The Air Force cut in half yesterday its $8 million-a-month contract with Fairchild Republic Co. for production of spare parts for military aircraft and development of the new T46A jet trainer.
Citing "numerous management and production deficiencies" at the company's Long Island, N.Y., plant, the Air Force said its latest review of Fairchild's work "rated all areas unsatisfactory."
The Air Force said it was slashing Fairchild's monthly payments to $4 million "to foster satisfactory contractor performance."
If Fairchild's performance improves, full payments will resume, but the company will never recover the lost payments, a Fairchild spokesman said.
The announcement represented one more blow to Fairchild Industries Corp. of Chantilly, the parent of Fairchild Republic.
In the past few weeks, Fairchild Industries has been rocked by a series of financial problems, including an $82.3 million loss for the second quarter of the year.
The company's lenders have agreed to waive certain provisions in their loan agreements, apparently so the company can avoid defaulting on its loans.
This latest action will cause further problems, financial analysts said yesterday.
"This is a company with severe liquidity problems," said financial analyst Joe Campbell of Paine Webber Mitchell Hutchins. "Four million dollars a month hurts . . . . The Air Force must be either unaware of its impact or more upset with Fairchild than we thought," he said.
Fairchild officials, however, said "the action taken was not as severe as we originally thought it might be. We have a recovery action program in effect now, and expect to be able to restore full progress payments soon," a spokesman said.
But financial analysts said this may be the beginning of Fairchild's troubles, noting that there are reports that the Defense Department, trying to trim its budget, is considering canceling the T46A jet trainer.
The T46A, which Fairchild had expected to bring in about $4 billion in revenue over its lifetime, is already five months behind.
The first test flight, initially scheduled for April, is now due next month.
A Fairchild spokesman said the company was aware of reports of possible cancellation of the jet, "but we have received nothing official from the Air Force . . . . If it were to be canceled, revenues from other growing concerns would supplant it," the spokesman added.
The Air Force's announcement came just as the first T46A prototype was being airlifted from the Fairchild Republic plant in Long Island to Edwards Air Force Base in California in preparation for the testing.
In a statement, Air Force Secretary Verne Orr said, "We based the reduction on numerous management and production deficiencies we identified during" a June contractor operations review.
"The contractor has failed to comply with numerous contractural requirements in the production facility," the statement said.
"We expect to see a substantial improvement in Fairchild's internal management practices," Orr said, noting that Fairchild provided a corrective action plan to the Air Force earlier this month.
In addition to producing the T46A, Fairchild Republic also supplies spare parts for the A10A Thunderbolt attack aircraft and the giant Lockheed C5A transport and McDonnell Douglas F4 Phantom fighter.
Fairchild Industries -- the 11th-largest company in the Washington area last year -- already has set aside $49 million in reserves for losses in the T46A program.
It has also been plagued by problems in the production of its commercial 33-seat twin turboprop plane, called the Saab-Fairchild 340, and has written off $135 million in losses on this project, largely as a result of higher costs and lower-than-expected sales.
In what financial analysts said was a move to sell the company's crown jewels to pay for its troubles, Fairchild earlier this month announced the sale of its 50 percent stake in its two satellite communications subsidiaries, American Satellite Co. and Space Communications Co.