Taking A Steep Nose Dive

Among U.S. defense contractors, few would seem better structured to survive the end of the cold war than the giant St. Louis-based McDonnell Douglas (1989 revenues: $14.6 billion). The company's civilian subsidiary, Douglas Aircraft, is the second biggest manufacturer of U.S. commercial passenger jets after Boeing, with 12% of the world market and an unprecedented backlog of nearly 1,200 orders and options on its books.

But for several years the sprawling company has been plagued by missed deadlines, cost overruns and late deliveries. "We let our costs and our overall staffing get out of control," admitted chairman John F. McDonnell. He said such problems were unacceptable "in this competitive situation."

So last week McDonnell announced an austerity plan to reduce annual operating costs more than $700 million. This will include an 11% reduction in the work force that will eliminate 14,000 to 17,000 jobs, about half of them at the firm's Douglas unit in Long Beach, Calif., with the rest at plants in 25 other states.

The prospect of leaner times ahead because of smaller Pentagon budgets was a significant factor in the cutbacks. Three of the company's four biggest military production programs -- the Air Force's F-15E Eagle fighter, the Marine Corps's AV-8B Harrier II strike fighter and the Army's AH-64 Apache helicopter -- are scheduled to be phased out in the next three years. The C-17 military transport is behind schedule, and orders for the Navy's T-45 Goshawk trainer have been cut back. The company is also teamed with other aerospace companies in several programs that face uncertain futures. Examples: the B-2 Stealth bomber, the Air Force's Advanced Tactical Fighter, the Navy's A-12 Advanced Tactical Aircraft and NASA's Space Station.

Production of MD-80 jetliners has returned to profitability after serious problems, and the company's newest hope, the 325-passenger wide-bodied MD-11 jetliner, is going through beat-the-clock flight testing to get FAA certification in October. Even so, first deliveries to airline customers will be later than originally promised, and revving up construction lines will require an investment of $2 billion this year. McDonnell maintained that his action was necessary to get the company ready for tougher days ahead, saying, "We cannot guarantee jobs where they do not exist."