Mcdonnell Focuses On Commercial Jets -- New CEO Changing Jet Maker's Priorities
Bloomberg Business News
ST. LOUIS - In his first six weeks on the job, Harry Stonecipher was an aircraft builder's dream.
McDonnell Douglas Corp.'s new chief executive made five trips to Washington, D.C., visited the company's commercial-aircraft operation in California and met with Fred Smith, chairman and chief executive of Memphis-based Federal Express.
His meeting with Smith, whose fast-growing overnight document and package delivery business has a fleet of 469 aircraft, reflects a hands-on approach key to McDonnell Douglas' future. Reviving the commercial jet business, one of Stonecipher's priorities, is crucial as the nation's No. 2 defense contractor faces more cuts in military spending around the world.
"This business runs on personal relationships," said Stonecipher, who also has spoken with AMR Corp. Chairman Robert Crandall since joining McDonnell Douglas on Sept. 26. "The CEOs of airlines make the airplane (buying) decisions."
Stonecipher is visiting airlines to assure CEOs that Douglas Aircraft Co., McDonnell Douglas' commercial jet-making arm, isn't going out of business. The company's market share has dwindled in the face of The Boeing Co.'s continuing strength and a challenge from European aircraft maker Airbus Industrie.
Douglas, which had 12 percent of the world's commercial jet deliveries in the first half of 1994, expects to deliver about 40 airplanes this year, half of 1993's deliveries and one-third the 126 delivered in 1992.
The ups and downs of the aerospace business are familiar to 58-year-old Stonecipher, who headed aircraft parts maker Sundstrand Corp. from 1987 until McDonnell Douglas Chairman John McDonnell chose him for his new job. Stonecipher began his career in 1961 at aircraft engine maker General Electric Co., moving up the ranks to head the large jet engine division.
Although some question the wisdom of eking profit from Douglas at low production rates, Stonecipher thinks Douglas can wrest market share from Airbus and Boeing. Airbus had 21 percent of first-half 1994 deliveries while Boeing had 58 percent.
"Douglas has made great strides," he said.
Layoffs and production changes have brought production costs to historically low levels. The MD-11 trijet takes 131 days to assemble, down from 174 days at the end of 1992. And Stonecipher has confidence in the cost-efficient MD-80 and the quiet MD-90, which he hopes to market as the "environmentally correct plane."
Then there's the proposed MD-95, a 100-seat passenger jet expected to be marketed to regional airlines. The airplane, which McDonnell Douglas hasn't officially decided to build, would be an updated version of its popular DC-9, introduced in 1965.
Stonecipher plans to beef up marketing and build on customer loyalty. Users of Douglas aircraft generally give them high marks - about 700 to 800 DC-9s, for example, are still in use around the world.
"We'll get back a lot of market share by telling customers who loved us all those years that we love them," Stonecipher said during an interview in his corner office overlooking part of McDonnell Douglas' sprawling complex in St. Louis.
A series of missteps at Douglas, including poor performance by the MD-11 trijet after it was introduced eight months late in 1990, caused some Douglas customers to buy competitors' airplanes "out of necessity," Stonecipher said.
"We didn't supply what they wanted when they wanted," he said.
A limited product line will continue to plague Douglas, said CS First Boston analyst Peter Aseritis. But Long Beach, Calif.-based Douglas can compete well in the niches it serves - the MD-11 trijet's 350-seat market, the 150-seat midrange market for the MD-80 and MD-90 twin jets, and the 100-seat market that would be served by the MD-95, the analyst said.
"The returns in this business can be pretty good," Aseritis said. "They've got their cost structure down. If the market comes back, they can be highly profitable. They have products people will fly."
Commercial jets become more important as McDonnell Douglas prepares for additional reductions in military spending at home and abroad. In recent years, sales to international customers helped offset lower U.S. defense budgets, but most large purchases by foreign governments are complete.
Investors seem to think Stonecipher's plans for McDonnell Douglas are realistic. The company's stock is trading in the $138 range, up about 21 percent since Stonecipher was appointed.
Part of the gain stems from a decision Oct. 28 to raise the quarterly dividend 71 percent, repurchase about 15 percent of outstanding shares and implement a 3-for-1 stock split.
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