An Offer of Costly Salvation

Under normal circumstances, the offer that the British government made to Lockheed Aircraft Corp. last week would sound like something to be turned down flat. But the circumstances were very far from normal. As operator of the now nationalized Rolls-Royce Ltd., the government proposed to deliver engines to Lockheed, six to 18 months late, the early models less powerful than Lockheed wanted, at a price perhaps 40% higher than Lockheed had expected to pay. In addition, Lockheed would have to form a production partnership with the British government and share some development costs--which could be quite expensive.

A Price for Error. Lockheed Chairman Daniel Haughton thought that the proposal was impossible, but he was in no position to reject it out of hand. His company has sunk $1 billion into developing its 256-passenger TriStar jet, needs engines to power the plane, and has no chance of enforcing its contract with the old, bankrupt Rolls-Royce. Haughton will negotiate further in an effort to try to improve the proposed terms.

Prying the offer out of the British at all took some doing. When Rolls was nationalized, the ruling Tories threw out the Lockheed engine contract. The U.S. Government, determined to keep Lockheed alive as a defense contractor, applied heat to the British at the highest levels. Eventually, in negotiations with Lord Carrington, the Tory Defense Minister, and other British officials. Haughton got the costly offer to save the project.

The British government proposed formation of a new company, to be owned 50-50 by it and Lockheed, that would produce RB-211 engines for the TriStar. The partners would pledge by cross-warranty to carry on--the British to keep producing. Lockheed to keep buying. The government would immediately put $144 million into the new firm. That may sound good for Lockheed, as this figure is Haughton's own estimate of the money that will be required to complete development of the engines. But there is a catch: Lockheed would have to pay any further development costs--and British experts think that these could total another $144 million. More than that, the British warned Haughton that Lockheed would likely have to pay about $1.2 million to buy each engine v. the $840,000 specified in the original contract. Also, the first engines would be six months late in delivery, and they would have only 37,000 lbs. thrust. Delivery of engines with the full planned thrust of 42,000 Ibs. would be 18 months late. Moreover, Lockheed would have to waive the $120 million in penalties that it could have tried to collect for late delivery under the old contract.

Profitable Delay. Lockheed's customers and creditors are anxious to save the company because they have so much money tied up in the TriStar. Eastern Air Lines, TWA and Delta have advanced more than $200 million in down payments for the plane. The airlines were supposed to begin flying the TriStars this November, but their executives will be happy to wait. Burdened with overcapacity now, they figure that they will be able to report higher profits this year if they do not have to pay for an expensive new jet. If it accepts the British terms, Lockheed will probably have to charge the financially strained lines $16 million for each TriStar v. the roughly $15 million originally planned. Banks and insurance companies, which have supplied an estimated $1 billion to Lockheed, would surely have to lend it more.

Beyond negotiating a better deal with the British, Lockheed's choices are limited. It could switch to General Electric or Pratt & Whitney engines for the TriStar, but that, too, would mean delay and additional expense. The other visible alternatives are a shotgun merger or financial collapse.

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