Perils of a Planemaker

How will McDonnell Douglas Corp., the nation's largest defense contractor with 1978 sales of $4.13 billion, weather the troubles afflicting its DC-10? Investors are taking a gloomy view. Since the Chicago disaster, the company's stock has dropped from $28.25 to $20.88.

Before the accident, the planemaker was looking good. It had more than $750 million in cash and, after its slow start, its ten-year, $1 billion investment in the DC-10 was about to pay off. The company needs 400 sales of the $40 million plane to cover costs and start making profits. It has already delivered 281, received firm orders for 49, and taken options--which buyers could still cancel--for 50. Last year the Douglas commercial-plane side, which McDonnell had acquired in 1967, lost $60.3 million, mainly because of unrecovered DC-10 costs. This was more than offset by the pretax profit of $281 million earned by other departments, primarily the McDonnell military division, which makes the F-4 Phantom, F-15 Eagle and F-18A Hornet fighters.

But McDonnell Douglas will need every bit of its strength to remain healthy in face of the consequences of the Chicago crash. Its potential liabilities:

>Most of the heirs of the 275 victims will file lawsuits against McDonnell Douglas. Estimates put its potential payout at around $100 million. The greatest part of the damages would be covered by insurers, but the company itself would have to pay any punitive awards.

>Airlines flying the DC-10 are losing $5 million a day because of its decertification and grounding right at the start of the peak summer travel season. If the suspension goes on long enough, many may sue McDonnell Douglas, but, again, insurance would probably cover most of the bill.

>McDonnell Douglas would have to pay for any Government-ordered repairs. Each of the 275 planes in service has two potentially troublesome pylons, holding the wing engines, that might have to be replaced. Cost: $500,000 each. But more extensive design changes, for which the company probably has no insurance, could add to that $275 million bill.

>Airlines already flying DC-10s will not be deterred from buying more. Reason: switching to alternative models would cause a costly lack of common parts, service and training. Yet the DC-10's troubles could cause new buyers to steer away from the plane and thus delay its break-even. Worse still, in the highly unlikely event of a permanent grounding, McDonnell Douglas would not only be sued by airlines that have paid a total of about $10 billion for DC-10s but would also have to write off the plane's $574 million of unrecovered development costs, more than triple last year's after-tax earnings.

Almost certainly, McDonnell Douglas will survive the travail of the DC-10. At worst, James ("Old Mac") McDonnell, the company's octogenarian chairman, would close the Douglas division and face a few tough years. Alternatively, the Pentagon could step in with a Lockheed-type federal bailout to protect its No. 1 supplier, though that will probably not be necessary. Military officers who have long been dealing with the company agree on one thing: "Old Mac is probably madder than hell that he ever picked up Douglas."

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