The new high-bypass turbofan engines, which
launched the Boeing 747, also launched a parallel effort that proved
less ambitious but better-suited to the workaday needs of the nation's
domestic carriers. At American Airlines, the vice-president of
engineering, Frank Kolk, was responsible for determining what type of
equipment his airline would need and for working with the
manufacturers [319] to get it. When Juan Trippe ordered his 747s, in
April 1966, Kolk saw that this aircraft was far too large for his
market. He quickly took the initiative in recommending the development
of another new airliner, one that would offer wide-body comfort along
with the economy of the new turbofans. His plane, however, would be
intermediate in size between the earlier jets and the 747.
Kolk's initial concept was well suited to
American's route structure, which featured large numbers of flights
between New York and Chicago. Indeed, it was a little too well suited;
it lacked the size and performance that other airlines demanded. Kolk
held discussions with his counterparts at Eastern, TWA, United, and
Delta, and together they agreed that the new airliner was to have
three engines and a larger passenger capacity. These four carriers
along with American would be the initial customers, and Kolk and his
colleagues proceeded to develop a common set of requirements.
Two plane builders, Lockheed and McDonnell
Douglas, proceeded to craft designs. This, however, was no federal
competition for a contract, wherein one would win and the other would
lose; this was an exercise in free-market competition, in which both
firms had the opportunity to vie for success. The designs that
emerged, the DC-10 and L-1011, were highly similar in size,
performance, and general appearance, reflecting their compliance with
Kolk's specifications.
During 1966, Lockheed was matched with Boeing in
a federal competition that was the mirror image of the one in 1965.
That earlier bidding war had involved the C-5A; when Boeing lost, its
management immediately moved to pursue the 747. In 1966, the focus of
attention was the SST, with these same firms competing for the FAA
contract, and this time it was Boeing's turn to win. Lockheed's
president, Daniel Haughton, learned the news on the last day of the
year. Like his counterparts at Boeing, he immediately ordered that the
people who were working on the SST shift gears and turn their
attention to Kolk's airliner.
In aerospace design, small details can have
large consequences, and this would be true of the L-1011. This
airliner was to install one of its engines at the rear end of the
fuselage, receiving its air through a curving duct that ran beneath
the vertical fin. At the outset, Lockheed's engineers knew that they
needed a short engine to fit this installation. Neither General
Electric nor Pratt & Whitney had what they wanted, but a third player
was at hand: Britain's Rolls-Royce. That company had a design on paper
for a new engine, the RB-211, along with a very aggressive head of its
Aero Engine Department, David Huddie. Above all, he wanted to place
his company's engines within America's new generation of wide-body
jetliners. Rolls had never cracked the domestic market in America, the
world's most lucrative, but Huddie saw his opportunity in the L-1011.
He succeeded, and in return he later received knighthood from the
Queen.
By 1971, however, Lockheed's Dan Haughton was
finding that he had hatched some chickens that now were coming home to
roost. This had happened during 1965, when he had presided over his
company's bid for the C-5A. The company had needed the work quite
badly; if it had lost the contract, it would have had to shut down a
division in Georgia, a major operating arm. To guard against this,
Haughton had "bought in," submitting an unrealistically low bid of
$1.95 billion. Even the Air Force had estimated that $2.2 billion
would be more like it.
Then, amid escalation of both inflation and the
Vietnam War, the C-5A program encountered major strains and delays.
Costs went through the roof. By 1971, the Pentagon had budgeted $1.3
billion to cover Lockheed's share of the overrun. Though most of this
would be charged to the taxpayers, Lockheed would take its lumps as
well. Early in 1971, Haughton, now chairman, agreed to accept an
additional loss of $200 million. That wiped out a modest profit; it
even cut into the company's net worth. This news would not be welcome
at the annual meeting, but business was business, and this transaction
meant that Lockheed could begin to put the messiness of the C-5A
behind it.
Haughton executed the agreement, headed for the
airport, and flew to London to talk about the L-1011 with people from
Rolls-Royce. As he later put it, "For about fourteen hours I felt
good." Rolls had been buying in as well, and for the same reason: it
needed the business. Its 1968 contract with Lockheed had committed
Rolls to develop its turbofan, the RB-211, for a fixed price of $156
million and Lockheed to pay $840,000 for each engine. Rolls was also
pushing onto new ground. This became apparent as the development of
the RB-211 proceeded.
Rolls had been pioneering in the use of carbon
fiber, a strong and very lightweight material. In selling the RB-211,
a key point had been the firm's intention to build its fan of Hyfil, a
proprietary carbon-reinforced epoxy. Hyfil resembles plastics used in
today's tennis rackets, and its use in the three engines of an L-1011
stood to save 900 pounds of weight. Such fans must stand up to
collisions with seagulls in flight. Hyfil's merits would rest on its
ability to pass the chicken test. This involved a cannon that would
fire four-pound chicken carcasses at an engine operating at full speed
on a test stand. The blades broke under the impact, which meant that
these blades would have to use the conventional material, titanium.
Titanium was heavier than Hyfil, and this change marked a sharp
setback for the RB-211 program.
It was one of a number of problems that drove up
the program's cost. As this cost escalated, Rolls reported a loss of
$115 million for the first half of 1970. Its chairman, Sir Denning
Pearson, turned to the recently-elected Tory government of Prime
Minister Edward Heath. The Tories responded by offering a subsidy of
$100 million. Pearson, however, had failed to control his costs and
hence he would have to go; the firm would have a new chairman, Lord
Cole. His board members would include a representative of the
government, Ian Morrow, who specialized in healing sick companies.
Morrow soon arranged for an independent accounting firm, Cooper
Brothers, to audit Rolls' books.
There was ample opportunity for questions, for
Pearson had been using accounting practices that made bankers wince.
Since 1961, he had avoided debiting the expenses of jet-engine
development in the years they were incurred. Rather, he held them over
and debited them in subsequent years, as these engines reached their
customers. This practice amounted to prorating the development cost
against income from sales. In this fashion, Rolls had reported a
string of profits prior to 1970. Now it was difficult to know the
firm's total liabilities.
The Cooper audit even had difficulty in
estimating the cost of completing the development of the RB-211. The
1968 contract had specified $156 million. Early in 1971, it was at
least $408 million. In turn, Lockheed had contracted to pay $840,000
for each engine, a price that supposedly would allow Rolls to make a
profit. However, the bare-bones cost of production, even without
profit, would now be $1.1 million. In addition to this, Rolls would
deliver the engines late. As a consequence, it faced penalties for
late delivery of an additional $120 million.
All this meant that Rolls was well past the
point where an extra $100 million from the government, or even $200
million, could make a difference. Late in January 1971, Lord Cole
learned that he lacked the funds to proceed with the RB-211. His board
of directors promptly voted to place the entire company in
receivership. In a word, Rolls was bankrupt.
This would be very bad news for Haughton.
Britain's bankruptcy laws are far more stringent than those in the
United States. American law works to protect a company against its
creditors, shielding the firm against debts and legal claims while
seeking a reorganization that can open a path to profitability. In
Britain, however, creditors come first. A company is not permitted to
operate if it has no prospect of success. Rather, it must sell off its
assets and go out of business.
Though the Rolls-Royce board reached this
decision on January 26, it did not announce it publicly. A week later
Haughton, newly arrived at the Hilton Hotel, received a phone call
from Lord Cole of Rolls: Could they meet privately at the Grosvenor
House? Cole proceeded to tell him the news, which was both unexpected
and crushing. When other executives arrived, for a previously
scheduled luncheon, they found Haughton looking "as if he had got a
bullet between the eyes."
The bullet was aimed more at Lockheed than at
its chairman, for those engine intakes on the L-1011 now were all too
likely to suck the company into its own bankruptcy. There simply was
no easy alternative to the Rolls engines. To turn to Pratt & Whitney
for its JT-9D turbofan or to General Electric for its own commercial
engine, the CF-6, would cost a year in time and $100 million in
development costs. That was because neither of these engines would
slip in neatly as a replacement. There would be need for extensive
redesign of engine housings and installations, starting with
wind-tunnel tests, proceeding through reconsideration of weight
distributions, and ending with extensive new tests necessary to win
FAA certification. Lockheed would receive a triple blow: a massive
overrun, a set of prices charged to airlines that would bring further
losses on each sale, and penalties payable to the airlines for late
delivery.
In addition to this, Lockheed already was deep
in hock, having drawn $350 million from a $400-million credit line
held by a syndicate of its banks. It could not seek help from the
Defense Department; the settlement of the C-5A had also settled other
outstanding issues. The company's stock was depressed. Worse, the
L-1011 itself was stirring little interest. Though it had pulled in as
many as 168 orders back in 1968, the total since then had grown by
only ten more. Lockheed had not booked a single order for it in over a
year. Yet to abandon the L-1011 was unthinkable. Its overhang of bank
debt could drive Lockheed into insolvency as well.
Rolls' receiver, Rupert Nicholson of Peat,
Marwick, and Mitchell, took control of that company on February 4. On
the same day, the bankruptcy was announced in the House of Commons. As
one official told the magazine Fortune, "The news was like hearing
that Westminster Abbey had become a brothel." Prime Minister Heath
might have bailed everyone out by nationalizing the whole of Rolls,
but he had excellent reason not to do so. His legal advisers held that
by doing so, the government could become liable for Rolls's debts, the
magnitude of which was unknown even to the auditors from Cooper
Brothers. Instead, Heath would take over only the portions of the
company that were building military equipment. The receiver could sell
off the division that was building the famous motorcars, which was
profitable and would readily find a buyer. As for the RB-211, Heath
would leave it to twist slowly in the wind.
This approach drew vigorous objection in
Parliament. Jeremy Thorpe, leader of the Liberal Party, stated that
the L-1011 would then be "the largest glider in the world." Worse, a
default on Rolls's contract with Lockheed would "throw into doubt our
credibility, our commercial competence and our good faith in all
spheres of advanced science." Labour M.P.'s raised the issue of jobs
for the some 24,000 people who were working on the RB-211 at Rolls and
at its subcontractors and suppliers.
Faced with such arguments, Heath unbent
slightly, agreeing to have his defense minister take a closer look at
the engine's prospects. This minister, Lord Carrington, appointed
three investigators that he called his "ferrets," whose report a few
weeks later struck a more hopeful note. The RB-211 was meeting its
performance goals in runs on the test stand. This was important; it
meant the engine after all could be a technical success. Moreover, its
development could go to completion for an extra $288 million.
Even so, the odds were formidable against saving
the RB-211, and hence Lockheed. Twenty-four banks were directly
involved as Haughton's creditors. All were highly averse to risk.
Nevertheless, they would have to live with it and accept more; they
might even have to throw good money after bad. Nine customers also had
ordered the L-1011. Each had its own financial problems and could
solve them in part by enforcing contract provisions requiring Lockheed
to pay out money as a penalty for late delivery.
Though his hand was weak, Haughton was not
without cards of his own to play. The banks, after all, wanted him to
succeed; a Lockheed bankruptcy would leave them with bad debts,
whereas with forbearance they might yet continue to hold profitable
loans. The customers also had reason to stick with the L-1011, for
they had already laid out substantial down payments. They also had
purchased this airliner on highly favorable terms. This had resulted
from Lockheed's competition with the McDonnell Douglas DC-10, wherein
Lockheed had won orders by lowering its price and sweetening the terms
of sale.
Even under the best of circumstances, the
problems with the program would bring delays of several months in
delivering the L-1011. However, most major airlines had lost money in
1970. They were in no hurry to receive the new airliners in accordance
with the contracted schedule. To the contrary, delays in delivery
would also put off the dates when they would have to pay the balance
of the purchase price. The chairman of TWA went so far as to suggest
that "a delay of a year would have as many advantages as
disadvantages, maybe more."
Hence, the report to Lord Carrington meant that
the outlines of a deal could begin to emerge. In essence, it would
call on everyone to go back to Square One and renegotiate their
contracts, paying little heed to the legal commitments of the previous
years. Heath would need assurance that Lockheed would indeed stay in
business and would not abandon the L-1011. Haughton would need more
money from his bankers to give him a base from which to offer such
guarantees. He also would have to pay more for his engines, while
waiving penalties for late deliveries. For their part, the airlines
would have to accept higher prices and later deliveries for their
airplanes, again without receiving penalty payments.
Haughton now was the man who had to make it come
together. He had a prodigious capacity for work, on which he now drew.
Often he had flown in from the East Coast in his Lockheed JetStar,
sleeping en route on a couch, checking in at home for a quick shower,
then reaching his desk at three or four in the morning to begin his
day's work. He also had extensive experience as a salesman. In this
business this certainly did not make him a Willy Loman in the play by
Arthur Miller, riding on a smile and a shoeshine. It meant, rather,
that although he was Lockheed's chairman, he had a strong personal
involvement in its sales. If an airline executive raised a question,
Haughton himself might turn up the next day in that person's office to
answer it.
In dealing with his banks and airlines, Haughton
had to do a lot of hand-holding. Two financiers, one a vice-president
from Bank of America and the other a vice-president from Bankers
Trust, accompanied him on his travels, as representatives of the
entire banking syndicate. Still, each airline and every bank would
have to agree that such a deal would represent the best possible
outcome for its investors and stockholders. Each of them would
naturally prefer to hold back and try for better terms. All would have
to agree at the same time, however, or the chance for a deal would
fall through. As Nixon's treasury secretary, John Connally, put it,
"Dan, your trouble is you're chasing one possum at a time up a tree.
What you've got to do is get all those possums up the tree at the same
time."
The most elusive of those possums would be the
U.S. government. Early that spring, Haughton became aware that he
could build a fragile arch that might support Lockheed, Rolls, and the
L-1011. Its keystone, however, would be a new line of bank credit
totaling $250 million. Lockheed lacked the assets to pledge as
collateral, and its creditors would certainly demand security. That
might be available, however, through a federal loan guarantee, a
pledge that the Treasury would reimburse the banks if Lockheed should
fold. On May 6, Connally met with Nixon at the White House and
announced that the Administration would send the necessary legislation
to Congress.
Specifications
|
|
Model |
Lockheed L1011-500 Tristar |
|
No. Of Engines: |
3 |
|
Aircraft Type: |
Jet |
|
Passenger Capacity (Max): |
330 |
|
Passenger Capacity (Min): |
230 |
|
Range (in Miles): |
6,150 |
|
Cruising Speed (MPH): |
580 |
|
Payload Capacity (in
Lbs): |
90,782 |
|
Wingspan: |
164 |
|
Length: |
164 |
|
Height: |
55 |
|
Takeoff Weight (in Lbs): |
504,000 |
|
Body Type: |
widebody |
|
Cabin Type: |
pressurized |
There it would face a minefield of opposition.
Congressman Wright Patman, chairman of the House Banking Committee,
had blocked federal support for the bankrupt Penn Central Railroad
only a year earlier. He was highly skeptical of the proposed Lockheed
loan guarantee. Senator William Proxmire, slayer of the SST and a
harsh critic of Lockheed, was ready to filibuster against the bill.
Though Lockheed was an important defense contractor, the L-1011 was
entirely a commercial venture. If the firm went bankrupt, the Pentagon
would find a way to rescue its military projects, most likely by
having other aerospace firms buy up the pertinent company divisions.
Moreover, the L-1011 was to use British engines, a point that did not
escape the attention of lawmakers with ties to General Electric and
Pratt & Whitney. An alternative, the DC-10, was already on the verge
of entering service.
Weighing against these arguments was a single
word: jobs. Haughton, testifying before Patman's committee, stated
that as many as 60,000 people would be out of work if the L-1011 were
to fail. The Democratic Party, which controlled both House and Senate,
was still the party of Senator Hubert Humphrey, the presidential
nominee of 1968 and a strong labor man. Having shot down the SST as
recently as March, Congress could not lightly affront the unions a
second time, particularly since the country was still in a recession.
Moreover, 1972 would be an election year.
The outcome was thin indeed. On July 30, the
House approved the bill, 192 to 189. The measure then moved to the
Senate, which was to recess for a month on Friday, August 6. Haughton,
however, had warned that by September, Lockheed would be out of cash.
The Senate leadership responded by bringing the bill to a vote the
previous Monday. California's Senator Alan Cranston, a principal
backer, had been doing the nose-counting and calculated that it would
lose by the margin of a single vote. He tried to win over Lee Metcalf
of Montana, whose no vote seemed soft, and as the calling of the roll
reached its conclusion, Metcalf saw that his vote was likely to be
decisive. He told Cranston, "I'm not going to be the one to put those
thousands of people out of work." He voted yes, and the loan guarantee
passed by a margin of 49 to 48.
With this, the main stone of Haughton's arch
fitted into place. The threat of a Lockheed bankruptcy receded, while
Rolls now could emerge from its own receivership. With its RB-211, it
would become a leader in the business of building engines for
wide-body airliners. In turn, Lockheed now was free to proceed with
its L-1011.
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