Graham Warwick/ST LOUIS
THE PRICE is not yet right for McDonnell Douglas (MDC) president Harry Stonecipher. While MDC has yet to participate in the consolidation frenzy which has taken US industry in its grip, the company is looking for acquisitions, but Stonecipher appears to be unwilling to pay the premium prices attached to recent transactions.
"I don't know how to pay a 30% premium and still make money. We have a very solid balance sheet which I do not want to disturb," he says. Stonecipher, who sees no signs that the premium is coming down, says: "I like the joint-venture approach better. You do not get into the premium," perhaps hinting at MDC's future direction.
Since Stonecipher took over as MDC president in September 1994, he has seen Lockheed merge with Martin Marietta and acquire Loral's non-space activities; Northrop acquire first Grumman, then Westinghouse's defence-electronics interests; Raytheon acquire E-Systems; and, most recently, Boe- ing agree to acquire Rockwell's aerospace and defence businesses.
Consolidation has built Lockheed Martin into the industry leader, with an estimated $27 billion in annual sales. Boeing's Rockwell acquisition will boost revenues to around $25.5 billion, and widen the gulf between it and third-ranked MDC to more than $10 billion. Yet Stonecipher does not feel under pressure to follow suit.
"We do not feel threatened by the consolidation. We still find we can win if we keep our costs down," he says, citing MDC's recent successes in the Pentagon's Joint Direct Attack Munition (JDAM), Joint Air-to-Surface Stand-off Missile (JASSM) and Northrop T-38 avionics-upgrade competitions. "If you are only doing these things to be bigger, that's not necessarily going to be better," he says.
"There is no pressure on our stock to make acquisitions - quite the reverse," Stonecipher says, pulling out a graph charting a rise in stock price which is far steeper than that achieved by any of MDC's rivals. The company's stock value rose by nearly 500% between January 1993 and December 1995, outperforming the US aerospace-industry average of just over 200%.
Although MDC has yet to get involved in the consolidation, Stonecipher sees the process continuing. "Fundamentally, we are about half over," he believes, adding: "I think there is a lot further to go unless there is a dramatic change." MDC recently appears ready to play its part: Stonecipher has been quoted as saying that the company could handle a $5-6 billion acquisition. "I do not think it is a bad idea," he emphasises. "There is a lot to be gained by buying some of these properties. E-Systems would have been delightful, but we were asleep," he says, while admitting that MDC might not have been willing to pay the premium Raytheon did for the defence-electronics firm.
DEFENCE IS BUSINESS
Despite the consolidation going on around it, MDC remains one of the largest US defence contractors - and the largest manufacturer of military aircraft. "We are in the defence business because we want to be in the defence business," Stonecipher emphasises. He dismisses rumours of plans to sell MDC's helicopters and missiles operations. "They are two of the most profitable businesses in MDC," he says.
"If we sell them, we get cash, we have to pay tax, and we earn 4-5% on what's left. We do not need the cash; we're buying back shares as it is," he says. MDC's missiles unit in particular, badly hit by the loss of Tomahawk cruise-missile business to Hughes, has bounced back strongly, winning first the JDAM production programme and following that with one of two JASSM development contracts.
MDC's broadly based military-aircraft business is at the core of its continued strength, and particularly the prospect that the C-17 transport, F-15 and F-18 fighters, AH-64 attack helicopter, T-45 trainer and AV-8B short-take-off/vertical-landing attack aircraft will remain in production for some time to come.
"The lines will continue to run," predicts Stonecipher. "The AH-64 Apache will be there if the Boeing Sikorsky RAH-66 Comanche is delayed; the F-15 will be there if the Lockheed Martin/Boeing F-22 is delayed," he says, noting the potential for further international sales of both aircraft. The F-15E is back in production to meet Israeli, Saudi and US requirements for more than 110 aircraft, and MDC recently signed a $1.9 billion multi-year contract to remanufacture some 230 US Army Apaches to AH-64D standard - having already sold almost 100 aircraft to the Netherlands and the UK.
"The F-18 is the backbone of the US Navy carrier fleet," Stonecipher says. Production of the current F-18C/D continues and the Navy plans to buy up to 1,000 of the upgraded F-18E/F now under development. "The T-45 is too expensive to be just a trainer. It has great lead-in fighter potential," he argues. MDC is offering the T-45 to meet an Australian lead-in fighter requirement and sees the potential for other export sales. "The AV-8B will continue in production until it is replaced," he believes.
The planned replacement for the AV-8B is the Joint Strike Fighter (JSF). MDC leads one of three teams bidding for this potential 3,000-aircraft programme. Two will awarded concept-demonstration contracts, possibly as early as October, and only one will proceed into development. Stonecipher does not see the JSF down-selection precipitating another round of consolidation.
"All three competitors [Boeing, Lockheed Martin and MDC] are very strong. I do not see it [winning or losing JSF] affecting the companies involved," he says.
After turning around a troubled programme, and substantially reducing costs, MDC signed a $16.2 billion multi-year contract earlier this year to build a further 80 C-17s for the US Air Force. "We are very happy with the contract, very happy with the aircraft's performance - and the customer is very happy," Stonecipher enthuses. "We are looking forward to expanding sales of the C-17. We think there is a foreign market, and a limited commercial market - just to carry outsize cargo," he believes.
MDC has approached the US Federal Aviation Administration to begin civil certification of an MD-17 commercial derivative of the C-17. "We are prepared to certificate the C-17 if there is a market," Stonecipher says, acknowledging that the cost of the aircraft would have to be reduced by deleting unnecessary capabilities from the aircraft.
"They are small changes. We would not have to sell many aircraft to pay for them," he maintains.
"We have not yet decided to certificate the C-17, but we're talking to customers," says Stonecipher. MDC is "talking partnerships" with possible users of the MD-17. "We want to keep control of the aircraft until we see how the market develops," he explains, with MDC proposing revenue-sharing agreements with potential operators of the aircraft.
The MD-17 will not compete with the MD-11 freighter, he believes, because "-the C-17 flies half as far, carries less, costs $20-40 million more -but it can do jobs no other aircraft can."
MD-XX MARKET TEST
A successor to the MD-11 is the "hottest topic" within MDC's commercial-aircraft business, Stonecipher says, with discussions under way with airlines interested in the proposed MD-XX tri-jet. This stretched, rewinged MD-11 derivative is being offered as a Boeing 747-200/300 replacement and as a rival to the Airbus A340 and the Boeing 777.
Stonecipher says that MDC is "testing the market" for the MD-XX, collecting "expressions of interest" from airlines. "The market will tell us if we go ahead or not. We like the responses so far," he says. MDC has yet to offer the MD-XX formally for airlines, but is planning a go-ahead decision early in 1997 - "around the first of the year", says Stonecipher.
"The MD-XX, if and when it is launched, will be a McDonnell Douglas product," he emphasises, describing the MD-95 100-seat twinjet now under development at MDC's Douglas Aircraft division as "a Douglas product". He explains: "McDonnell Douglas used to run divisions as free-standing companies. Now everyone working in the Phantom Works, the military-transport business, here in senior management are very aware of the MD-XX." It is perhaps the biggest change at MDC since Stonecipher took over.
Douglas is now headed by Mike Sears, who managed the F-18 programme at McDonnell Douglas in St Louis and who has taken his experience with F-18E/F development and manufacturing processes to Long Beach, Stonecipher says. David Swain, general manager of MDC's Phantom Works advanced-technology centre at St Louis, has assembled a team "...to make sure the cost is right and the performance is right," he says.
If it goes ahead, the MD-XX will follow the MD-95 into production at Long Beach and replace the MD-11 on the assembly line. Stonecipher is bullish about the MD-95, despite the uncertainly surrounding the future of launch customer ValuJet Airlines - so far the only announced customer for the 100-seat aircraft, with 50 on order and 50 on option.
"We are accelerating through ValuJet," Stonecipher maintains. "The MD-95 is the right aircraft. It is the right size. Everybody is trying to get down to 100 seats, testimony that it is the right size aircraft for the market," he believes. "We will stretch the aircraft," he predicts, referring to an MD-95-50 with some 30 more seats and which would be developed concurrently with the MD-XX.
Development of the MD-XX is likely to involve risk-sharing partners, as does the MD-95 programme, but for different reasons. "We will have partnerships, similar to the MD-95," Stonecipher confirms, adding: "We did not have the money to do the MD-95, so we had to have partnerships. Now we will do it for market penetration."
If the MD-XX does not go ahead, then MDC has a "couple" of other commercial-aircraft projects it will pursue, Stonecipher says, without being specific.
If the tri-jet programme goes ahead, then these projects will be delayed. They are unlikely to involve the production of a 200-seater, however. "There are too many 200-passenger aircraft already," he believes.o
Stonecipher: "We still find we can win if we keep our costs down"
"If you are only doing these things to be bigger, that's not necessarily going to be better."
Source: Flight International
