McDonnell Douglas Corporation History

Company History:

The largest defense contractor in the United States, McDonnell Douglas Corporation is also the world's largest builder of military aircraft, the third largest commercial aircraft maker in the world, and the third largest National Aeronautics and Space Administration (NASA) contractor. As McDonnell Douglas fought to retain these enviable rankings in the 1990s, it faced a host of new and formidable obstacles that represented some of the most difficult challenges in its storied history.

Donald Douglas's interest in aviation can probably be traced back to a Wright Brothers exhibition for the U.S. Army in 1908. Douglas later entered the Naval Academy which, at the time, was experimenting with seaplanes. After two years at the academy, he left to study mechanical engineering at the Massachusetts Institute of Technology. Douglas completed the four-year curriculum in two years. Upon his graduation in 1915, he was summoned to California by the designer Glenn Martin (later of Martin Marietta). A year later, with the outbreak of war in Europe, the United States government asked him to move to Washington, D.C. in order to direct the aviation section of the Signal Corps. After a few months, Douglas became frustrated with Washington and returned to Martin's company, whose headquarters had since moved to Cleveland.

Douglas left Martin in 1920 and established his own company office behind a Los Angeles barber shop. With virtually no capital at his disposal, Douglas persuaded a wealthy young man, David R. Davis, to underwrite the costs of developing a new aircraft design called the "Cloudster." With Davis's help, Douglas had enough money to hire several engineers away from Martin in order to build the Cloudster. This airplane was designed to fly coast to coast, stopping only to refuel. It also had a service ceiling high enough to enable it to fly over mountain ranges.

In 1921, the newly renamed Douglas Company produced a torpedo plane for the Navy designated the "DT." The DT's popularity established a reputation for Douglas in the War Department which later led to an interest in Douglas's next plane, the World Cruiser or "DWC." In a 1924 demonstration, the World Cruiser was flown around the world in 15 days. This accomplishment generated more interest in Douglas's small company.

Douglas, no longer needing the financial support of Davis, introduced a flying boat for the commercial market in 1928 called the Douglas Dolphin. In 1934 Douglas's rival, William Boeing, secretly purchased a Dolphin which he allegedly used to tender his yacht. It has been suggested that Boeing studied the Dolphin's design and later incorporated some of this design into the Boeing Company's flying boats.

When Jack Frye of TWA was unable to convince Boeing to sell airplanes to his airline--Boeing chose to give top priority to the airlines owned by his own United Company--he solicited several alternative aircraft companies for a new all-metal tri-motor airplane capable of carrying 12 passengers at 145 miles per hour. Douglas received one of Frye's written requests in August 1932. His small company was an unlikely candidate to supply TWA with an airplane, but when Douglas submitted an airplane design able to carry 14 passengers, capable of speed approximating 180 miles per hour, and fitted with only two engines, Frye awarded him the contract. The airplane Frye agreed to purchase was the DC-1 (DC stood for "Douglas Commercial"). Before more than one DC-1 could be produced, the design was improved. The airplane finally delivered to TWA was a revised version of the DC-1, redesignated the DC-2. With the experience he had gained from the production of the DC-2, Douglas began work on his next design, the DC-3. New airmail legislation in 1934 increased the reliance of airlines on passenger business. As a result, the DC-3 was designed to meet new specifications, making it the "first airplane to make money just hauling passengers."

Airplane manufacturers were aware of the rising political tensions in Europe. The likelihood of war was becoming increasingly apparent. Aircraft designers knew that the large commercial airplanes could easily be converted into bombers. Many became suspicious when they learned that Hitler's Germany was ambitiously building commercial planes for routes that weren't yet charted. People wondered what Germany was doing with so many planes, when the country in fact had no commercial airline. Douglas thought another war in Europe was inevitable, so the DC-3 was developed with a dual commercial/military purpose in mind.

Douglas's DC-3 was more popular than Boeing's 247. At the beginning of World War II, 80 percent of the airplanes in commercial service were DC-3s. During the war, the DC-3 served as a personnel carrier, and in other design variations as a B-18 bomber and a C-47 transport. Over 10,000 DC-3s of various configurations were built for service with the Army Air Corps. Douglas also produced a number of attack planes for the military, the A-20 Havoc and the SBD Dauntless among them. A squadron of Dauntless airplanes was instrumental in the defeat of the Japanese Navy at the battle of Midway Island.

Douglas's next plane, the DC-4, was put into military service (as a C-54) before it flew commercially. The DC-4 had four engines and was nearly three times larger than its predecessor. When it finally entered commercial service in 1946, it gained an undeserved reputation for accidents. Pilot error was most often determined to be the cause of the disasters.

When the war exposed the secret development of Lockheed's revolutionary designed "Constellation," Douglas was provided with a look at what his competition would be offering after the war. Douglas began work early on a response to Lockheed's airplane, and his DC-6 entered service after the war. An improved version, the DC-6B earned substantial revenues for the airlines. A further improvement, the DC-7, was the first commercial transport to cross the United States non-stop against prevailing winds. Over 1,000 airplanes in the DC-6/DC-7 series were produced. The first presidential aircraft were Douglas DCs; Roosevelt's "Sacred Cow" was a C-54, and Truman's "Independence" was a C-118, the military version of a DC-6.

Donald Douglas prepared his son, Donald Jr., for a leading position in the company, and appointed him president in 1958. The senior Douglas, however, continued to make the "important" decisions. One such important decision was to delay the development of a passenger jetliner. Unfortunately, it turned out to be a very costly decision. In Seattle, Boeing was flight testing its 707 when Douglas's DC-8 was just a model in the wind tunnel. Douglas was surprised when its most loyal customer, American Airlines, placed an order for Boeing 707s. Douglas accelerated development of its similarly configured DC-8, but Boeing's lead in designing and manufacturing a jetliner was insurmountable.

In a rather ironic turn of events, United Airlines, historically associated with Boeing, placed the first order for DC-8s. When the airplane finally became available, Douglas wasn't adequately prepared to meet the demand for its new jetliner, and a backlog of orders developed. The company lost some customers to Boeing and upset others by delaying delivery of the airplanes.

In 1965, the company introduced an improved jetliner designated the DC-9 in order to challenge Boeing's new 727. Once again these two airplanes were very similar. They were both designed with engines mounted on the rear of the fuselage, a feature first seen on the popular French-built Caravelle. The costly development of the DC-9 and the continuing backlog of orders resulted in a liquidity problem for Douglas. Douglas lost a great amount of money in 1966, and banks began to withhold their financial support of the company.

"Overwhelmed by prosperity," but unable to control costs, Douglas was quickly becoming a prime target for a takeover. In 1967, six companies submitted takeover bids for Douglas: General Dynamics, North American Aviation (later Rockwell International), Martin Marietta, Signal Oil & Gas, Fairchild, and McDonnell Aircraft. Douglas's board of directors voted for a sale to McDonnell, which had a history of effective management as well as an innovative group of middle managers. McDonnell had expressed an interest in Douglas as early as 1963 but was unable to arrange a merger until Douglas's financial position had sufficiently deteriorated. The merger encountered no problems because McDonnell had recently split its operations into three separate divisions, all independently managed. The simple addition of Douglas as a fourth division was made without difficulty and without interruption of either company's business.

James Smith McDonnell's company began as an airplane manufacturer for the military shortly before World War II. It was a major manufacturer in St. Louis by the end of the war, but it gained significant recognition only with the production of its Phantom jets in 1946. McDonnell was primarily a manufacturer of military jets, including the F2H Banshee, F3H Demon, F-101 Voodoo, and the various F-4 Phantom designs. (James McDonnell had a fascination with the occult, which may explain the origin of the names he chose for his jets.) In addition, McDonnell built the Mercury and Gemini space capsules for NASA. Since that time, the company built a number of missile systems, but its business with NASA remained limited.

McDonnell had two sons, James III and John, as well as a nephew, Sanford. All three sat on the board of directors at McDonnell Douglas. Donald Douglas, Jr. was gradually excluded from the management of the company, and it became hard for him to work in the shadow of the McDonnell family. Sanford McDonnell was named chief executive officer of the company upon James McDonnell's retirement in 1971, but Sanford still took directions from his uncle.

Under the continuing domination of James McDonnell, McDonnell Douglas developed a wide body "jumbo" jetliner in order to compete with Boeing's 747 in the commercial airliner market. The 450-passenger 747 was certainly larger, but McDonnell Douglas' DC-10, with only three engines, was better suited for the needs of more airline companies. Boeing had a hard time selling 747s; the airplanes were regarded as too large. Soon the company was facing a financial crisis. Then, with modifications, the 747 began to garner substantial orders. The DC-10 entered the market just as the Boeing 747 was becoming popular. As a result, McDonnell Douglas had a difficult time selling the DC-10 and recovering its development costs.

More stable business came from the Pentagon. McDonnell Douglas was licensed to build Hawker Siddley's vertical take-off and landing Harrier "jump-jet," which played a prominent role in Britain's war in the Falkland Islands. The company also produced the popular F-4 Phantom, the F-15 Eagle, the A-4 Skyhawk, and the F-18A Hornet.

McDonnell Douglas risked losing its contract to manufacture F-15s in 1970 when the U.S. Civil Rights Commission reported racially discriminatory hiring and promotion practices at the company, particularly in regard to African American employees. By 1979, however, the company reported that the implementation of affirmative action programs had rectified the situation.

There were other problems for the company as well. In 1979, James McDonnell III and three other company officials were indicted on charges of bribing foreign officials. According to the indictment, McDonnell Douglas was paying bribes to influence the sales of its airplanes in Korea, Pakistan, Venezuela, Zaire, and the Philippines. Clark Clifford, a former secretary of defense, defended the company in court by arguing that these payments were made with the full knowledge of the U.S. government in "difficult sales environments." Nevertheless, a committee of directors recommended that nonmanagement executives should dominate the membership of the board of directors to prevent schemes such as this from happening again.

McDonnell Douglas wasn't the only company accused of paying bribes. Lockheed, desperate to sell the L-1011 TriStar, was similarly implicated, but its activities were believed to have been far more extensive. Both Lockheed and McDonnell Douglas admitted their guilt, but while McDonnell Douglas was merely ordered to pay a fine of $55,000 and a $1.2 million civil award, the Lockheed Corporation was nearly ruined.

It was a bad year for McDonnell Douglas in another way. On May 25, 1979, at Chicago's O'Hare Airport, an American Airlines DC-10 lost an engine during take-off, crashed, and killed all 273 people aboard. After a temporary grounding of DC-10s, the National Transportation Safety Board cited inherent design flaws and unapproved maintenance procedures for having caused the accident. In response, Sanford McDonnell issued a statement to remind DC-10 customers that American "damaged the plane severely by using a crude maintenance technique." Controversy persisted as the public continued to associate the DC-10 with the crash. The design problems were finally corrected, and all maintenance procedures were standardized. The DC-10 was updated, redesigned, and renamed the MD-11; the MD-11 looked very much like a DC-10 with the exception of small vertical winglets located on the tips of airplane's wings.

The MD-11 proved more fuel efficient, could carry 405 passengers, and required only a crew of only two. It also had a flying range of 8,870 miles. For these reasons, airlines showed significant interest in the airplane. It was uncertain, however, especially in light of intense competition from Boeing and Airbus, whether McDonnell Douglas could make the MD-11 project profitable.

During the 1980s, McDonnell Douglas attempted to compete in the commercial aircraft market without designing an entirely new jetliner. In addition to the MD-11, McDonnell Douglas offered an updated version of its DC-9, designated the MD-80 (the number ostensibly indicated the year of the design) to compete with Boeing's 757. This airplane seated 150 passengers and cost approximately half that of a new Boeing. In order to sell the MD-80, the company arranged to lend the jetliners to American Airlines with a later option to buy. Instead of the standard 18-year lease, the McDonnell Douglas-American contract had a five-year term.

As McDonnell Douglas entered the 1990s, however, the future prospects for government-funded projects--the perennial mainstay of the company&mdash⟩peared bleak. For years, a steady supply of military contracts had driven the company's growth, fueling the development and operation of its commercial aircraft unit as well, but with the end of the cold war signalling reduced defense spending by the federal government, McDonnell Douglas quickly found itself without a predictable source of revenue. Moreover, the company's development of the MD-11 and several other programs had exhausted its cash reserves, sending America's largest defense contractor into the turbulent early 1990s strapped for cash.

Under the stewardship of a new leader, McDonnell Douglas fought to reposition itself for the difficult years to come. John F. McDonnell, the son of the company's founder, was selected as McDonnell Douglas' chief executive officer in 1988, and under his control the company headed toward the potentially deleterious early 1990s. Long-term debt tripled from 1986 to the beginning of the decade, swelling to an alarming $3.3 billion and putting the company on the brink of insolvency. McDonnell initiated a drastic restructuring program in mid-1990 to restore the company's financial health. He cut McDonnell Douglas's work force 40 percent, winnowed the company's operating costs by more than $700 million annually, and placed a stronger emphasis on its non-core, non-military businesses. Through such measures, McDonnell Douglas's debt was reduced by more than $1 billion, giving the company's management a much needed reprieve to target its long-term objectives for McDonnell Douglas's future growth.

Given the constraints of reduced defense spending, John McDonnell was forced to make the company's commercial airline business the engine for future growth. This formidable task was made more difficult because of several factors, including the pernicious economic climate during the early 1990s, the commanding lead of McDonnell Douglas's largest competitor in the airliner business, the Seattle-based Boeing Company, and the absence of vast reserves of cash to fund the development of new commercial aircraft. Boeing controlled a 55 percent share of the commercial airline order backlog in 1992, compared to 12 percent for McDonnell Douglas, a disparity resulting from Boeing's venerable history in the airliner business and its broader product line, which comprised five types of planes compared to the two models marketed by McDonnell Douglas. Of crucial importance to narrowing this gap and sparking the company's resurgence in the commercial airline business was the development of McDonnell Douglas's new plane, the MD-12, a wide-body, jumbo jet designed to compete against Boeing's esteemed 747. Unlike years past, however, McDonnell Douglas needed a partner to help fund its development of the MD-12, and began courting both U.S. and foreign companies, particularly the Taiwanese government-backed Taiwan Aerospace Corp., to raise the roughly $5 billion necessary to put the MD-12 in the sky.

By 1993, however, McDonnell Douglas had effected a turnaround from the precarious position occupied several years earlier, assisted in large part by its success in garnering government-funded defense contracts. The same economic conditions that had hobbled McDonnell Douglas had damaged some of its competitors more severely, and from the rubble left in the aftermath of the industry-wide struggle for survival, with an assortment of mergers and divestitures leaving fewer companies competing for defense-related projects, McDonnell Douglas emerged revitalized. Earnings for the year soared 145 percent, up from a loss of $781 million in 1992 to $396 million in profit, despite a drop in revenues, while the company's debt continued to fall. As the company entered the mid-1990s, further cause for optimism arrived in early 1994, when Israel announced it would purchase 20 McDonnell Douglas F-15 fighter aircraft, a deal valued at $2 billion.

Although McDonnell Douglas's resurgence in the mid-1990s augured hope for the future, the transformation of its commercial airliner unit into the company's main profit engine remained the company's best hope for future long-term growth. During the early 1990s, the company's airliner unit remained in the black, but only through extreme cost-cutting measures. As the company charted its course for the remainder of the 1990s, away from the economic recession that hampered airliner sales earlier in the decade, much depended the performance of McDonnell Douglas in the commercial aircraft arena.

Principal Subsidiaries: McDonnell Douglas Financial Services Corp.; McDonnell Douglas Helicopter Co.

Further Reading:

• Bilstein, Roger, Flight in America 1900-1983: From the Wrights to the Astronauts, Baltimore: The Johns Hopkins University Press, 1984.
• Bowers, Peter M., The DC-3: 50 Years of Legendary Flight, Blue Ridge Summit: Tab Books, Inc., 1986.
• "Dwindling Hopes," Forbes, June 8, 1992, p. 45.
• Ellis, James E., "Gone Is My Co-Pilot?," Business Week, July 6, 1992, p. 71.
• Ellis, James E., "McDonnell Douglas: Unfasten the Seat Belts," Business Week, February 14, 1994, p. 36.
• Ingells, Douglas J., The McDonnell Douglas Story, Fallbrook: Aero Publishers, 1979.

Source: International Directory of Company Histories, Vol. 11. St. James Press, 1995.