Analysts question viability of McDonnell Douglas strategy.

LONG BEACH - McDonnell Douglas Corp. is flying into dangerous airspace with its new strategy of becoming a smaller, "niche" player in the worldwide commercial aircraft manufacturing business, industry analysts said last week.

The company, in a surprising announcement early last week, said it decided not to build a new jumbo passenger jet and instead will become a smaller player in the industry.

Analysts questioned the long-term viability of the company's commercial aviation business. To remain viable, the company will need to make some additional future moves, such as forming partnerships with other commercial aircraft manufacturers, many analysts said.

Jon Kutler, president of Century City-based Quarterdeck Investment Partners Inc., said the new strategy might "scare off potential new customers" because airline buyers tend to buy their aircraft from one manufacturer.

"The niche strategy may work in an up cycle, which we're in now with new aircraft orders, but it's not going to work in a down cycle when airlines want commonality of their airline fleets," said Kutler.

Another analyst questioned how the company's commercial aircraft segment could continue to compete without developing new aircraft.

"At some point in the far-off distant future, Douglas might not have anything left to compete with. They might run out of product with this strategy unless they do something," said Paul Nisbet, an analyst who heads his own firm, JSA Research in Newport, R.I.

Meanwhile, Long Beach city officials and Douglas workers said they are not overly concerned about the decision to drop plans to build a new jumbo airliner at the Douglas Aircraft Co. division in Long Beach.

In making the announcement that the proposed jumbo jet, called the MD-XX, would not be developed, McDonnell Douglas Chief Executive Officer Harry Stonecipher outlined a new strategy for the commercial aviation division.

He said the Long Beach division will quit trying to compete head to head against industry giants Boeing Co. and Europe's Airbus Industrie, and instead concentrate on its existing line of commercial aircraft.

The commercial aircraft division, Stonecipher said, will become a niche player rather than trying to keep up with Boeing and Airbus in the race to develop new aircraft.

"Of course anytime there is an announcement like this, we're concerned," said Long Beach Mayor Beverly O'Neill. "But Douglas has been here for a long time, and they will be here for a lot longer."

Douglas builds commercial aircraft in Long Beach, along with the C-17 military cargo plane. Together, the two operations employ about 18,000 workers, making Douglas the largest private employer in Long Beach and the fourth largest in Los Angeles County.

At the office of Local 148 of the United Auto Workers union, which represents about 7,000 Douglas employees, officials said they are "concerned" about the announcements, but as of last week they were more pre-occupied with an upcoming election for shop stewards.

"Of course, we're watching this, but we really haven't had any time to do anything," said Jim Fix, administrative assistant to union Local President Kedrick Legg.

About 250 Douglas employees, mainly engineers and designers, had been working for about six months on a proposal to build the MD-XX, said company spokesman Tom Downey in Long Beach. He said those workers will be reassigned to other duties at Douglas Aircraft.

The MD-XX was designed to be a 350-seat jumbo jet, capable of competing against Boeing's 747 and 777 and other big aircraft by Airbus. The MD-XX would have been slightly bigger than Douglas' existing jumbo jet, the MD-11.

All of Douglas' other commercial aircraft - including the MD-80, MD-90 and the new MD-95 - are shorter-range planes with a capacity of between 100 and 150 passengers. All together, Douglas has a backlog of more than 220 orders for its commercial aircraft, which alone is expected to keep its Long Beach workers busy for another 10 years.

Wolfgang Demisch, an aerospace industry analyst with BT Securities in New York, said McDonnell Douglas' decision to pull the plug on the MD-XX was probably a good move from a short-term standpoint because the $2 billion to $3 billion investment required would have been excessive.

Demisch was more optimistic about the new niche strategy than the other analysts, and predicted Douglas will make some further moves to remain in the business.

"Douglas has been in the commercial airline business for decades. And while there have been some problems, I think it's going to be an ongoing business. But I do think eventually you'll see them form some kind of partnership," said Demisch.

The possibility of a partnership is not new at Douglas. In 1991, Douglas came close to forming an alliance with a company in Taiwan to make the MD-12, a proposed jumbo jet. That deal never materialized and the plane was never built, largely because the recession hit and aircraft orders dropped off dramatically industrywide.

To build its new MD-95, Douglas has formed partnerships with several companies, including businesses in Italy, Israel, Korea and England.

Also, Douglas is assembling many of its MD-90 aircraft in China under a partnership agreement with a public-private consortium in Shanghai.