Lockheed's Great Dilemma

Can a C.P.A. make that big bird fly?

Roy A. Anderson, a silver-haired accountant who will be elected chairman of Lockheed Aircraft Corp. next month, is taking charge of a company that has endured a succession of crises termed by an internal management study to be "unparalleled in the history of American business." Lockheed in 1969 and '70 lost wads of money on fixed-price defense contracts. It was saved from bankruptcy in 1971 only by the Government's guarantee of a $250 million bank loan, and ever since has been in almost continuous negotiation with its bankers to arrange credit. The company's reputation was almost ruined by disclosure that up to $38 million in questionable foreign payments was made to spur sales of its aircraft; the scandal involved Prince Bernhard of The Netherlands and former Prime Minister Kakuei Tanaka of Japan, among others. To top it all, Lockheed's effort to re-establish itself as a principal supplier of commercial aircraft has been a disaster.

TriStar L-1011s have never recouped development costs, and the company is resigned to writing off about $400 million of those costs over the next eight years; since the write-offs reduce profits, they have the effect of a guaranteed annual loss.

When Chairman Daniel Haughton and President A. Carl Kotchian were forced to resign last year at the height of the payments scandal, Lockheed seemed likely to stall like a disabled jet. That it did not is due largely to Robert Haack, former president of the New York Stock

Exchange, who came in as interim chairman. Though Haack describes Lockheed as "a colossus to try to get your arms around," he helped to pare long-term bank debt from $595 million to $425 million. During his tenure, a special review committee of outside directors drafted a severe code of ethical conduct that bars any illegal or off-the-books payments.

In a year-long search, Haack and other directors considered about 100 outsiders for the job of permanent chairman. But they eventually concluded that to bring in someone new would set Lockheed back while the outsider familiarized himself with the company. So the choice fell on Anderson, who knows Lockheed thoroughly. After serving as a naval officer during World War II and the Korean conflict, he joined the company in 1956 and worked his way up through several financial posts to vice chairman and chief financial officer. In that job, he was aware of some jiggery-pokery in Lockheed's foreign sales. But the board's special review committee found that he was "to a certain extent the victim of a plan by Haughton and Kotchian to keep him uninformed."

So now Anderson must try to lessen the TriStar drag that has left Lockheed trailing badly behind its chief competitors in the commercial aircraft market, Boeing and McDonnell Douglas. Last year all three had comparable sales: $3.2 billion for Lockheed, $3.5 billion for McDonnell Douglas and $3.9 billion for Boeing. But while McDonnell Douglas earned a profit of $109 million and Boeing $103 million, Lockheed netted only $39 million. Reason: an operating loss of $125 million on the airbus. The news this year is no better. In the first six months, Lockheed's profits rose to $25.5 million, from $22.2 million a year earlier, but they would have been three times as large without a $52.7 million TriStar write-off. Lockheed's share of the commercial jet aircraft market is a puny 2.7%, compared with McDonnell Douglas' 28% and a fat 52% for Boeing.

Nonetheless, Anderson is adamant that Lockheed will continue to manufacture the TriStar. He has high hopes for the long-range version of the plane (British Airways has ordered six) and has set up a new financial affiliate that will arrange favorable terms for prospective buyers. The inability to do that while Lockheed's own finances were in a mess is a major reason why TriStar sales have never matched the company's predictions. Anderson's most immediate problem is to arrange short-term loans to replace an estimated $80 million of the Government-guaranteed loan.

Anderson further has the luck to take over at a time when the always cyclical civilian aircraft industry seems to be starting on an upswing. Although McDonnell Douglas' deliveries of DC-9s and DC-10s will drop from 65 in 1976 to 37 this year, the company has already booked orders for 54 planes to be finished in 1978. Executives and industry analysts expect the upturn to continue. Some airlines have more money to buy planes because traffic is rising and earnings are improving (even Pan Am may report a profit for the first time in nine years).

Other parts of Lockheed's business are in fine shape. The company's total order backlog, largely military, has risen to $4.6 billion, up $1 billion in twelve months. Defense business is consistently profitable; it ranges from cargo aircraft to missiles and electronics--to say nothing of secret projects undertaken at Lockheed's "skunk works," which turned out, among other things, the U2. Negotiations are under way between the Japanese de fense agency and the U.S. Department of Defense for the sale of 44 Orion antisubmarine aircraft, a deal that would bring Lockheed more than $1 billion over the next decade or so.

Anderson himself raises one thorny problem about Lockheed's new code of conduct. Says he: "One thing that still has to be considered is the question of what advantage this may give to foreign companies" if they are less scrupulous about making under-the-table payments to aircraft buyers. Investors obviously are not worried. Although payment of a dividend is a long way off, Lockheed's stock has about doubled in price this year, to around $ 18 a share.

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