McDonnell Douglas Corp., the nation's largest defense company and No. 2 airplane maker, yesterday unveiled its plans for pulling the company out of its financial nose dive, saying it would eliminate 14,000 to 17,000 jobs by the end of the year and slash budgets for travel, consultants and capital expenditures to reduce costs by more than $700 million a year.
The vast majority of the job cuts will occur in Southern California and St. Louis. About 80 jobs in the Washington area will be affected, including 41 at the McDonnell Douglas Electronics Systems Co. in McLean, about 24 jobs at the Washington office in Crystal City and the remainder in about a dozen small program offices in the area.
Company officials said the cuts assume that McDonnell Douglas will maintain its current level of military business. Should Congress reduce purchases of McDonnell Douglas cargo aircraft or attack jets, as some expect, further layoffs in the company's 135,000-person work force could be required, they said.
The move was the latest in a series of dramatic changes that McDonnell Douglas has enacted over the past year in an attempt to shift more of the company's resources from the declining defense business to the booming commercial aerospace arena. But it was far less radical than the rumors that swept Wall Street last Friday involving the resignation of Chairman John F. McDonnell, a bankruptcy filing or a purchase of the company by Mitsubishi.
The Mitsubishi rumor caused McDonnell Douglas's stock price to rise on Friday, and today's denial caused share prices to drop $2.50, closing at $42.37 1/2. Although none of the rumors appeared to have any substance, analysts said the seriousness with which they were taken reflected the depth of concern among investors about McDonnell Douglas's difficulties to adjust to a rapidly changing marketplace.
Last year, McDonnell Douglas lost $37 million from continuing operations, compared with a profit of $372 million the year before. (For various accounting reasons, the company was able to post a net profit for the year.) So far this year, operating earnings have improved: During the first quarter, the company lost $11 million on its continuing operations, compared with a $33 million operating loss for the first quarter of 1989.
Company officials noted that McDonnell Douglas still has a record backlog of $54 billion, including firm orders of about $22 billion for commercial transport aircraft.
But both its military and commercial programs have been plagued with cost problems.
Like other major military companies, McDonnell Douglas has been hurt by high development costs in military programs with fixed prices. Last month, the company said it faced "potentially serious cost problems" on its C-17 cargo jet program, the T-45 trainer and A-12 attack jet.
In addition, McDonnell Douglas's commercial transport division has been struggling. The MD-80, which has been in production for several years, has suffered from delays that resulted in millions of dollars in penalty payments last year.
McDonnell Douglas also said the company has lost money on the MD-80 because many of those still being delivered were priced a couple of years ago and the prices do not now cover the costs.
With yesterday's announcement, the company hopes to focus its resources on solving problems at the commercial operations and eventually reverse its business mix, from 60 percent military to 60 percent commercial.
At a news conference that was held in St. Louis, with hookups in Los Angeles and Washington, McDonnell, who is also chief executive officer, said, "We let our costs and overall staffing get out of control" on both the commercial and military sides of the business.
He said cuts would be across the board, and that no major product or lines of business would be eliminated.
McDonnell also acknowledged that the company "made some mistakes" in a controversial reorganization launched last year, when the company forced all managers at Douglas Aircraft Co., the transport aircraft facility in Long Beach, Calif., to reapply for their jobs, abruptly eliminated four layers of management and set up a team system for all employees. Morale plummeted, as did earnings at the division.
But McDonnell also said that the company's financial plight was due to its "unique position" of having a high number of new products all in the development phase where much money is being spent but little is coming in. He said that once the company moved past that phase, its operations would return to profitability.
For example, McDonnell said the company will have to invest $2 billion in the development of its new MD-11 passenger jet this year and will not see any revenue from the aircraft until it is certified and can be sold, which he expects to occur at the end of this year.