XIV

EXIT FROM THE AEROSPACE INDUSTRY

The expectation of economists that profitable periods would see entry into an industry and unprofitable ones would result in exits is roughly borne out with the aerospace companies. As shown in the last chapter, attempts at entry occurred mostly in the aerospace prosperity of the fifties. Curtiss-Wright left the industry at the end of the profitless forties, and Republic and Douglas collapsed in the troubled sixties and were absorbed by Fairchild and McDonnell. However, as will be seen, corporate crisis has been almost continuous among the aerospace firms since World War II, so these three exits could well have been coincidental in their timing.

BARRIERS TO EXIT

Of the exits, none were voluntary and two represented company failures. There must, then, be powerful barriers to exit. They are believed to be the highly specialized engineering and production technology of the industry. High quality and precision in construction do not fit civil needs for the most part, and they conflict with commercial demands for low cost. Finally, aerospace marketing skills are suited to sell to government agencies and not to business or consumers. The diversification struggles related in Chapter X covered the problems of exit except for corporate failure, the most common form of leaving the aerospace industry. Although it did not fail, Curtiss-Wright has never been the same since its exit from the business.

FADING AWAY: CURTISS-WRIGHT

Curtiss prepared for the post-World War II period by amassing large liquid reserves. In common with many able persons, its president, Guy Vaughn, expected the usual postwar depression. The company proceeded very cautiously with new designs, conserving its liquidity as much as it could. Curtiss failed to sell any of its postwar designs to the military, and its hopes for Commando airliner business faded when the AAF dumped its C-46's onto the used airplane market, where they flew on and on. None of its proposed new designs appealed to the airlines.

For a while the firm limped along on airframe subcontracting and modification work. Its engineer group declined in quality, and there were organizational convulsions. After the second one, Roy T. Hurley became president. A production expert from Ford, he had little use for a large design staff, and the engineering group was reduced to cut expenses. This was the execution order for Curtiss-Wright's airframe business, which was officially abandoned in 1950.

After leaving airframes Curtiss continued its policy of holding down engineering efforts on its remaining aircraft engine business. This enterprise, too, faded away. The company became an aerospace industry subcontractor, retaining some special fields such as instrumentation and the Wankel engine.

During and after Curtiss-Wright's decline and departure, other firms narrowly escaped exit through failure.

THE NARROW ESCAPES: MARTIN

Despite aggressive design and development, the Martin company achieved production for only small numbers of flying boats, all based on World War II types. Its postwar models appear to have been well done, but were narrowly bettered by other designs, military and commercial.

From 1947 to 1949 Martin was in crisis. The founder, Glenn Martin, stepped up to the position of chairman of the board; a new president, C. C. Pearson, was hired; and other management changes were made. The airliner projects, which had been draining cash, were shelved. Unable to get private credit, the company obtained a Reconstruction Finance Corporation loan of $28 million, which brought it through.

The firm made progress towards renewed financial health. Martin modified its airliner to make it more competitive. A conservative approach was followed to get business before committing funds, but the company still got into trouble with a combination of bad timing and managerial errors. It was committed to airliner production on fixed-price contracts when the Korean War inflation hit. At the same time military work increased. The expansion got out of control, and Martin's narrowly sufficient finances could not stand the strain.

In 1949 Martin had made the blunder of taking sides with the Navy in the B-36 controversy, an error which nearly ruined it in the new crisis, as relations with the Air Force were strained. A tactless error had been made earlier, during World War II, which may have been a factor as well. The Martin B-26 gained an unfavorable reputation with many pilots and had a high accident rate, earning the popular "record" of "a plane a day in Tampa Bay." At one of Senator Harry Truman's hearings in midwar, Glenn Martin made the mistake of telling the senator that the company refused to modify the plane. Truman said he would see that the plane was not bought. It was modified, but undoubtedly some ill will remained.¹

Now, in 1951, Martin appealed for government aid again. V-loans were obtained but not enough. RFC financing was the last resort, but the head of that agency was now Stuart Symington, who had been secretary of the Air Force at the time of the B-36 controversy. Symington denied Martin a loan, expressing his belief that the industry had too many firms in it. He also said Glenn Martin was senile and a bad risk. As it turned out, Martin got the loan because President Harry Truman overrode Symington, but a condition imposed by the lenders was the complete dismissal of Glenn Martin. George M. Bunker was brought in as president, serving from 1952 to 1972, and under him Martin diversified and did well. One potential corporate crisis loomed when Titan was in trouble: at the time, the Martin launch pad at Canaveral was called "The Inferiority Complex." George Bunker took over personal direction of the program, and as he made only some minor organizational changes it was probably his presence which restored efficiency.

THE LONG STRUGGLE: FAIRCHILD AND NORTHROP

Fairchild has not been so close to exit through failure as Martin, but it has had severe crises. When the Air Force abruptly gave the large-scale C-119 contract to Kaiser-Frazer it treated Fairchild shabbily. Fairchild employees resented it, of course, and there have been claims that some of them took reprisals by working carelessly on assistance for Kaiser. This probably accounts for the ill will between Fairchild and the Air Force in the fifties, and', in turn, was probably reflected in the firm's difficulty in selling to the airmen. It has been asserted that the cool relations account for the fact that the F-27 was not adopted as a military transport. Fairchild tried repeatedly to secure a follow-on transport of its Own design to the C-82 and C-119 tradition, which had been a breakthrough in military transport design. All it could get was production of the Chase-designed C-123, and the C-130 gave to Lockheed the dominance in tactical transports once held by Fairchild. Following the end of C-119 and C-123 production, Fairchild came closest to success with the F-27 airliner and the Goose guided missile. When the F-27 did not sell and the Goose was canceled, Fairchild. began a two-year crisis in 1958. A new president was named at that time, but he failed to improve things, and in 1960 Sherman Fairchild again took over temporarily. In 1961 Edward G. Uhl, an engineer, was named head. The actions he took included the sacking of executives, a cost reduction campaign, and a switch from product diversification to technical diversification. Uhl asserted that the basic problem was a weak engineering staff, and Republic was acquired to help strengthen Fairchild in this area.² By 1966 Fairchild was strong enough to bid for the Douglas Company. Sales trebled and earnings doubled, although there was a heavy loss in 1968 as Fairchild's 228 jetliner follow-on to the F-27 was written off with a loss of over $30 million. Uhl has sought mostly missile and space work but is still interested in aircraft, and in 1973 Fairchild won the A-X attack plane competition with its A-10.

As the first important transport for forward areas to embody design features desired by the military, the piston engine C-119 gave Fairchild the promise of a secure market niche. Trouble with the Air Force over the Kaiser-Frazer contract for building C-119's and the advent of the excellent propjet C-130 gave Lockheed this market. Courtesy Fairchild Industries, Inc.

Northrop's problems have been similar to Fairchild's. Its first postwar crisis came in 1947, when its proposed airliner did not sell; and the Air Force canceled its flying-wing bombers in 1949, probably because of the technical success of the longer-ranged B-36. An RFC loan kept Northrop going until its F-89 was accepted for production, but when the F-89 and Snark were terminated, Northrop was at another critical juncture. It diversified and finally prospered in the sixties.

The repeated near-exits by failure of Fairchild and Northrop represent points of progressive deterioration of their status in the industry. From full competitors of the larger giants, they have been forced to diversification and to peripheral status in order to survive among the design giants of the aerospace industry.

THREE-TIME LOSER: GENERAL DYNAMICS

Convair got into trouble in 1947 and nearly exited through failure in the same way as Martin. Convair lacked military production and airliner sales, and development costs on the commercial transport were high. Into this crisis stepped Floyd OdIum, who acquired a controlling interest. He had acted before to revive faltering firms, but what he found after acquisition was a sieler company than he had expected. Convair's cost management had been ineffective and losses were greater than OdIum had believed. Production of the Convair 240 was grossly inefficient, with a costly habit of continuing an incomplete aircraft down the assembly line to be finished later, which often meant teardown to install missing parts. OdIum raised cash by a stock sale and by borrowing from banks. He also tried to gain financial strength through merger with North American and then Northrop. Management was overhauled, production improved, and cost controls instituted. Yet the only thing that saved Convair was purchase of the B-36 by the Air Force.

Incredibly, when General Dynamics got into trouble with its 880/990, two of the 1947 mistakes were repeated: one was the lack of cost control and the other was running incomplete aircraft off the assembly line. This company crisis was studied in some depth by Richard Austin Smith.³ But he has not noted a peculiar state of mind that existed at the time: early in the 880/990 program, a General Dynamics spokesman said that there was only room for two manufacturers of jetliners, but he failed to give a rationale for the company's late start against the competition of Boeing and Douglas under such circumstances.⁴ It appears that General Dynamics knew better but went ahead regardless. Recovery from the 880/990 crisis was long and difficult; the heavy losses severely taxed the company even though it was by then a giant conglomerate. Probably, it was saved only by the cash flow from its large government contracts and from its cement business.

General Dynamics' third major difficulty arose from shipbuilding losses, $119 million from the Quincy shipyards, which had been acquired for the company by Roger Lewis. Again there had been inadequate control of costs. Perhaps more disturbing, General Dynamics had developed a great advance in business equipment, called Datagraphix, but had bungled the commercial opportunity it presented. This marketing blunder is an excellent example of one of the difficulties aerospace firms encounter in exiting to commercial business.

SUDDEN DEATH: REPUBLIC AND DOUGLAS

Republic's crisis broke suddenly with contract termination of the F-105, but it had long been brewing. Republic had staked its future on gaining the F-111 contract, and when it lost that competition it was left with nothing immediately to follow the F-105. The company had been unable to break out of its one-product status, partly because its overhead costs made it uncompetitive. Republic's demise, then, is not in any way peculiar to its being in the aerospace industry.

Douglas' corporate death also has aspects characteristic of general business situations. Because of its former dominant position in airliners, Douglas had once been the soundest aerospace maker. Its peak in sales was reached in 1958. Thereafter came the crisis over development costs of the DC-8, near-complete collapse of Douglas' government business, and the final catastrophe of 1966. What happened?

Corporate crisis arises from a complex of long-developing causes, according to the reasonable observation of Richard Austin Smith in his book Corporations in Crisis. Therefore the selection of any point in time to begin the story of Douglas' collapse is arbitrary. Yet the circumstances of the DC-8 decision, already related, indicate that the early fifties was the time when important events took place which bear on the ultimate crisis of 1966. The DC-8 was given the final go-ahead in 1955. The lag behind Boeing, the inability of Douglas to improve on the 707, and the problem of financing the DC-8 all created large and continuing problems. The early and middle fifties also were the period of the fateful decision by Donald Douglas, Sr., not to enter into avionics. The step was belatedly taken in 1961.

In 1957, in midstream on the DC-8 project when Douglas engineers were taxed harder than on any previous design, aging Donald, Sr., attempted to turn the company over to his forty-year-old son, Donald, Jr. The senior Douglas had been an autocrat whose rules were so detailed that they included restrictions on coffee-drinking by company scientists and engineers. His top managerial group had consisted of a relatively stable group. of around ten vice presidents. When control was turned over, the older Douglas kept veto power, and he soon returned to work full time because of unexpected new company difficulties which arose.

The younger Douglas was also an autocrat, but he was less cost-conscious than his father. His principal preparation for the top job had been the position of vice president for military sales from 1950 to 1957, and there was widespread resentment over his accession, which he never overcame. Morale declined and stayed low enough to be apparent to outsiders.

In 1959 Douglas' net losses, before taxes, of over $68 million were incurred because of development and production costs on the DC-8, which was not moving down the learning curve as rapidly as expected. Plans for the DC-9 were shelved and company salaries cut. Key engineers for both government and civil business departed in 1960. The final results for 1960 were another disaster with a loss before taxes of over $40 million. Douglas' main hope for future government business, Skybolt, was lagging behind schedule, and two project managers for it were fired within a year's time. A complete managerial overhaul was undertaken in 1961; by the next year a total of fourteen former top executives had left the company since 1958 in firings, resignations, and retirements. A. V. Leslie, a financial expert, was brought into the company as vice president for finance, but he was never made privy to key company finances, right up to the 1966 collapse.

Skybolt was canceled in 1963 after five straight test failures, and the major contracts left were for Heinemann's perennial A-4, Genie, the Saturn third stage, Sparrow, and Thor. The same year Douglas took the hazardous step of going ahead with the DC-9, although it did not have orders in hand. For financing, Douglas entered into cost-sharing with its DC-9 subcontractors. By the end of 1965 Douglas had lost many bid competitions on government jobs. The company's overall record in the preceding decade is shown in Table XIV-I.

Dividends were skipped for four years. Then suddenly the business outlook brightened. The DC-9 received its certificate in November 1965, and airliner sales zoomed. Douglas began to look for engineers and workers, and employment doubled in 1965 to almost 30,000 and then grew to about 35,000 by October 1966. This was achieved by accepting low quality workers, as employees who had been let go in previous cutbacks refused to return. Problems resulted, including expensive training and .a high turnover. The firm had expected to hire 25,000 in order to increase its work force by a net 20,000, but found that a tight labor market forced it to hire 31,000 instead. Shortages and delays in the arrival of purchased components added to difficulties created by the need to spread middle management thin to help subcontractors with their many problems. Critics asserted that Douglas' policies had created an array of DC-9 subcontractors with low capability, and that the capital-poor company had been forced to impose such business terms that only firms desperate for sales had come in on the DC-9 program.

Sudden demand for the Douglas DC-9 led to the production and financial crisis which proved to be fatal for the company. The DC-9 had been designed to create the short-range jetliner market segment. Courtesy McDonnell Douglas Corporation.

TABLE XIV-l

SALES AND PROFITS FOR DOUGLAS, 1956-1965

Fiscal Year	Sales (X 000,000)	Profit (Loss) Before Taxes (X 000,000)
1956	$1,075	$72
1957	1,093	66
1958	1,210	38
1959	887	(68)
1960	1,175	(40)
1961	795	12
1962	757	20
1963	702	24
1964	654	26
1965	775	25

The delays were partly a result of the Vietnam War. Douglas' principal business and interest was in commercial aircraft, and this had a lower priority in the industry than military production. A major problem was late delivery of engines. As early as the spring of 1966, Douglas was two and a half months late on the delivery of DC-9's. In October twenty airplanes were late, and the company was falling further behind. Production was complicated by variations in designs: from one basic DC-8, the firm jumped to three stretched DC-8 and three basic DC-9 models, plus cargo versions of each. Airliner interiors offered 800 items with choices in color and finish. This excessive variety had been promised in an effort to bolster sales in the period before the boom began. Another difficulty was that Douglas clung to a single assembly line for too long, and its changeover to three lines caused more disruption than it would have if it had been done earlier. The production problems were aggravated by a a lack of information and control, despite a mushrooming growth in paperwork in the production departments. In August 1966 management consultants were hired to develop controls and to help on cost determination, and later it was found that DC-8 and DC-9 production costs had jumped 48 percent by June 1966.

All the problems outlined above strained Douglas' finances, which had never been strong since the DC-8 development. An indication of the cash demands was the growth in inventory from $368 million in late 1965 to $719 million a year later. Douglas was also forced to support its subcontractors financially. When Menasco Manufacturing had trouble delivering landing gears, Douglas set up a second supplier, Nordskog, at the expense of $500,000 in tooling and materials. It assumed obligations worth $35 million for De Havilland of Canada in return for tooling, inventories, and the lease of a plant. In the push for airliner sales Douglas had granted overly generous financing' terms. In June 1966, Douglas first sought additional financing with a $75 million debenture issue. The size of the issue shows that Douglas did not realize the extent of the company's problems. There could be no doubt by August. A pretax loss of $33 million was reported for the previous quarter. In November the company sought to borrow $100 million from eight banks, and an application was made for government guarantee on $75 million of it which was eligible for a V-loan. The government granted the guarantee, but the banks had lost confidence in the Douglases. Douglas engaged investment bankers to help, but the company's reputation was now too low to raise equity funds. The bankers believed Douglas needed $400 million more for eighteen months, and that a merger was the only solution, a merger with a company with the managerial depth to take over Douglas at all levels. The companies interested in merger were General Dynamics, North American, McDonnell, Martin, Fairchild, and Signal Oil and Gas. Lockheed and Chrysler rejected overtures. All of the candidates but McDonnell and Signal were eliminated because they were unable or unwilling to put up the funds required. Signal lacked the management resources needed. So it was McDonnell that took over, and Douglas, once the leading aerospace company and the dominant airliner manufacturer, exited from the industry through failure.

TOTAL PACKAGE FAILURE: LOCKHEED

Lockheed's first major crisis was brought about by the Electra's failure in 1960. The problem never became as severe as Douglas' because Lockheed's government business remained high. Exit from the industry was only a remote possibility. But Lockheed's second crisis was unique and spectacular. First, it represents the nightmare of diversification, simultaneous disaster in different fields: military aircraft, commercial transports, and shipbuilding. Second, it represents the failure of the Total Package Procurement Concept, in which Lockheed had most of the contracts. Third, the bankruptcy of a coalition company, Rolls Royce, precipitated a domino effect on Lockheed. Fourth, the affair was a general surprise.

Until the C-5A scandal Lockheed was considered to have outstandingly imaginative and competent management. Among those who were highly impressed was the McNamara group. In the fifties and early sixties Lockheed had produced some exceptional airframes: the F-104, U-2, A-11, P-3, C-130, C-141, as well as the Polaris missile and Agena Space vehicle. Suddenly, with the next wave of designs, the C-5A, Cheyenne, and L-1011, nearly everything seemed to go wrong. Technical problems in the C-5A and Cheyenne were never overcome. Managerial inefficiencies surfaced with the C-5A, and prompt corrective action was taken. Despite the presence of cost experts, cost nearly got out of hand: some top executive turnover resulted, as well as giant transfusions of cash, including the $250 million government loan guarantee. What had happened to cause the dramatic reversal in performance? It can be only speculation, but excessive overconfidence in its ability to solve technical problems could have resulted from Lockheed's spectacular earlier successes. Also, management may have become overextended as the company grew from about 75,000 employees in 1964, early in the C-5A program, to over 97,000 in the problem year of 1969. Too, the rapid growth in net facilities, which trebled in the same period from $115 to $338 million, may reflect government-inspired overexpansion with resultant inefficiencies. Such overcapacity would make any cutback problems more severe than normal. What Lockheed cannot be faulted for is the circumstance that it held several huge contracts at an unfortunate time: when government willingness to underwrite unexpected costs was greatly reduced.

TALE OF THE TOMCAT: GRUMMAN

Grumman may also have been a victim of the same overconfidence and of the Total Package Procurement Concept when the costs of its F-14 Tomcat outran Navy willingness to pay, precipitating a company crisis. When the Navy version of the F-111 was canceled, Grumman won the contract for its replacement, the F-14 Tomcat. But other business dwindled, and when the Navy refused to pay for the cost overruns of the F-14 and technical problems arose, Grumman entered a crisis. As with Douglas and Lockheed, the government felt compelled to render financial assistance. By 1973 Grumman and the Navy concluded an "advance payment pool agreement" wherein the company could draw on Navy funds for the F-14 and ten other projects. This is the first time advance payments had been given to a top contractor. Grumman paid 6.875 percent interest on these monies, and the Navy instituted common lender controls: restrictions on dividends, property disposition rules, and limits on the salaries of key officials. At the end of 1973 the Navy loans totaled $54 million, and the advance payment device had forestalled collapse. Grumman's is the most recent incident in a long series of aerospace firm crises since World War II. These crises are summed up in Figure V. Two significant facts emerge. First, in only six out of twenty-eight years since World War II was no giant aerospace company in trouble. This is a dismal record. Second, the leading precipitating factors in the crises were failure to get government business, and the unevenness of the demand for airliners.

FIGURE V AIRFRAME COMPANY CRISES

CONTRACT ROTATION

These results appear to contradict the popular notion of contract rotation, or contract roulette, in which the government is said to spread its business around to all firms. Such a policy would mean that the basis for winning a bid was a lack of business, which would not be an economic or efficient procedure. And it is one which would make "military-industrial complex" sound as though it were collusion. In 1972 Frederic M. Scherer told the Senate that this was Air Force policy in the fifties, implying that it was not before or since.⁵ Stekler says the policy was never "clearly articulated or consistently pursued."⁶ One difficulty in determining the existence of such an unwritten policy is that there are excellent reasons for awarding a 'contract to a firm which lacks business: (1) such a company has the capacity to efficiently complete a project, in contrast to an organization that must impose a new order into existing business, which is likely to entail excessive marginal costs; (2) if used judiciously the policy would promote competition; and (3) it may be useful in maintaining mobilization capacity. If these justifications have been used they have not been primary bases for awarding contracts, as is shown by the frequency with which a lack of government business has contributed to corporate crisis. Certainly Curtiss-Wright, Douglas, Fairchild, Martin, and Republic would argue against the existence of contract rotation as a government policy, since they have conspicuously not been beneficiaries of it.

Exit from the aerospace industry through failure is all too easy.