Estimates of C-17 Overruns Range Up to $3.2 Billion

WASHINGTON —  New estimates of McDonnell Douglas Corp.’s potential cost overruns on development of the C-17 cargo jet range as high as $3.2 billion--a level that congressional critics say could wreck the struggling aerospace firm.

The highest estimate to date for C-17 cost excesses came Monday from Rep. John D. Dingell (D-Mich.), who is investigating the jet, built in Long Beach by McDonnell’s Douglas Aircraft unit.

In a letter to Defense Secretary Dick Cheney, Dingell credited the $3.2-billion figure to internal company calculations. McDonnell “could not possibly sustain such losses on the C-17 program and survive,” Dingell wrote.

A Pentagon analysis, meanwhile, says the Air Force program faces an overrun as high as $2.6 billion--almost four times the $700-million overage acknowledged by the Defense Department just 10 days ago. The Air Force estimate remains the Pentagon’s official assessment of the program’s likely cost.

McDonnell Douglas expressed confidence that the cargo plane contract will ultimately be profitable and said there is no likelihood of further huge cost increases. The company says it will cost $7.04 billion to make three test aircraft and six production planes--an overrun of about $440 million above McDonnell’s original $6.6-billion contract.

“We’re well into the contract, and we have confidence that our numbers are correct,” said Robert O’Brien, a McDonnell Douglas spokesman.

But there is worry--in the Defense Department, Congress and among financial analysts--that the company’s fiscal future would be jeopardized by an overrun in the range of those projected by Pentagon experts and Dingell.

The Pentagon analysis--described by a Pentagon source Monday as a “worst-case scenario” for the C-17--is gloomy. The program, it notes, is “behind in developing and acquiring support equipment, spares, etc.” The schedule for the first flight, originally planned for June, “continues to slip,” notes the Pentagon analysis.

The Times reported last month that in the worst case, Air Force and Pentagon officials believe that the first C-17 would not fly before December.

Published reports Monday of the Pentagon analysis drove McDonnell Douglas stock down $2.125 a share to close at $51.125 on the New York Stock Exchange.

The potential for ever-bigger cost overruns on the C-17 is particularly worrisome because of McDonnell’s recent financial difficulties, relieved only by strong second-quarter earnings posted by the firm in July.

Early this year, Cheney canceled the Navy A-12 attack plane, built by McDonnell Douglas and General Dynamics, because of an overrun in excess of $1 billion. How the costs of the cancellation will be borne is being contested in the courts by the defense contractors and the government.

McDonnell Douglas owes $1.2 billion in taxes and also faces a potential loss of $500 million on the T-45 aircraft trainer program, according to Dingell’s letter to Cheney. But those problems “pale by comparison with the projected losses” on development and production of the C-17, said Dingell, the influential chairman of the House Energy and Commerce Committee.

Dingell said the firm’s performance on the C-17 contract is “as dismal” as that on the A-12 program. By allowing the C-17 program to continue, Dingell charged, “the Department of Defense appears to be throwing good money after bad.”

The firm is, “in effect, being surreptitiously bailed out by the Pentagon at a level exceeding the public bailouts of Penn Central, Lockheed or Chrysler,” said Dingell, whose oversight investigations subcommittee will hold hearings next month on the financial health of McDonnell Douglas.

He asked Cheney to direct Undersecretary Donald Yockey to discuss the company’s financial health with subcommittee staff members in preparation for the hearings.

McDonnell Douglas spokesman O’Brien said company officials have not seen either the Pentagon analysis or Dingell’s letter.

“I don’t know what the congressman means when he is talking about a bailout,” O’Brien said.