Out of Fuel

Four weeks ago the U.S. Air Force fired off an explosive letter to its 28 major airframe and missile contractors. In fiscal 1958's first quarter the Defense Department has spent its money at the rate of $40 billion annually, $2 billion more than its $38 billion budget. To help get back in line, the Air Force proposed a temporary cut averaging 25% in its monthly progress payments for aircraft production. But the Air Force still expected the industry to maintain full delivery schedules, either by cutting costs or borrowing money to keep going. Last week the replies were in, and they added up to one loud, angry yelp. Said one planemaker: "If the Department of Defense were private industry, it could be adjudged guilty of mismanagement punishable by law."

Bankers & Boeing. The industry obviously considered itself in serious trouble. Many companies operate so close to the line that they will be pressed to meet payrolls without 100% Air Force payments each month. Nor will it be easy to get outside loans to replace the deferred 25%. Though full payment will come when the Air Force gets more money at the end of fiscal 1958 or when money loosens because of heavier Treasury receipts, the feast-and-famine aircraft business is such a questionable risk that few banks are eager to lend scarce funds. Those who do get interim financing may have to pay higher interest rates than other industries. And since the extra cost cannot be recovered under most defense contracts, it will also mean a sharp cut in profit margins.

A prime example of the planemakers' dilemma was Seattle's Boeing Airplane Co., the Government's biggest defense contractor, with a $2.1 billion backlog of orders. Boeing faces the deferment of more than $350 million in payments due for the rest of fiscal 1958. If the Air Force sticks to its new schedule, and the company cannot expand its $100 million bank credit, Boeing will be forced into a major production slowdown, says senior Vice President Wellwood E. Beall. Boeing is already closing its 1500-worker plant at Everett, Wash.; it has chopped employee overtime, temporarily abandoned a new preflight hangar at Moses Lake, Wash., reduced its shop supply inventory, and cancelled its Christmas party this year.

Republic & Lockheed. Outside of Douglas, which is in better shape than most because of a $150 million credit that can be transferred from its DC-8 commercial jet program, the rest of the major contractors are in bad shape. Republic, facing a 30% to 40% cut in payments for the rest of the fiscal year, blames the new payment schedule for a layoff of nearly 2,500 workers. Lockheed is also cutting back. So are the Martin Co., North American and other major contractors. The picture is even darker for the thousands of subcontractors who sometimes do as much as 60% of the actual work on each plane. As prime contractors are forced in turn to defer payments or withdraw subcontracts, the Strategic Industries Association estimates that 500 subcontractors in Southern California alone will go under before year's end.

Reading the industry's replies last week, the Pentagon said it would take a second look at its plan. If manufacturers are unable to meet the demands -and few seem to think they can -the Air Force may be forced to cut its overall procurement totals to match its purse or compromise by stretching out delivery schedules still further.

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