BOEING'S $13.3 billion McDonnell Douglas (MDC) acquisition will make the company the world's largest manufacturer of military, as well as commercial, aircraft. While Lockheed Martin will remain the number one US defence contractor, Boeing will take up and expand MDC's mantle as the leading producer of combat aircraft. The merger will also boost the combined company's position in the space market and add weight to its missiles business.
Boeing already has a major stake in the Lockheed Martin-led F-22 and half shares in the Bell Boeing V-22 and Boeing Sikorsky RAH-66, as well its own Airborne Warning and Control System and CH-47 programmes. It recently won the Airborne Laser development and Joint Strike Fighter (JSF) demonstration contracts. Its just-completed Rockwell acquisition brought with it responsibility for the B-1B.
Now the MDC acquisition will add the F-15, F-18, AV-8B, AH-64, T-45 and C-17 programmes to Boeing's military-aircraft portfolio. If the "traincrash" in US tactical-aircraft programmes occurs, as has been widely predicted, Boeing will be uniquely challenged as it will have major stakes in all three fighter programmes which are regarded as competing for US Department of Defense (DoD) funds - the F-18E/F, F-22 and JSF.
Any or all of the three programmes could be stretched and slowed, and production numbers reduced. Already the F-22 partners are being asked to find unit-cost reductions to avert a potential $13 billion overrun on the US Air Force's 438-aircraft production programme, and questions are being asked about the Navy's need for 1,000 F-18E/Fs.
The October loss of the 3,000-aircraft JSF programme proved instrumental in MDC seeking a merger partner. By early December, the company was preparing a bid for Hughes Aircraft, and Boeing realised that it had to move fast. The idea of a merger was refloated by Boeing chairman Phil Condit at an unscheduled board meeting. The MDC board was informed of the offer and, on 10 December, MDC president Harry Stonecipher flew to Seattle armed with agreed "rules of engagement" for a possible deal. Later that day the companies agreed to merge, and the deal was sealed by Condit and Stonecipher.
Boeing offered $63, in Boeing stock, for each MDC share, valuing the deal at $13.3 billion and promised Stonecipher - the first MDC president appointed from outside - the position of Boeing's president, left conveniently vacant by the announcement that Condit would become chairman in 1997. The merged company will employ 200,000 people and is claiming annual sales of $48 billion in 1997.
DoD reaction to the merger has so far proved positive, although it has set up a review panel and asked the military services for their input. The Pentagon policy of endorsing industry consolidation over recent years makes it unlikely that the merger will face heavy opposition, but the DoD has made it clear that it will require parts of the merged business to be sold off if it identifies a conflict.
Questions may be asked about Boeing's continuing role on the F-22, particularly as it plans to operate its military business from the former MDC headquarters in St Louis, home of the F-18. Already Lockheed Martin insiders are concerned as to where the merged company's long-term loyalties will lie.
As the other JSF demonstration contractor, Lockheed Martin has immediate reason to be concerned by Boeing's acquisition of MDC. As Paul Nisbet, aerospace analyst for JSA Research comments: "Boeing very much needs the combat-aircraft expertise of MDC for JSF...if you want to win JSF, you need MDC, Northrop Grumman and British Aerospace." Boeing's Condit seems to agree: "The carrier-suitability experience that McDonnell Douglas brings is a great strength," he says.
While the involvement, if any, of MDC's former JSF partners on Boeing's programme has yet to be decided, Condit has already said that BAe has been approached "...as a potential JSF partner". For BAe, which had tied its JSF hopes to MDC's bid, the Boeing take-over offers a face-saving way back into the UK-supported programme, although Lockheed Martin is also working hard to woo the UK company to join its JSF bid.
Meanwhile, Northrop Grumman, MDC's partner on the F-18 as well as its JSF bid, may find itself being courted assiduously by Lockheed Martin.
The merger brings critical mass to the combined company's military-helicopter business, which will consist of the AH-64, RAH-66, CH-47 and V-22. Of the major US programmes, only the Bell AH-1W and Sikorsky H-60 series lie outside the merged company. Given Boeing's huge investment in the V-22's tilt-rotor technology, the company is unlikely to want to leave a rotary-wing business that is at last large enough to make sense.
The merger may be more problematical for MDC's commercial-helicopter business, which will be a small part of Boeing's overall activity. MDCis struggling to make money building the MD 500, 600 and Explorer civil helicopters and Boeing brings little to the commercial table, except its half share in the Bell Boeing 609 civil tilt-rotor - and a fervent belief in the commercial potential of the concept. Boeing's already close ties with Bell may give it the opportunity to bring about a further rationalisation of the helicopter business.
In the fragmented missiles market, the merger gives Boeing surprising strength. The combined company will be involved in almost all of the USA's major air-to-surface missile programmes. MDC builds the anti-ship Harpoon, is developing the land-attack SLAM ER and JDAM guided bomb and is competing against Lockheed Martin to produce the JASSM stand-off missile. Rockwell brings the AGM-130 stand-off weapon and a stake in the Hellfire joint-venture with Lockheed Martin. Boeing itself continues to support the Air-Launched Cruise Missile. The only major US air-to-surface missile programme outside the enlarged Boeing is the JSOW stand-off weapon - and its builder, Texas Instruments, is up for sale.
In space, the merger gives Boeing the mass to meet Lockheed Martin head-on. Boeing is already prime contractor on the Space Station and, through its Rockwell acquisition, a partner with Lockheed Martin in the US Space Alliance, which operates the Space Shuttle. MDC has the successful Delta launcher series and was recently selected over Boeing to compete against Lockheed Martin to develop the US Air Force's Evolved Expendable Launch Vehicle (EELV). Boeing also has its Sea Launch commercial venture using the Russian Zenit booster, while its Rockwell acquisition brought with it rocket-motor manufacturer Rocketdyne.
The EELV competition could prove to be the last major US military procurement in which companies other than Boeing and Lockheed Martin can compete and hope to win. Only Alliant Techsystems stood in the way of the two behemoths and it is doubtful that the company, had it been selected, would have been able to muster the resources to win the EELV programme against competition from either of the "Big Two".
Much attention has focused on the impact of the Boeing-MDC merger on the commercial-aircraft market, and particularly its effect on Airbus Industrie. The immediate effect is likely to be minimal, as MDC was already regarded as a "spent force", particularly after its decision not to proceed with development of the MD-XX stretch of the MD-11. Boeing's acquisition of MDC, however, does eliminate the possibility of Airbus eventually collaborating with Douglas Aircraft and would appear to limit the European consortium's options in seeking a US partner for projects like the A3XX to Lockheed Martin and Northrop Grumman.
As a major subcontractor to Boeing on the 747, 757 and 767, Northrop Grumman's ability to co-operate with Airbus would appear to be extremely limited, while Lockheed Martin has so far shied away from re-involvement in the commercial-airliner market. That said, the USgiant is courting the Airbus partners as collaborators on its New Large Aircraft (NLA) programme to develop a military tanker/transport and commercial freighter, in a bid to kill off the European Future Large Aircraft as competitor for its C-130J. The NLA would compete against future military and civil derivatives of MDC's C-17.
Boeing plans to operate its commercial-aircraft business from Seattle, and the eventual fate of the current Douglas product-line is not yet clear. Stonecipher says that market forces will drive the decision. "We intend to continue the lines of products that we currently have going at Douglas. We will continue to sell those product lines and it will really be the marketplace that will decide on which of those aircraft sold of the ones that are being produced," he says. A critical decision in the marketplace will be whether Delta Air Lines opts for any MD-90s in a big competition it has under way with the airframers to replenish large portions of its fleet.
MD-80s and -90s are still being produced, although the MD-80 line has almost dried up. Some MD-80/90s may yet be sold as a result of both the Airbus A320 and Boeing 737 lines reaching capacity. Boeing could also sell the MD-80/90 line to China, which produces the aircraft under licence.
Most attention has focused at the opposite ends of Douglas' product range - the MD-11 and MD-95. While MDC has only about 20 orders in hand for the MD-11, the aircraft is selling well as a freighter, and Boeing may elect to continue manufacture of the cargo variant in order to shift valuable resources from production of the rival 747-400 freighter.
The fate of the MD-95 is more problematic. The aircraft is a better 100-seater than the 737, but does not fit in with Boeing's current concept of enabling customers to operate a range of aircraft with similar cockpits. MDC also has only one customer for the MD-95 - and ValuJet Airlines is unlikely to be as large as was envisaged when its 50-aircraft order was placed.
Prospects for MD-95 sales could increase considerably with the merger, however, with Boeing's ownership giving airlines greater confidence in the long-term viability of the aircraft. Boeing itself has proved reluctant to enter the 100-seat market, preferring instead to offer the larger 737, but with the 737 production line approaching capacity, the MD-95 could prove a useful product to offer - although the planned MD-95-50 stretch is certain to be dropped.
Airliner sales will be focused through a single entity. "My expectation is that we will end up with a single marketing organisation, and the goal will be to best serve the needs of the customer," says Condit. His comment acknowledges that there are a large number of airlines operating McDonnell Douglas products that could be interested in the MD-95.
Boeing has already tapped into the engineering capacity available at Douglas after cancellation of the MD-XX, and disposal of the slow-selling twinjet line, other than the MD-95, would free manufacturing capacity at Long Beach. The company could then consider transferring some production to California. The recent decision to re-engineer the production lines at Everett and Renton has introduced unprecedented flexibility into the manufacturing process. It is likely that Boeing will take advantage of this to provide more room for production of the next-generation 737. This could involve moving all, or part, of the 757 line as well as, possibly, some parts of the 767. The latter would free space for the expanded 777 and planned 747-500/600 lines.
Boeing's challenge now is to consolidate the Rockwell and MDC mergers to achieve the savings which will make the acquisitions worthwhile. Lockheed Martin alluded to the challenge when it wished the Boeing and MDC well - the company has unrivalled experience following Martin Marietta's acquisition of GE Aerospace, its merger with Lockheed and subsequent acquisition of Loral.
A combined transition team has been formed to handle the consolidation task, which includes finding savings of up to $1 billion a year - most of which will come initially from combining some marketing and administration activities. The team is not exactly starting from scratch. Some at Boeing and MDC began theorising on how to combine their businesses in 1993, when the idea of a merger was first broached. The concept was revisited more seriously in 1995, but stumbled on price issues.
Much of the speed, and apparent ease, with which the merger has been agreed this time round appears to be based on the people involved. Condit and Stonecipher are personal friends. Condit has a reputation for taking a long-term view of business. Stonecipher is described as an excellent salesman. Condit does not expect the merger to fall foul of anti-trust concerns. "We believe that, dramatically [the programme] are complementary. There are overlaps, but they are very minor. So we think that ...anti-trust is not going to be a big issue."
Source: Flight International
