The Defense Department is moving toward cancellation of a multimillion-dollar contract with Fairchild Industries Inc. for an Air Force jet trainer airplane, in part because of doubts about the troubled company's future.
Defense Department officials yesterday acknowledged that Deputy Secretary of Defense William H. Taft IV had approved an Air Force proposal to cancel Fairchild's production of the T46A jet trainer, which some financial analysts had viewed as one of the company's most promising long-term investments.
The revelation comes just one week after the Air Force announced it was halving the monthly $8 million payments it made to Fairchild's Long Island subsidiary, Fairchild Republic Co., for production of the jet and spare parts for other aircraft. The Air Force said it would reduce payments until Fairchild corrected "numerous management and production deficiencies" and improved the "unsatisfactory rating" that the plant received in all production areas.
The Pentagon's proposed cancellation of the T46A has been tentatively approved by the Defense Resources Board, a panel of top civilian and uniformed officials who decide budget and policy issues. The decision will be reassessed in other meetings on the fiscal 1987 budget by DRB and could be reversed. It also could be changed by Congress, which must approve the budget.
Fairchild said that it expects to retain the contract but that, if the contract is canceled, the company might benefit in the short run.
The Air Force proposed the cancellation as a way to reduce its budget. A Defense Department official said the Air Force made its decision after finding technical problems in the jet and "sloppy management" at Fairchild Republic. Additionally, the official said, the Air Force was concerned about the company's future because of its growing financial troubles.
If the Defense Resources Board and Congress ultimately go along with the Air Force recommendation, financial analysts said yesterday that there would be even more red ink on Fairchild's already troubled financial statement. The company reported an $82.3 million loss for its second quarter.
"It would hurt a company that is already bleeding," said Morton Langer, a financial analyst with Bear Stearns & Co. "It would open a deeper wound than the company already has," he added.
However, analysts said that the cancellation would not be fatal to Fairchild, the 11th-largest company in the Washington area.
"It would be a very painful blow, but not a fatal one," said Wolfgang Demisch of First Boston. "The company is not going to dry up and blow away without the T46A. Fairchild has a half billion dollars of other businesses," Demisch added, noting that aircraft manufacturing represents less than half of the company's revenue, which totaled $899 million last year, and significantly less than half of the $1.4 million in profits during 1984.
Fairchild, in a brief statement yesterday, said that cancellation would have a positive effect in the short run, considering that the company has just set aside $49 million in reserves to cover expected losses in the T46A program. "If the program were ended . . . it would have a positive effect on Fairchild Industries in the next two to three years because we would reduce spending and recover some reserves established on the program."
But, Fairchild acknowledged, "in the longer term, beyond 1988, the program, if continued, would be a good cash producer." Fairchild has anticipated receiving $1.5 billion from the Air Force for 60 jet trainers and an additional $2.5 billion in foreign sales.
"That's the kind of business you'd hate to go down the chute," said Demisch, who added that cancellation would reduce further the attractiveness of the company as an investment. Fairchild stock yesterday dropped by 25 cents a share to $9.875 a share.
Fairchild and financial analysts said they were confident, however, that the company will be able to retain the T46A contract.
"This is a very preliminary decision and has a long way to go," said Langer. "By the time it goes through Congress, it will come down on the side of practical and political considerations. And the practical consideration is that the Air Force needs the trainer." The only trainer it now has is the 30-year-old Cessna T37.
Politically, Langer added, "the company has some very strong backing in Long Island," particularly Rep. Joseph P. Addabbo (D-N.Y.), who is chairman of the House appropriations subcommittee on defense.
Addabbo was unavailable for comment, but his spokesman, Ira Mehlman, said the congressman is "going to do everything he can to try to preserve it because the subsidiary is a New York-based company, neighboring his congressional district. He will want to see what the Air Force reasons are, to see if they are valid. If unworthy, he will certainly go to bat for them Fairchild ."
Rep. Thomas J. Downey (D-N.Y.), whose Long Island district includes the Fairchild plant, said yesterday he was confident that the contract will remain. "In the 11 years I have been in Congress, I have seen weapon systems come and stay. I have never seen them come and go. . . . I don't think this is a problem."
Defense Department officials, however, said the agency was braced to fight the opposition on Capitol Hill.