Lockheed's Lament

Though Lockheed Aircraft Corp. is the nation's biggest defense contractor, not a demonstrator was in sight at its annual meeting last week--for good reason. The meeting was held outside Los Angeles in a vacant helicopter hangar surrounded by a fence topped with barbed wire. Shareholders had to pass through four checkpoints manned by helmeted and pistol-packing guards. Company officials patrolled nearby rooftops, and two tow trucks and a fire truck were on hand in case of trouble. The 630 stockholders who attended, many of them present and former Lockheed employees, roundly applauded the management--despite Chairman Daniel J. Haughton's report that the company lost $32.6 million last year.

Lockheed's managers face an even more critical time in Congress, which must decide whether or not to use Government funds to tide the company over its severe financial troubles. Last week the House passed the Defense Department procurement bill for fiscal 1971, which included a $544.4 million allotment for Lockheed. The prospect of passage in the Senate's more hostile environment is far less certain when the bill comes up for debate early next month. Of Lockheed's allotment, $344.4 million represents progress payments on production of the giant C-5A military transport. The remaining $200 million is called "contingency funding" by the Pentagon and "bailout money" by Lockheed's critics. Says Wisconsin Senator William Proxmire: "I don't think it is in the public or national interest to finance Lockheed."

Lockheed's money difficulties are as large as the aircraft that caused most of them, the C-5A. The company underestimated the expense of building the world's biggest airplane when it eagerly underbid Boeing to get the contract in 1965. Partly because of inflation, overrun costs totaled $1.1 billion. Lockheed's defense woes were compounded by some troubles with its contracts to build the Cheyenne helicopter, the motor for the SRAM (or short-range attack missile) and military ships. The Government has partially reimbursed Lockheed for some of its losses, but all together the four programs could conceivably wind up costing the company $1 billion.

Sand of Reality. As Lockheed sees it, the fault lies not in its own performance but in a system of Pentagon contracting called Total Package Procurement, or TPP, instituted under former Defense Secretary Robert McNamara. TPP was designed to end overrun claims by setting a strict ceiling on the final cost of any project. It penalized contractors who exceeded the ceilings but held out the reward of higher profits to those who reduced production costs. As Lockheed's costs overran the total package price, wrote Chairman Haughton in the company's annual report, "the gold of good intention turned into the sand of reality." Because of what he called "Government inflexibility" in enforcing the contract's terms, Lockheed might have to pay a $16,000-per-plane penalty for each day the C-5A is late in delivery.

At issue between Lockheed and the Pentagon now is the question of how many C-5As were ordered. The Air Force says 81. Lockheed holds that the Air Force is committed to 115, and has taken its case to the Armed Services Board of Contract Appeals. The difference amounts to nearly $700 million for Lockheed. The board, however, is unlikely to rule until next year.

Last March Chairman Haughton wrote to the Pentagon asking for $640 million in interim funds--that is, advance payments on problem contracts. The request assumed that the contract appeals board will rule in favor of Lockheed. Without the money, Haughton said, it would be "financially impossible" for the company to continue work on its money-losing defense programs. The Pentagon's reply was the proposal for the $200 million "contingency fund."

Subcontractor's Risks. There is considerable irony in Lockheed's woes. The C-5A is now performing above specifications, the Army wants to order an improved Cheyenne helicopter, and the SRAM missile motor is the most advanced of its kind. Lockheed has a $4.84 billion backlog of work. More than half of that amount is for commercial orders, chiefly the L-1011 Tri-Star "airbus," which is due to roll out next September. Lockheed, however, so far has only 173 orders for the L-lO11's transcontinental model, and none at all for a planned intercontinental version--not nearly enough to break even. It is sharing the risk under a tough contract with the L-1011's subcontractors. They will not be paid until the planes are delivered to airline customers, and will receive nothing at all if Lockheed cancels production. As Haughton put it at the annual meeting last week: "I am unable to tell you positively that the L-1011 will be a profitable project."

What is more predictable is that if the Senate does not approve the proposed "contingency funds" for Lockheed, the company will face a critical shortage of cash. It has already drawn $310 million of a $400 million line of credit--intended for development of the L-1011, and used $175 million of it on the contested military programs. If the Senate decides against further funds for Lockheed, the alternatives are either: 1) a shutdown of the C-5A, SRAM and Cheyenne production lines as well as Lockheed's shipyards; 2) a Government takeover of production in those four programs, or 3) a merger of Lockheed with another firm.

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