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Sunday, July 19, 1992 - Page updated at 12:00 AM

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Taiwan's Rebuff Leaves Mcdonnell Douglas Scrambling

St. Louis Post-Dispatch

The collapse of McDonnell Douglas Corp.'s deal with Taiwanese investors has put the future of the company's commercial-aircraft business in jeopardy once again.

Taiwan Aerospace Corp., a partnership of Taiwan's government and private industry, agreed in November to invest up to $2 billion in McDonnell's Douglas Aircraft division. McDonnell officials need the infusion of cash to get their planned $5 billion MD-12 jumbo jet off the ground and to vault Douglas into the race against larger rivals Boeing Co. and Airbus Industries.

After months of prolonged negotiations, Taiwan Aerospace last month backed out of the agreement. Instead, the Taiwanese said they would be willing to buy 20 MD-12s and would do that only if McDonnell can find buyers elsewhere for 30 more planes.

Jilted by the Taiwanese, McDonnell executives are scrambling to revive the marriage. It won't be easy.

All airliner manufacturers, including Boeing and Airbus, are suffering in the current recession. Bankruptcies and fare wars mean cash-strapped airlines are not ordering many new jets. Worse, they are even canceling and delaying previous commitments.

With no Taiwan deal and no ability to develop new planes, McDonnell's long-term future in the commercial aircraft business "is certainly in doubt," said Jack Modzelewski, aerospace analyst at PaineWebber, a New York investment firm. "This is an industry that requires new products."

The commercial business has become increasingly important to McDonnell. As the nation's largest military contractor, it has been counting on commercial aircraft to lead its future growth as military spending declines.

Company officials insist they are still talking with Taiwanese investors, even though their original deadline of Jan. 31 to complete the transaction has long since passed.

"I remain personally convinced we will successfully negotiate a mutually satisfactory agreement with investors in Taiwan," Douglas President Robert Hood recently wrote employees in a letter.

McDonnell is paying the price on Wall Street for its inability to close the Taiwan deal. The company's stock price has fallen sharply since it reached a high of $80.50 last November in anticipation of the Taiwanese agreement. After hitting a low of $36.37 on June 26, the stock has rebounded slightly.

The company got a significant boost late last month when it reached a $1 billion agreement to jointly make 40 airliners in China beginning in 1995. That deal could grow to a total of 170 planes and add billions more to McDonnell's coffers.

"The Chinese deal may keep them alive for a while," said Paul Turk, an aviation analyst and consultant.

Meanwhile, company officials are chopping more jobs and cutting other expenses in response to the downturn. Hood announced plans to lay off 4,000 to 5,000 more workers this year. That is in addition to 1,650 workers who received layoff notices in recent weeks. And the company intends to close its fabrication center in Torrance, Calif., which employs about 2,000 people. Since mid-1990, employment at the company has declined by 17,000 people to about 36,000.

Without Taiwan, McDonnell would have only two choices. It could find new partners; or it could squeeze whatever profits it can from the aircraft it already makes - the MD-80 and MD-90 twin-engine jets and the MD-11 jumbo tri-jet - and then eventually exit the business.

If airline officials begin to think McDonnell may leave the business, the company could face problems much worse than the industry slump, aviation analyst Turk cautions.

"When Lockheed had trouble with the L-1011, customers went running every other direction," Turk said.

Hood said the corporation remains committed to the commercial-aircraft business. McDonnell "has weathered previous downturns in our industry and we are prepared to weather this one as well," he wrote workers. ". . . The industry will come back and we will come back with it."

Copyright (c) 1992 Seattle Times Company, All Rights Reserved.

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