Should Lockheed Be Saved?

THE U.S. Government is being confronted with a major and difficult question of principle--and practice--involving the nation's way of doing business. Lockheed Aircraft Corp., the biggest defense contractor, is in a deep cash crisis, and it is looking to Uncle Sam for a bailout. The company wants Congress to authorize an unprecedented federal guarantee of a $250 million loan to save its wholly commercial L-1011 plane, a medium-range "airbus" designed to carry 250 passengers. If Congress refuses, the company's management warns that Lockheed will skid into bankruptcy, upsetting a business empire that employs 75,000 people in 26 states. This would add to the unemployment rolls, particularly in California, and dim President Nixon's chances of carrying the state in 1972.

The Nixon Administration has made a command decision to save Lockheed. Having sent to Congress a bill to authorize the loan guarantee, President Nixon has assigned Treasury Secretary John Connally, a relentless persuader, to lead a hard-sell campaign on Capitol Hill. Hearings on the issue are scheduled to begin June 7, and there will be many dramatic confrontations before the final vote is taken, probably at the end of July. At the moment, a slim majority in Congress appears to favor the guarantee, though with much reluctance. As a price for it, California Senator Alan Cranston, a Democrat, demands the firing of Lockheed's chairman, president and board of directors. Indeed, Lockheed Chairman Daniel Haughton told TIME Correspondent Jerry Hannifin last week that he is willing to step down. Said

Haughton: "The management is more interested in Lockheed's survival than in any jobs, and that starts with me."

Expensive Burial. Haughton and other Lockheed chiefs argue that failure to back the loan for the three-engine L-1011 TriStar would be an economic disaster. Without this support, they say, most of the $1.49 billion already invested in the plane will be lost. Subcontractors have already spent $350 million on it, and the airlines have advanced $240 million in progress payments. Lockheed has poured in $900 million, including $400 million in loans from a consortium of 24 banks led by California's Bank of America and Manhattan's Bankers Trust.

Connally contends that it would cost more to bury Lockheed than to sustain it. Without giving specifics, Administration officials maintain that if Lockheed fails they will have to renegotiate some of its defense contracts with other producers, and probably be forced to pay more. In trying to find precedents for helping Lockheed, Connally mentions the Reconstruction Finance Corp., which made loans to troubled but solvent companies from Depression days through 1953. Yet these loans were limited to $500,000, and theoretically they were available to all firms, not only those with special clout. In asking for help now, Lockheed has noted that in 1967 the Government guaranteed a $75 million credit for Douglas Aircraft before it merged with McDonnell, but this money was specifically earmarked for defense work and not a commercial venture. As Lockheed, in its widely distributed position paper, says of its own request:

"There is no full precedent for this."

Should Lockheed get special treatment? Surprisingly, there is little support in the aerospace industry, except from Lockheed itself, for the loan guarantee. Lockheed's rivals resent the Government's supporting a company that they believe has been grossly mismanaged--a high-cost, undercapitalized producer. Aerojet-General President Jack H. Vollbrecht contends that help for Lockheed would mean that "if you fail big enough, you don't fail."

Lockheed has also built up a reservoir of ill feeling in the industry because many rivals believe that it has often used abrasive competitive tactics. It has a reputation for "buying in" on Government projects, bidding unrealistically low on the assumption that once the contract was landed, the costs could be renegotiated upward. On Lockheed's C-5A military transport alone, the Government has laid out an extra $1.3 billion to pay for "cost overruns." Still, Lockheed last year managed to lose money on the C-5A and three other major military contracts.

Bad Judgment. On the L-1011 project, Lockheed's top managers contend that they have been victimized by events beyond their control. They had contracted with Britain's famed Rolls-Royce to build the plane's engines; at the time, Rolls-Royce greatly underbid its American rivals for the award, and the deal was widely thought to be a coup for both companies. But Rolls-Royce also had done some "buying in," and when development costs jumped far beyond estimates, the company fell into bankruptcy. After months of negotiations, the British government agreed to spend up to $312 million to complete the engine's development and get it into production. Lockheed consented to buy 555 engines and increased its purchasing price for each one by $180,000, to about $1 million. To ensure that Lockheed would remain in business as a customer, Britain also demanded that the U.S. Government guarantee the company's bank loans.

Rival aerospace men now argue that Lockheed judged badly in choosing a foreign producer to develop a complex new engine at an unrealistic price. Moreover, in the view of many American businessmen, the British government failed to make enough of an effort to honor foreign commitments after the company went bankrupt and the government took over. As a result, the prestige of British industry in the U.S. has been hurt more than is generally recognized. U.S. engine makers believe that a loan guarantee would be an undeserved rescue of Rolls-Royce as well as of Lockheed.

Delivery Delays. In any event, it is doubtful that the L-1011 will ever be profitable. Increased engine costs will boost its price to customers by at least $540,000. In 1968, during the early developmental stages of the plane, Lockheed's price for TriStar was $15 million; inflation and the Rolls debacle have kicked the price skyward. TWA reports that it expects to pay slightly more than $18 million for the airbus. The estimated price for a strikingly similar new plane, the McDonnell Douglas DC-10, will probably be at least several hundred thousand dollars less. Lockheed must sell an estimated 350 of its big planes to recoup its development costs; so far it has orders for 178. Meanwhile, Boeing has completed the design for a stubbier version of its 747, called the 727X. If the Lockheed plane is shot down, Boeing may move into the medium-range market to compete against McDonnell Douglas' DC-10.

Lockheed has managed to hold its customers despite the delays and price rises, partly because they have already sunk so much into the L-1011. Should it be scrubbed, they would be among the losers. Eastern has put up $68 million, Delta $34 million. TWA, which has advanced more than $100 million to Lockheed, might be forced into a merger. Unpalatable as the prospect seems, it could prove a benefit to TWA, which last year suffered losses of $64 million. One or more mergers would ease the profit pressures in the stiflingly crowded and overly competitive airline business.

Props and Privilege. Despite Lockheed's dire predictions, it is by no means certain that the company will "go down the tubes" unless Congress votes the loan guarantee for the L-1011. Whatever the bankers say now, they may agree to put up more money rather than let their investments evaporate. Even if Lockheed is pushed into bankruptcy, much will be salvaged. Court-appointed trustees would take over the company; they would probably seek a merger or sell some or all of Lockheed's several profitable divisions to more efficient and affluent contractors. Except for the L-1011, almost every major project would survive. Lockheed had assets of $1.3 billion in 1969; they are less today and would be diluted further in any liquidation, but a part would ultimately trickle back to the bankers and airlines that have advanced money to the company. Shareholders would be at the end of the line and stand to collect little if anything, but those are the risks of capitalism. Avco, Sperry Rand, United Aircraft and other subcontractors, which have invested much to tool up for the L-1011, would also get little from the liquidation. But some might win new orders as a result of the expanded demand for the McDonnell Douglas DC-10 or Boeing 727X. Few of the suppliers are so weak that they would go under.

The hardest-hit victims would be the 9,700 workers employed on the L-1011 project at Lockheed's Burbank and Palmdale plants. Many have already been hurt because work on the L-1011 has been cut back by 50% since the Rolls-Royce collapse; some would get jobs at the McDonnell Douglas plant in nearby Long Beach, where the DC-10 is being built. There would likely be more hiring by Boeing as well as McDonnell Douglas, and by their U.S. engine makers, Pratt & Whitney and General Electric. Thus, while a failure of the L-1011 would cause unemployment to rise in parts of Southern California, it would create more jobs in other sorely pressed areas from Connecticut to Washington State.

Most important, a Government guarantee of a loan to rescue Lockheed could have some dangerous complications in the future. The Government would set a precedent of propping up a poorly managed company at the expense of its more efficient rivals, giving Lockheed and Rolls-Royce special competitive privileges in markets that may well be better --and more cheaply--served by McDonnell Douglas, Boeing, General Electric and Pratt & Whitney. By contending that Lockheed is too important to be allowed to fail as the result of a commercial project, the Government gives itself vast new powers to determine just which firms are "important" enough to survive. Should military contractors be given precedence over civilian companies? Should big firms be favored over small? For an Administration that champions free enterprise, there is yet another question: How deeply can the Government intrude in the marketplace without bending the whole system out of shape?

This file is automatically generated by a robot program, so reader's discretion is required.