Douglas may snare $3 billion even if U.S. scraps C-17 plane program.

McDonnell Douglas Corp. could be eligible for payments of up to $3 billion if the Pentagon decides to terminate the C-17 military cargo aircraft project in Long Beach.

Congressional sources and defense-industry analysts said the final figure would be subject to negotiations and possible legal action. But the payment could be so significant that it would cushion the contractor -- and the 10,000 project workers in Long Beach -- from any immediate financial damage from the loss of the controversial project, they said.

However, there likely would be considerable resistance in Congress to giving McDonnell Douglas any settlement for cancellation of the project that could be worth $30 billion in new business to Douglas Aircraft Co., the Long Beach-based division of the giant military contractor, sources and industry experts said.

The last time the Pentagon canceled a major defense program was in 1991 when then Secretary of Defense Dick Cheney terminated the A-12 attack aircraft project for "default," meaning contractor-generated cost overruns or performance problems. McDonnell Douglas and General Dynamics Corp. were prime contractors on that project and are trying to recover $1.3 billion from the Navy for the termination. The U.S. Navy, in turn, maintains it is owed $1.3 billion by the two contractors on the project.

If a project is canceled for default, the government does not have to pay the prime contractor or contractors anything. If a contract is canceled for "convenience," the government is required to pay a settlement to the contractor. Termination for convenience means the government cancels a project for any reason other than default by the contractor.

"If it (the C-17) is terminated for convenience, you can bet Douglas will try to get everything it can," said a congressional source who did not wish to be identified. "If it is terminated for convenience, it will amount to a bailout of McDonnell Douglas because the company has defaulted on the project," the source said.

The source said payments to McDonnell Douglas for termination for convenience could reach the $3 billion range.

McDonnell Douglas has acknowledged cost overruns and other performance problems but has pledged to work with the government to correct any ongoing concerns.

In recent weeks, there has been a growing amount of discussion in Washington about terminating the project, which now stands at six completed and flying C-17s out of a potential order of 120.

John Deutch, under secretary of Defense for acquisition, earlier this month started a review of the C-17 project. In August, Deutch is scheduled to convene a meeting of the Defense Acquisition Board to consider the review and determine the future of the project, including possible termination.

Meanwhile, the Pentagon and members of Congress have begun discussing possible alternatives to continued funding of the C-17, a four-engine jet cargo plane with short-runway takeoff and landing capabilities.

Among the alternatives are buying commercial aircraft, like Boeing Co.'s 747, and converting them to military uses. Other options are restarting production of the Lockheed Corp.-made C-5 cargo aircraft, and extending the life of the existing C-141 cargo aircraft, also built by Lockheed.

James Ramsey, a Douglas Aircraft spokesman in Long Beach, said in response to a question of whether the company is making provisions for the project being terminated:

"We don't think it's going to be canceled. We welcome this latest action by Mr. Deutch and think with a new administration and a new secretary of defense, the new team better understands the need for this aircraft and appreciates the progress that has been made on it over the past two years."

He said all military contracts contain termination clauses and that any settlements are negotiated between the government and contractor.

Some government allocations to the contractor have already been questioned by lawmakers, who charge the Pentagon improperly advanced payments to McDonnell Douglas in late 1990 to keep the program alive.

Wall Street analysts said they doubt the project will be terminated but, if it is, it could be a blessing in disguise for McDonnell Douglas. Any negotiations on termination payments would probably start at $1 billion, which McDonnell Douglas could use to pay down its $2.7 billion debt, they said.

But most analysts said the current debate is part of a political ritual that accompanies all large military projects.

"It's been a truism that whatever military program is represented by the largest amount of dollars gets the most scrutiny and criticism. It happened with the B-2 and is happening with the C-17 now," said Paul Nesbit, a defense industry analyst who heads JSA Research Inc. in Newport, R.I.