Too Big or Too Little?

AIRCRAFT PROFITS

THE U.S. aircraft industry gets by far the biggest slice of the defense dollar--and no industry gets, in turn, a more careful check from Congress. The allegation before the current House investigation (headed by Louisiana's F. Edward Hebert) is that the industry's profits are too big. The manufacturers pose a larger question: Are profits big enough to let the industry do the vital defense job cut out for it?

Even in the current boom, most U.S. military planemakers feel that they are in a precarious position. "In 1954 U.S. aircraft companies' profits after taxes were 3.5% of sales, v. 6% for all manufacturing. Furthermore, on military business, the profits of Douglas Aircraft, for example, were less than half the profit on civilian production. All told, in 1954 the U.S. aircraft industry netted $218 million in profits, little more than a single big company such as General Electric.

Many planemakers feel that they do not keep enough money to do the job. For example, both McDonnell's Navy F3H fighter and Air Force F101 were held up from four to ten months because McDonnell lacked funds for computers and wind tunnels, had to wait in line to use the Government's. Said McDonnell's Executive Vice Pres ident Robert H. Charles: "If we had more money for development facilities, we could save millions."

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Another big trouble is the feast-or-famine nature of aviation. While the current long-range procurement policy is a vast improvement over previous policy, airmen still remember what happened after World War II. North American, for example, went from a profit of $14 million in 1945 to a $12 million operating loss in 1947. Then it had to crank up to high speed again to produce F-86 Sabre jets for Korea.

As a result, North American and other planemakers currently lease much of their expanded plant space from the U.S. Government, use it on a rent-free basis. They have been criticized by the Hebert committee for this. But planemakers have never had enough money to expand as fast as the Pentagon wants during an emergency, would go broke trying to build the plants themselves. Furthermore, military contracts are precarious; cancellations can make a huge, expensive plant useless to a manufacturer.

Actually, the debate over rent-free leases is academic: to pay rent would merely add to the cost of planes, in effect transfer Government funds from one pocket to the other. However, it still gives rise to an argument that planemakers make too much money in relation to their net worth. Thus, McDonnell's 1954 pre-tax profit of $14 million looks big beside its $24 million net worth. But the industry argues that the cold statistics take no account of the enormous investment in designers, engineers and production men, give little credit for years when profits are small.

Many planemakers think a fixed price plus incentive bonus for producing cheaply works best, feel that they can both save the U.S. money and make more themselves. Yet only .9% of all contracts are bonus incentives; most are straight fixed price or cost plus fixed fee, depending on what the Pentagon prefers at the moment. Says Douglas' Senior Vice President Frederic W. Conant: "When we're building at a loss, the Pentagon wants to buy at a fixed price. When we're making a profit, the Pentagon wants to buy on a renegotiation basis."

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No manufacturer can be sure of his profit until it is approved by the Government's Renegotiation Board. Airmen complain that the board, which still has 3,500 cases on its docket, works too slowly. Under a fixed price plus incentive bonus contract, Boeing estimates that it saved the Air Force $23.2 million on B-47 bomber production in 1952 by producing lower than estimated prices. In doing so, it won itself an additional $5,800,000 profit. But last fall, three years later, the board decided that Boeing's 1952 profits of $54.5 million before taxes, on sales of $739 million, were $9,800,000 too high, ordered the company to hand back the money.

Many planemakers think that the board's methods for determining a fair profit are vague, sometimes unfair. While most businessmen gauge profits in relation to sales, the board puts heavy weight on a company's net worth, along with such other factors as character of the business, extent of assumed risk and subcontracts, and inventive contribution. Even the Hebert committee recognizes that the renegotiation law is too vague.

In most businesses, the most efficient company usually makes the most money. But planemakers feel that the stress on profits in congressional investigations tends to punish the most efficient. And with all the harping on profits, they fear that the Renegotiation Board will clamp down still harder, squeeze earnings lower, and hurt the industry when the U.S. most needs to speed its technical advance.

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