AVIATION: Flying Low

The $11 billion-a-year aircraft-manufacturing industry, fifth biggest in the U.S., is troubled and worried. Despite enormous backlogs of orders, most companies feel insecure, not only about the future but also about the present. Warned United Aircraft’s Chairman H. M. (“Jack”) Horner: “All of our military business is in jeopardy.” What has put it in jeopardy is the change that missiles have brought to the industry. They not only promise the end of manned military bombers and fighters, but have brought such other lightning changes that huge projects, calling for hundreds of millions of dollars, can be made obsolete almost overnight. To meet the challenge, the plane-and enginemakers are well aware that their industry must undergo the fastest and most radical change in its history —or die.

Since 1957, Government budgeting for manned aircraft has slid from $8.4 billion to $6.6 billion; missile procurement soared from almost nothing a few years ago to $3.9 billion this year (see chart). Within five years, the split will be fifty-fifty.

Almost every dollar the U.S. commits to missiles is squeezed out of some plane program. All told, the U.S. will order only 1,500 planes this year compared with 1,760 last year. Next year the cuts will be bigger. Of the fabled Century series of supersonic fighters, the fiscal 1960 budget allocates not a penny for North American’s F-100 Super Sabre, McDonnell’s F101 Voodoo, Convair’s F-102, Lockheed’s 1,400-m.p.h. F-104 Starfighter or Convair’s F-106. Only one tactical plane is funded in the new budget: Republic’s supersonic F-105 fighter-bomber.

Woe on Wall Street. To exist in the new age of missiles, some planemakers have already drastically changed their companies. Some are still hustling to do so, and some face the grim prospect that they must either merge with a bigger company or shut up shop. The change has already begun to cut heavily into profits. The plane industry, said one broker sadly, is the “only industry in a recession.” In the first six months of this year, sales of the 15 largest aircraft companies slipped 5% and profits tumbled 45%. Among the giants, General Dynamics’ earnings dropped from $20 million to $11 million, Boeing’s from $20 million to $3,600,000. United Aircraft, one of the bluest chips in the industry, jolted investors by chopping its quarterly dividend from 75^ to 50¢, as first-half earnings fell from $22 million to $16 million. Douglas Aircraft, long a darling of Wall Street, landed with a bone-shaking loss of $15,009,920, will probably show a deficit for the year.

At current rates, aircraft profits will drop from $614 million last year to $350 million this year. Does an industry earning $350 million have cause for worry? “You buy stocks on the earnings outlook,” said one Wall Streeter, “and almost all the aircraft earnings will continue to nose down.” Compared with their 1959 highs, all aircraft stocks are well down. General Dynamics has dropped from 66½ to 48½, Martin from 62½ to 38¼, Douglas from 59¼ to 46, North American from 52⅝ to’ 37¼, Grumman from 30¼ to 24⅜. In the past fortnight, nine aircraft stocks scraped new 1959 lows. Among them: McDonnell, Bell, Temco, Northrop, United Aircraft.

Investors are worried not only about falling profits but also about the warning from Defense Secretary McElroy that heavy cutbacks are on the way, probably as much as $1.5 billion. For a middle-sized company that has most of its backlog tied up in a few contracts, such cutbacks can bbring it close to disaster. For example, Fairchild Engine was clobbered by the cancellation of its Goose missile and its J83 jet engine, is in critical condition. Chance Vought hit the canvas when the U.S. knocked out its Regulus missile and F8U fighter, is going through a painful reorganization.

Gone is the day when a company could win a contract for a new plane, confidently count on years of mass production—and stable profits. The new military planes in the future will be turned out in such small numbers that they will be virtually custom-made. One reason is that nuclear bombs make the new planes much more effective than old bombers; the other is that the bombers themselves are becoming so complex and costly that the U.S. cannot afford huge fleets. Each one of North American’s 2,000-m.p.h. B70 Valkyries will cost $175 million. Even at that fancy price, there is always the chance that some new project will come along so fast that it will obsolete the Valkyrie before it is really flown. Just to play safe, North American has plotted its future as if the U.S. will cancel out the Valkyrie as well as the 2,000-m.p.h. F108 interceptor, also abuilding. Says President John Leland (“Lee”) Atwood: “To do otherwise would be to take a needless and unwarranted chance.”

No Guarantees. To learn the new arts of supersonic flight, missiles and space probes, the planemakers have been obliged to spend enormous sums for research. This money has come out of their profits rather than, as often in the past, from the Government. United Aircraft has pumped more than $100 million into research and development in the past two years, plans to spend $60 million more this year and next. “We are willing to sacrifice our near-term earnings to assure long-term growth,” says Jack Horner.

Despite the heavy outpouring of cash, the aircraft industry has no guarantee that it will continue to win the bulk of the defense business. While missilery requires a whole new technology for the old-line plane builders, much of this technology, notably in electronics, is well known to giants such as RCA, General Electric, Westinghouse. Wherever the aircraftmakers turn, they find dozens of highly skilled competitors already in the field, and new ones coming in every day. The number of electronics companies, for example, has jumped from 100 to 2,000 in the last several years. Size alone is no guarantee that an aircraft company can compete against the flock of nimble newcomers. Said Douglas Aircraft’s President Donald Douglas Jr.: “The little guy can beat your head in with his flexibility and low overhead.”

Jet Losses. The planemakers are not yet making money on their commercial jets, although the jets have proved to be enormously profitable to the airlines. Boeing has delivered 55 of its 7075, has orders for 197 in all. But it still needs orders for 50 more before it can hope to turn a profit, is losing $500,000 to $750,000 on each one it delivers. Douglas Aircraft last week won FAA certification for its DC-8, which will be put in service this month by United and Delta airlines. Even though Douglas has 143 planes on order, it needs to turn out many more before it can make a profit on the liner. General Dynamics’ Convair Division has spent $57 million to develop its long-range jet 600 and shorter-range 880. But so far it has orders for only 79 of the planes, needs triple that—or more—to turn a profit. Lockheed spent $50 million to develop its turboprop Electra, and has orders for 178. But it needs to sell 100 to 200 more to break even. The planemakers are confident that they will sell all the planes they have to—and then some. But they are playing safe, in case they have guessed wrong. They have written off most—or all—of their heavy development costs so they will not be a burden in future years. If the planes are sold, profits will be fat. Lockheed’s Chairman Robert Gross pointed out that in 1946. when Lockheed began to sell its Constellation, the company set a sales goal of 135 Connies as the break-even point “and prayed for the best.” All told, Lockheed sold 856 Connies for more than $1.5 billion—and a fine profit.

The Fat. Paradoxically, the companies that were fattest with profitable commercial and defense projects when the missile buildup began have moved the slowest into the new art, largely because they were too busy.with the present to spend time and money on the future. United’s Horner candidly acknowledges that his company was in no rush to jump into rocket engines, because it had all it could do to keep ahead in the race to make better jets. “If we had gone into rockets, we might not have had our J-57-” said he, and the J-57, which powers almost all U.S. bombers and fighters, as well as the commercial jets, has been a big moneymaker. But now, United is spending heavily on rocket and nuclear engines and on dozens of other space projects to get out ahead in rockets as it was in jets.

The Thin. The swiftest and most profitable shift from planes to missiles was made by the Martin Co., simply because it had no choice. It was either that or go broke. When George Bunker, a corporate rescue expert, took over as boss in 1952, the company was deep in the hole (1951 loss: $22 million.). Bunker easily saw that Martin had no future in planemaking. He shifted into missiles and electronics, busily worked to get dozens of Government contracts that looked none too inviting to other companies, because the profit was less than on commercial business. Now Martin has contracts for six different missiles (including the surface-to-surface Mace and the Titan ICBM). more than any other company, making up a plump missile-and-electronics backlog of $600 million. Earnings, on the rise, are expected to hit $4.50 a share this year. Says Bunker: “We were either lucky or smart, and we don’t care which. We got in first, and now we’ve really got our arms around this thing.”

North American was also one of the companies to get in first, even though it held big contracts for its F-86 and F-100 fighters. It figured that the fighter might well be shelved by missiles, started right after World War II to get ready. Now, with its Rocketdyne Division making many of the big rocket engines and with a backlog of $758 million for projects running from nuclear reactors to the X-15 (the plane that is expected to be the first to fly into space), North American’s profits are on the upturn. They will rise from $26.8 million last year to $28 million in the fiscal year ending this month.

The other giants—Lockheed, Douglas, Boeing. General Dynamics, et al.—are hopeful that the worst is over. Even so, the future promises to be more Spartan than the past. The Government has issued ample warnings that it no longer will doctor ailing firms with contracts just to keep their facilities in shape for an emergency. In the missile age, the fight will be won by what is on the firing line and not, as in the past, by what could come off the assembly line.