Costs of Lockheed Plane $300 Million Over Budget : Aerospace: The firm had planned to use parts from an older anti-submarine aircraft's design for its new P-7A. That didn't work.

By RALPH VARTABEDIAN

Nov. 18, 1989 12 AM PT

TIMES STAFF WRITER

Lockheed Corp. disclosed Friday that it will incur a massive $300-million cost overrun on development of the Navy P-7A submarine patrol aircraft and will charge the costs against profits in the fourth quarter.

The writeoff represents a 50% overrun, accumulated in only one year, on Lockheed’s $600-million fixed-price contract to design and develop the P-7A. Ultimately, production of 125 of the aircraft is expected to cost $4 billion to $5 billion.

The Calabasas-based aerospace firm said that it may lose money for all of 1989 as a result of the writeoff and that the $300 million is expected to cover all the anticipated problems on the program for the next several years.

Investors drove down the price of Lockheed shares by $2.25 Friday on news of the writeoff, and the stock closed on the New York Stock Exchange at $39.375.

Lockheed officials said the overrun occurred because the P-7 has less commonality than the company originally expected with its predecessor aircraft, the P-3, which Lockheed has produced for more than two decades. Both planes are designed for anti-submarine warfare and carry torpedoes, missiles and bombs.

“We can’t use as many P-3 parts in the P-7 as we originally thought,” Lockheed spokesman James Ragsdale said. “What looked at first to be a very high commonality of parts is turning out to be a very low commonality of parts.”

In a letter to employees Friday, Lockheed Vice President Bill Bernstein, the P-7 program manager, went even further, saying, “the P-7A is now viewed as an almost entirely new design.”

Navy and congressional officials were astounded by the disclosure. Lockheed Chairman Daniel M. Tellep met with Navy Secretary H. Lawrence Garrett on Thursday to reveal the extent of the problem. Congressional sources said the problems will delay the program by two years.

The Navy’s P-7 officials “only learned all the details this morning,” a Capitol Hill source said. “This is fast breaking, and a lot of questions remain to be answered.”

Problems in the development of aircraft are not unusual, but they usually involve electronics and flying characteristics, not basic assumptions about the metal structure.

Lockheed officials could not explain how they erred so greatly in their assessments, but congressional experts in Navy aircraft said the problem may have resulted from Lockheed’s lack of knowledge about its own aircraft design.

“The engineers who designed the P-3 30 years ago are long gone, and my sense is that Lockheed hasn’t built an aircraft in this class for a long time,” a Capitol Hill source said. “All Lockheed was doing toward the end of the P-3 program was assembling parts that other companies were fabricating. They just underestimated the task.”

Ragsdale said most of the commonality problems have resulted from the fact that the P-7 is substantially heavier and carries a larger payload than the P-3, requiring a stronger basic airframe. The P-7 will have a maximum gross takeoff weight of 156,600 pounds compared to the P-3’s 139,700 pounds. In addition, the P-7’s wings will be 10 feet longer than the P-3’s.

Lockheed employs 1,200 workers on the program, 900 of whom are in the Los Angeles area. A letter distributed to Lockheed employees Friday said, “Manpower assigned to this program will be adjusted,” which apparently means that layoffs are possible.

The layoffs might occur during a three- to five-month period when Lockheed and the Navy reassess the aircraft’s design and the program schedule. A revised schedule would apparently result.

The overrun makes clear why Tellep recently announced that Lockheed would no longer accept fixed-price development contracts, which shift all of the technical and financial risk from the government to a contractor when designing and developing a weapon system.

An aerospace industry official who formerly was in the Navy Department said he was not surprised by the Lockheed disclosure, since many Navy officials thought that Lockheed had “low-balled” its bid to the Navy in order to win the contract in 1988. Lockheed competed against Boeing and McDonnell Douglas for the contract.

“They bid low to get this program,” the official said. “The Navy will not exactly want to run in and bail out Lockheed. If the company is having problems with commonality, they should have figured that out before they bid.”

Aerospace analyst Wolfgang Demisch of UBS Securities in New York said he was not particularly surprised by the writeoff, since Lockheed had said in the third quarter that it was reporting financial results on the program at a “break-even” level.

“This is a classical example of getting into a competition where you come in with your best possible estimate, and then you look at the gory details later,” Demisch said. “But by then, you have already signed on the dotted line.”

Lockheed took a $165-million writeoff on two other aircraft in the third quarter, resulting in a $35-million net loss for the period. At the time, analysts said Lockheed’s earnings were falling below Wall Street expectations.

Lawrence Harris, analyst at the Los Angeles investment firm of Bateman Eichler, Hill Richards, said, “It represents a large overrun, particularly since the contract was won just last year.” Harris added that the writeoff, combined with other writeoffs and costs, will exert financial pressure on Lockheed “for some time to come.”

In the first nine months of 1989, Lockheed earnings from continuing operations were $108 million on sales of $6.6 billion. In the corresponding period of 1988, earnings from continuing operations were $333 million on sales of $7.2 billion.

Separately, a Lockheed spokesman acknowledged that the firm six weeks ago replaced the program manager on the P-7 and put Bernstein into the job.