Mcdonnell Douglas -- Boeing's Big Gulp

First of two parts

Tomorrow, Boeing and McDonnell Douglas begin joint operations, making the new Boeing the most powerful company in the history of aerospace.

ST. LOUIS - On his first visit to a fighter jet plant since announcing Boeing would acquire McDonnell Douglas, Boeing chief executive Phil Condit broke away from his entourage to meet some of the people who build the F-18 Hornet.

"He was pumped up about the merger," recalled barrel-chested foreman Bob Cummins, a man with a gold earring who oversees the operation of splice jigs that fasten together large components of the jet. "He was interested in the product, he was crawling in the jigs asking questions. . . . He had been around sheet metal before, you could tell. It was just the way the guy came across. It was the way he carried himself, made you feel like we'd succeed."

Indeed, the alliance of the world's biggest commercial jet maker with the world's largest builder of military aircraft has all the makings of a huge success. Boeing, after all, has been around sheet metal before.

The new Boeing, which begins operations tomorrow, will create the most powerful company in the history of aerospace. It will generate annual sales approaching $50 billion. It will employ 220,000 people across the nation. It will command the attention of airlines, governments and military establishments around the globe.

It will have the perfect product balance between commercial and

government customers. It will have narrowbodies, widebodies and jumbo commercial jets, Hornets, Eagles and Raptor jet fighters, Globemaster cargo planes, Chinook and Apache military helicopters, Slam and Harpoon missiles, Delta rockets, the Space Shuttle and, the future Space Station.

Boeing and McDonnell Douglas had little trouble navigating their $16 billion merger deal past U.S. antitrust authorities. Pentagon officials blessed the merger; the military drawdown since the late 1980s has triggered a spree of aerospace and defense mergers and a wholesale consolidation of the industry.

Only the European Union, in a bow to rival Airbus, made Boeing sweat for months before approving the merger last Wednesday. Boeing ultimately had to make several concessions to the Europeans, including the scrapping of sole-supplier contracts it had signed with three U.S. airlines. But that concession changes little. American, Delta and Continental still plan to buy only Boeing jets.

The toughest challenges for Boeing now could prove to be inside, rather than outside, the vastly expanded company. Staying nimble, meshing the corporate cultures of the two behemoths, finding common ground and positioning the new company for the future will be no easy tasks.

NEW, POST-COLD WAR REALITY

In its new incarnation as a leading military contractor, Boeing and the rest of the industry will have to align themselves with the realities of the post-Cold War defense budget.

The key barometer will be the procurement budget. That's where Congress allocates money for the purchase of new weapons, particularly aircraft. Military spending for new equipment has declined 58 percent since the 1987 peak, but there are signs the decline is ending and there are projections that defense spending will rise over the next five years to replace aging equipment.

The merger of Boeing and McDonnell Douglas, and the proposed combination of Lockheed Martin with Northrop Grumman, create huge defense contractors with few competitors. Critics believe they also create a greater potential for complacency.

"Competition and innovation in the defense industry will decline," warned Marcus Corbin, spokesman for the Washington, D.C.-based Project on Government Oversight. "Boeing will be weaker in the long run by not having a McDonnell Douglas to needle it, to make it better."

While Boeing officials acknowledge such dangers, they maintain that global competition and a reform-minded Pentagon present different challenges - ones that will force the company to remain lean and nimble.

After the cost overrun and defense-fraud scandals of the past two decades, affordability to the taxpayers and the integrity of the system are key considerations in weapons contracts. Pentagon officials have eliminated wasteful red tape and are demanding more accountability and more efficient commercial-design practices.

The challenge of staying lean is one of the problems of growth, conceded Larry McCracken, vice president of corporate communications for McDonnell Douglas. "You need to stay nimble and quick. That's what people warn about when you get big. That's a management problem that needs to be managed by good managers. You need to be able to react to the environment."

CULTURE SHOCK LIKELY

To make the merger a success, Condit and his senior executives will have to focus on the immediate challenge of absorbing McDonnell Douglas and its 64,000 employees, many of whom have spent their entire careers in a military-contracting environment far different from Boeing's.

Condit promises swift action to bring over 200,000 diverse employees from three different companies - Boeing, McDonnell Douglas and the Rockwell aerospace businesses, acquired by Boeing last year - under one sprawling tent.

Boeing's union with McDonnell Douglas promises to be the most problematic.

The cultures of the two companies are as different as the conservative Midwest and the liberal Northwest. In St. Louis, they have signs that say "Welcome to fighterland, USA." Seattle is more known for its gourmet coffee.

Boeing is defined by the volatile world of selling commercial jetliners to a worldwide market. McDonnell Douglas, long among the largest U.S. defense contractors, has been more sheltered from harsh market forces.

Boeing management is known for its broader, more flexible organization. Boeing managers are given an array of different assignments, often in areas outside of their expertise.

Alan Mulally's rise to president of Boeing's Defense & Space group is a good example. Before the promotion, he was vice president for the Boeing 777 commercial aircraft division.

Other than helping to manage a NASA program early in his career, Mulally has no other military or government-project experience. No one at Boeing considers that a handicap. His strength is managing complicated projects and people.

McDonnell Douglas reflects the hierarchical structure of its biggest customer: the U.S. military. Management tends to be more rigid and more project oriented.

Government spending flows more freely and defense contractors such as McDonnell Douglas are used to counting on extensive research-and-development contracts before they ever begin production. They are protected from the cyclical swings in the commercial aviation market.

"It will be difficult to bring the two together," said Bill Schoneberger, author of a book on the history of aviation in California. "You need to understand the culture of the company and use that culture to your advantage. But in my opinion, the Phil Condits and the Alan Mulallys of the world can do that. "

A MERGER THAT NEVER WORKED

For a insight into how a military contractor and a commercial aircraft company tried to mesh cultures, and largely failed, look no further than the 1967 merger between McDonnell Aerospace and Douglas Aircraft.

At the time of the merger, Douglas was at the height of its power. The Long Beach, Calif.-based company was selling DC-9s and DC-10s briskly. But it also was spending too much money and needed a cash infusion. McDonnell agreed to purchase Douglas.

The merger, however, never worked. The philosophies of the two companies clashed.

The entrepreneurial Douglas Aircraft, a pioneer in commercial aviation with the popular DC-3, was headed by Donald Douglas Sr., a free-wheeling businessman who befriended Hollywood stars.

McDonnell Aerospace was run by the conservative James McDonnell Sr., known as Mr. Mac. A quiet and gifted engineer who designed brilliant military combat planes, he was also notoriously cheap.

"If Mr. Mac had his way, he would have moved the management into one giant building with his office in the corner," Schoneberger said. "He ran the company very frugally. Whereas Douglas' style was flamboyant. He spent money to make money, and Mr. Mac was diametrically opposed to that."

At the time of the merger, the Douglas Delta rocket division bonded with McDonnell Aerospace. They shared common programs and customers, said Don Hanson, a Douglas public relations spokesman for more than 30 years. McDonnell built the Mercury and Gemini space capsules, among other space projects.

But "the commercial side didn't come together quite as well because of the difference between designing, building and selling airplanes for the commercial market compared with the military market," Hanson said. "Once you get past aerodynamics and propulsion, there is little similarity.

Even 27 years after the merger, angry Douglas family members spoke out in the Wall Street Journal, accusing three successive McDonnell chief executives of severely damaging the Douglas reputation.

Under the McDonnells, the Douglas division became a "very old lady with a new set of lipsticks," huffed Douglas family members, who complained that McDonnell executives refused to spend money to upgrade the Douglas factories.

Today, the fate of ailing Douglas Aircraft and its 10,300 employees remains one of Boeing's biggest management challenges.

How it handles that challenge and myriad others will ultimately determine the success of the megamerger.

Even though aerospace analysts fear Boeing risks overextending itself with its purchase of McDonnell Douglas, they also are confident that Boeing's management is up to the challenge of making the alliance work.

One of the key moves, analysts say, was appointing McDonnell chief executive Harry Stonecipher as president and chief operating officer of the new Boeing. Stonecipher will be moving to Seattle to work with Condit.

"To get everybody to sing from the same hymnal is a major issue," said Wolfgang Demisch, aerospace analyst for BT Securities in New York. "I'm not particularly disturbed that there is going to be change. I think the biggest surprise is the desire by everybody in leadership that the change be two way."