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JAMES FLANIGAN

A Gutsy Move by McDonnell Was Smart, Too

January 02, 1987|JAMES FLANIGAN

What better way to start the new year than with a stunning display of U.S. competitiveness, an American company playing guts ball, carrying the game to its opponent and by so doing standing a better-than-even chance of success. The company is McDonnell Douglas, the St. Louis-based aerospace outfit that announced just before the old year ended that it was going ahead and building a new long-range passenger airplane.

The plane, which replaces the DC-10, is called the MD-11, and it will be able to fly 7,000 to 8,000 miles without refueling, depending on the passenger load, which can vary from 300 to 400.

That places it directly in the emerging competition for long-range airplanes with Airbus Industrie--the European consortium of government-backed aircraft companies from West Germany, France, Britain and Spain--and with Seattle-based Boeing Co. Airbus is on the verge of announcing its own new plane, called the A-340, which will be capable of flying nonstop from New York to Hong Kong, and Boeing is modifying its venerable 747 for the same potential market.

Investors Wary

Three's a crowd, said Wall Street. The instant reaction of some industry analysts and investors was that McDonnell was asking for trouble, getting itself into a three-way competition for a market in which there would be scant profit for anybody. Also, analysts noted that McDonnell went ahead without an MD-11 order from a major U.S. airline--even though it has orders for 52 planes from 11 non-U.S. airlines plus Federal Express, the Memphis-based overnight mail carrier.

Accordingly, investors clipped $3 from the price of McDonnell stock in the two days following the MD-11 announcement. The stock steadied on Wednesday, the last trading day of the old year, at a price above $71 a share.

Did Chairman Sanford McDonnell, a member of the family that owns 15% of McDonnell Douglas stock, and James Worsham, who heads the commercially oriented Douglas Aircraft division, do something reckless? No, they did something smart. By working with a derivative of the DC-10 design, the McDonnell company can bring out a new plane at a development cost of slightly more than $1 billion--about one-fourth of what it would cost to develop an all-new airplane from scratch these days. The Airbus consortium, meanwhile, is waiting for approvals from the German and British governments to spend $1.5 billion just to start development of the A-340 complex.

Foreign Orders

Had McDonnell waited, Airbus might have received those approvals after the German government elections on Jan. 25. Now, with McDonnell going ahead with plans to produce a plane at lower costs than Europe can possibly manage--particularly with the U.S. dollar at a competitive low against the German mark and French franc--there is pressure on the European governments to question whether another project for the heavily subsidized Airbus company is the best way to spend taxpayers' money.

McDonnell added to that pressure, moreover, by securing MD-11 orders from Thailand's Thai Airways, an Airbus customer for other sizes of aircraft, and Italy's Alitalia, a potential Airbus customer. In football, that's called carrying the game to your opponent.

McDonnell played guts ball on the home front, too. The big U.S. airlines, American and United, were bargaining hard to get the MD-11 at a giveaway price, figuring McDonnell needed their orders to go ahead with the plane. But McDonnell went ahead without them, taking the chance it would get an order later. "I'm encouraged that McDonnell didn't play that game," says the industry's leading analyst, Wolfgang Demisch of First Boston Corp. Look for McDonnell to win its home-front gamble with a big U.S. order in the first half of this year.

There is another issue here, one often overlooked in the huggermugger of instant analysis and stock prices. We hear a lot these days about the short-term focus and timidity of our profit-oriented companies. Well, McDonnell Douglas, although it gets most of its $11-billion total business by selling fighter planes to the U.S. government, is not government-owned. Like Boeing, it is stockholder-owned, facing the same pressure as most other U.S. companies to report a profit. Airbus Industrie, however, is a government-owned group of companies where the need to show a profit is distinctly secondary to the need to provide jobs in France, Germany, Britain and Spain.

So it's salutary for the new year to reflect that an immediate result of McDonnell's MD-11 decision will be 6,000 additional jobs in Long Beach, and thousands of other jobs among its subcontractors throughout the country. And in the long term, its decision will only reinforce strong U.S. leadership of a major world industry. Our system demands daring as well as skill. But when it works, it works beautifully.

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