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This Plane Isn't Taking Off

International -- American News: STRATEGIES


One year ago, Harry C. Stonecipher swept into the corner office of McDonnell Douglas Corp. What a change. Brash, decisive, and a passionate salesman, the 59-year-old chief executive seemed everything his genteel, brainy, and often ponderous predecessor, John F. McDonnell, wasn't. Stonecipher, the first nonfamily member to run the aerospace company in its 75-year history, quickly made his mark internally: He gives shop-floor pep talks, pens personalized newspaper ads, and started casual Fridays at the stodgy St. Louis (Mo.) headquarters.

Stonecipher, however, seems to be stumbling where it really counts: turning around McDonnell's beleaguered commercial airline division, Douglas Aircraft Co. Last spring, Scandinavian Airlines System scuttled a major order for McDonnell's proposed MD-95, instead inking a deal with Boeing Co. for 100-seat 737-600 jets. Then, on Sept. 19, news broke that negotiations for a major order of MD-95s with ValuJet were crumbling and that the Atlanta-based airline was warming instead to a bid from Airbus Industrie. The same day, McDonnell Douglas was compelled to issue a statement denying reports that its inability to secure orders for the MD-95 would force it to take on the Chinese government as an equity partner.

EARNINGS PLUNGE. Such woes have triggered new speculation that McDonnell may be forced to shut down its commercial jet business. In dozens of newspaper advertisements, Stonecipher has denied any plans to do so. But the company's 22% share of the commercial market five years ago has dwindled to just 9.8% today (chart). Since 1991, operating earnings at the unit have plummeted from $283 million to $47 million.

Commercial aircraft, moreover, contributed just one-third of McDonnell's $13.1 billion in 1994 revenue, dwarfed by sales of space and military equipment to the Pentagon, foreign military customers, and NASA. "If McDonnell Douglas hadn't had a profitable core of military sales, the company would have gone bankrupt a long time ago," says Wolfgang Demisch, an aerospace analyst with BT Securities Corp.

Stonecipher, who was unavailable for comment, has seen battle before. After heading General Electric Co.'s jet-engine business, he spent seven years turning around Sundstrand Corp., a maker of aerospace and industrial products that had been mired in a military contract-fraud mess. An enthusiastic hands-on manager, he's well known for taking over troubled projects personally--as he has with McDonnell's new C-17 military transport plane.

What Stonecipher has in his favor at McDonnell is a robust military business, which generates nearly $800 million in cash each year. That's more than enough to finance the launch of the MD-95. But industry observers say the company's decade-long commercial slide against such rivals as Boeing and Airbus, coupled with its inability to secure orders for the MD-95, signal that it could eventually be forced out of the market. "The MD-95 is the last program that could help [it] stay viable in the eyes of customers," says Nicholas Heymann, aerospace analyst with NatWest Securities Corp.

MAINTENANCE WOES. The launch of the MD-95, which will cost between $22 million and $23 million apiece, is crucial. The jet's basic design is based largely on McDonnell's venerable DC-9, but it boasts a new twin engine as well as a spruced-up nose and landing features. All that makes the plane an attractive complement to the reliable but gas-guzzling MD-80 jet.

Worldwide demand for MD-95-size planes is expected to exceed 800 by 2010, according to analysts. But McDonnell is competing with new products from Boeing, Airbus, Daimler Benz Aerospace's Fokker subsidiary, and Britain's Avro. Says Herbert J. Lanese, deputy president of McDonnell's Aerospace unit: "This is like the Olympic time trials."

Without stronger signs that McDonnell Douglas is a long-term player in the market, it's unlikely that many MD-95 orders will materialize. Customers justly will worry about plane maintenance, upgrades, and plummeting leasing values. Over the past five years, indeed, the market value of McDonnell Douglas' large, three-engine MD-11 has dropped 40%, analyst Heymann says, as rival aircraft makers have launched better-performing competing products.

For that reason, some analysts speculate, Stonecipher acknowledges the pressure for McDonnell Douglas to abandon its commercial business. But he also realizes that throwing in the towel completely could all but eliminate the current value of existing planes. The way the business is sinking, though, Stonecipher may have little left to lose.By Ron Stodghill II in St. Louis, Mo.

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