The life of the defense contractor is anything but simple. The future is subject to the prevailing political winds.Millions of dollars are spent designing and building a product that hopefully is seldom used for its intended purpose.
But after some recent years made difficult by adverse publicity arising out of scandal and the problems faced by a defense contractor in transition -- Fairchild Industries Inc., through an agressive diversification program, seems headed for continuing prosperity in the coming decade and a balance sheet that may not be dependent on the unpredictable defense game.
Looming on the company's horizon in 1983, however, is the predicament that periodically faces any major armaments producer; the end of a contract. In this case, it's the end of a series of contracts calling for the construction of 733 A-10 close-airsupport aircraft for the U.S. Air Force, contracts that total just under $3 billion for the Germantown-based company and by themselves made Fairchild the nation's 20th largest defense contractor in fiscal 1978.
Fairchild is trying to develop a new version of the A-10 that will expand its capabilities to include night and bad-weather work. But in an effort to lessen the impact of the transition period betwen major defense contracts, Fairchild decided in 1972 to broaden its base, a move that came at a time when the company's prospects were less than certain. In fact, Fairchild lost $2.2 million in 1973. "They were struggling with the uncertainty of what to do next," said one stock analyst. "They were practically starving to death."
What Fairchild did next was:
Develop the profitable A-10.
Revamp Swearingen Aviation Corp., a struggling San Antonio, Tex., manufacturer of commercial airplanes purchased by Fairchild in 1971.
Expand its production of popular, lightweight airplane seats at another subsidiary.
Secure subcontracts to build major parts of the Boeing's 747 and 757.
Move into what is expected to become a profitable satellite communications market.
And the formula seems to be working. The company reported 1978 profits of $24.5 million on sales of $543 million compared with 1977 profits of only $9.6 million. This year, the company easily will surpass $30 million in profits, having reported nine-month earnings of more than $28 million on sales of about $521 million.
"As we close the Seventies, we are expecting to hit $700 million in sales," President John Dealy said in an interview last week. "Four or five years ago you're talking about a $200-million-a-year company.
"In 1972 we decided we'd like to develop into a balanced business, rooted in the technology we're familiar with," Dealy said. "In order to maintain earnings growth, we did not want to be totally dependent on any one program."
As Dealy noted, the diversification was necessary to lessen the company's dependence on government contracts, thus building a broader base for a major expansion. "It is clear that in the 1980s size alone is important in business," Dealy said, pointing out the advantages of size and diversity in the advertising, equipment and management sides of the business. "It takes a certain size just to put the ingredients together," he added.
And Fairchild's new commercial business was designed to lessen the company's dependence on particularly cyclical industries. "In our business, it was possible at times to go from a high level of employment to zero," Dealy said. "Government is a one-customer market. Politics change and needs change, so a business can get severely whipped."
In addition, Dealy pointed out that "all industries move in different phases." Commercial aviation, for instance, moves on a different cycle than contracting with the government. "When the economy is in a recession, government business can be very strong," Dealy said. "Government can use a recession to get some work done."
But the company also has had its problems with the federal government. Just this year, the company and its chairman, Edward G. Uhl, were acquitted on charges of filing false income tax returns in connection with a political campaign fund. In addition, Fairchild was implicated in the scandals in the mid-1970s involving former Rep. Robert Sikes of Florida, who was reprimanded by the House of Representatives for holding Fairchild stock worth more than $5,000 while voting for defense approrpriations legislation that benefited the company.
But watchers of defense industries have been reporting than in light of the Iranian crisis and the Carter administration's announcement last week of plans to hike the defense budget, companies with a toehold in the defense industry could be in for prosperous time. "Fairchild has attracted a lot of attention lately," said a local analyst.
Yet, with the A-10 contract basically in hand through 1983, the company's growth is also dependent on the somewhat uncertain future of the space shuttle, a program in which Fairchild has a limited stake -- up to $30 million a year -- as a result of its production of parts for the project.
But Fairchild's growth is expected to be even more dependent in the short run on its commercial business, with a growing share of company sales based on nongovernment work. By 1983, Dealy expects Fairchild to show sales of $400 million to $500 million in nongovernment work. Just three years ago, Fairchild reported commerical sales of only $65 million, although that figure nearly doubled in 1978.
Of particular importance is the commercial aviation industry through Swearingen, its communications subsidiary, American Satellite Corp., and Fairchild-Burns Co., another subsidiary that has become a leading producer. of airline seats.
And Fairchild has acquired 20 percent of Bunker Ramo Corp., an Illinois computer and technology firm and has made other offers to increase its share of the company. But those offers require the approval of the Bunker Ramo board, which has rejected them. Fairchild's hopes to expand holdings in Bunker Ramo seem to be on hold. "Bunker Ramo seems to have told them to jump in a lake," said an analyst.
But the acquisition of Swearingen has been a significant Fairchild success story, and Swearingen's contribution to the company's profits was second only to the A-10. The airplane firm, which according to one expert is "making money hand over fist" is now producing seven planes a month, a rate that will increase to 12 by the end of 1981. The Texas plant produces two lines of turboprop aircraft, Metros and Merlins, for corporate clients.
Metros, which seat 19, are said to be the most successful turboprop commuter aircraft produced in the country, with an impressive share of that market. In fact, commercial aircraft are expected to represent about $80 million of Fairchild's sales this year, a significant portion of the company's 1979 growth. With the growth of cummuter airlines in recent years, Metros are now operated by 33 lines worldwide and four charter operators.
When the Federal Communications Commission opened up competition in the satellite cummunications field seven years ago, Fairchild jumped right in, seeing the development of what is expected to be a thriving market in the future. The company is a partner with Western Union in three satellites and earlier this year entered into a joint venture with Continental Telephone Corp. -- the nation's third largest independent telephone company -- that will provide American Satellite with resources to expand both its network of 44 earth stations and its list of 150 commerical clients.
"We are the first company that is actually delivering this kind of communication service," Dealy said, also noting that the "business developed more slowly than anyone anticipated."
Furthermore a stock analyst who is an expert in Fairchild's operations believes that the $100 million the company has invested in the satellite business indicates that the company "bit off more than they can chew" and that when a company like Fairchild enters into competition with the nation's communications giants, it "is out of its league." But that same expert points out that the fact that Fairchild is "grandfathered" in to a slot in the space market is of "very high value."
Dealy and others believe the era when American Satellite and other similar firms realize the value of satellite investment is in the years ahead. "The long-term value of American Satellite is somewhat akin to owning an NBC television station in 1959," Dealy said. "I think that in the world of communications, the 1980s will be very striking in space."
Ultimately, despite charting a course that lessens its dependence on the federal defense contract market, Dealy recognizes that the company's hopes for the future are to a major extent tied to the nation's defense posture. And he maintains that the public's increasing awareness of the importance of national defense is good for the country and good for his company.
"Look back on the way people reacted to Vietnam and now look at how people are reacting to a different incident," he said.
"Now there is an increasing national outcry that we are helpless. Our presence around the world is diminished and our bluffs have been called. The nation has wound up in a situation where you can't have it both ways. The use of force is something a country should do very judiciously. I know about force having grown up in the streets of New York City," he added.
Dealy, 40, who is supports passage of the SALT treaty, says the treaty and the debate revolving around it have raised the national consciousness about defense issues. "Fairchild's position depends on the realities of the defense industry," he said.