely to Halt Some Models of Douglas Jets

Boeing Chairman Philip Condit strongly signaled Friday that the aircraft maker is preparing to cancel some of the major passenger jetliner programs at the firm’s Douglas Aircraft division in Long Beach, saying a final decision will be announced in early November.

In his remarks on Douglas’ future, Condit gave no hint of which specific products would be cut, but aircraft industry sources and securities analysts say Boeing will almost certainly cancel the MD-80 and MD-90 family of aircraft.

But the decision is virtually certain to also provide a commitment by Boeing to back the new MD-95 jetliner under development in Long Beach and thereby ensure the giant production complex’s future.

Boeing may also continue making the MD-11 jumbo jet, which has a nearly two-year backlog of orders and an emerging role in the cargo transport industry as a dedicated freighter, industry sources said.

The net effect of Boeing’s decision on the 10,000 employees now building Douglas jetliners remains uncertain, in part because Boeing is also considering using the Long Beach plant to build portions of Boeing jets. Any major cancellation of aircraft programs, without being offset by new Boeing production, would threaten thousands of jobs.

The Douglas unit, which Boeing took over with its acquisition of McDonnell Douglas earlier this year, has been struggling with sagging orders for more than a decade and now directly competes with Boeing’s far more successful line of products.

In a news conference Friday, Condit said Boeing would take a charge against earnings on the Douglas operations in the fourth quarter, a strong sign the company will cancel some production in Long Beach. Condit said he could not predict the size of the charge.

A second key decision will be made in early January, Condit said, when Boeing will put Douglas production facilities under a microscope. The decision will involve potential plant closures, although the 450-acre Long Beach complex is unlikely to be shuttered. Douglas operates other plants in Melbourne, Ark.; Salt Lake City; and suburban Toronto, Canada.

Boeing also plans to fully integrate Douglas’ operations with its own, affecting a range of administrative, manufacturing and engineering functions. As part of reorganization, the company is examining whether Douglas facilities in Long Beach or elsewhere could help produce portions of Boeing jets, reducing the stresses on the firm’s facilities in the Puget Sound area.

Those stresses were apparent Friday, when the company reported a massive $696-million loss in the third quarter, resulting from a $1.6-billion charge the firm took on production problems at its Seattle factories. Included in the red ink were unspecified losses at Douglas.

The loss was larger than Wall Street anticipated just two days ago when Boeing first stunned investors with the news that it would be forced to take the $1.6-billion charge and an additional $1 billion in charges through 1998.

In an unusual effort to unsnarl its plants and restore order to its assembly lines, the company announced earlier this month that it was halting new production of 747 and 737 jetliners. Boeing has been stung by parts shortages and productivity problems with thousands of newly hired workers.

The firm is attempting to double production at the same time it cuts costs, an ambitious goal that it was unable to execute. As a result, Boeing is being forced to increase overtime work, perform assembly operations out of their regular sequence and ultimately miss its scheduled deliveries to airlines.

“Obviously, this is not a situation that we like,” Condit said. “Had we known what was ahead, we might have moderated slightly our increased production rate, but we would have made the same basic set of decisions.”

He insisted that the problems are under control and that the company’s recovery plan is ahead of schedule. In one indication that the production snafus do not threaten Boeing’s competitive position, China is expected to announce a $2-billion to $3-billion aircraft order from Boeing soon.

Boeing shares lost 63 cents to $48.44 in trading Friday on the New York Stock Exchange. They have tumbled 20% from their 1997 peak of $60.50.

In his remarks, Condit characterized the fate awaiting Douglas products as similar to that of aircraft his company has canceled before.

“This is no different than what Boeing had to do as we made the decision on the 727 or 707 . . . that this was the right time to complete that production,” Condit said. “. . . So we are looking at the product, making a decision what we will do over the long term.”

Douglas has firm orders for 13 MD-80s and 91 MD-90s, both evolved from the 1960s-era DC-9, which was developed when Douglas was an independent company. The firm is producing four of the aircraft per month.

If Boeing does cancel the models, it is likely to continue production until existing orders are filled or persuade customers to switch to another product. Douglas has received few orders for the plane.

“Those are dying products,” said aerospace analyst Joseph Campbell of Lehman Bros.

Douglas has firm orders for 19 MD-11s and is producing them at a rate of one per month, giving the manufacturer a 19-month backlog. But it has picked up several orders in recent months, and the jumbo jet is considered a viable product in the freighter market if Boeing can throw marketing weight behind it.

Federal Express runs the largest fleet of MD-11s--24--and has spoken in support of Boeing continuing production.

Douglas is also developing the new 106-seat MD-95--it has 50 firm orders for the plane from AirTran (formerly ValuJet Airlines)--and, said Douglas spokesman Don Hanson, is completing assembly of the first two MD-95 test craft.

Merrill Lynch analyst Byron Callan said he believes Boeing has lined up as many as 100 orders for the jet, pending the firm’s final decision to go forward with production. In developing the MD-95, Douglas is looking at creating a family of new jets, including 80-seat and 136-seat models. But industry sources said Boeing would most likely wait to see if market demand would sustain the MD-95 variants.

The decisions on Douglas do not include its Long Beach plant that makes the Air Force’s C-17 cargo jet. That line, with about 8,000 employees, is part of Boeing’s military aircraft programs.