An unexpected problem plunges a promising new airliner program into crisis mode, potentially dragging the world’s largest aerospace company down along with it.
Billions of losses, meanwhile, pile up on another new aircraft created for the U.S. Air Force’s mobility fleet, thanks to the company’s risky strategy to bid low on a fixed-price development contract. In desperation, the firm’s executives come begging to Congress for a controversial loan guarantee, as whisperers on Wall Street wonder whether the company can survive.
The company: Lockheed.
The year: 1971.
Over a century ago, Mark Twain observed that history doesn’t repeat, but it does rhyme. Many details divide the troubled stories of the L-1011, C-5A and Lockheed from over 49 years ago and today’s headlines about the 737 MAX, KC-46 and Boeing. With the request by Boeing for loan guarantees, the two sagas now uniquely converge.
Last week, Boeing sought Congressional support for $60 billion in loan guarantees as a bailout for itself and its suppliers. Likewise, in 1971, a cash-strapped Lockheed pleaded to Congress to approve $250 million ($1.6 billion today) in loan guarantees.
The main difference dividing the stories, of course, is a global health scare. The COVID-19 pandemic spread by the novel coronavirus has collapsed demand for air travel, jolting a formerly healthy airline industry into a sudden economic crisis. As airlines park fleets, the economic crisis expands to formerly thriving production lines of new aircraft, threatening manufacturers of commercial aircraft, engines and other subsystems.
The COVID-19 crisis adds to mounting financial pressures on Boeing. The year-long grounding of the 737 MAX fleet to fix fatal design flaws added nearly $20 billion in unexpected costs. That comes on top of a four-year series of financial charges totaling nearly $4 billion related to errors and delays on the KC-46, a tanker aircraft designed and produced under fixed-price contracts awarded by the Air Force since 2011.
Similar, self-inflicted errors 50 years ago had weakened Lockheed’s financial position, leading up to its bailout request. On Jan. 7, 1971, Aerospace DAILY described the company’s grim situation. Lockheed had underbid Boeing and Douglas in 1965 to claim a fixed-price, $1.9 billion contract from the Air Force to develop and produce the entire C-5A fleet. The terms of the contract shifted all of the financial risk to the contractor, and the C-5A proved significantly costlier than anticipated by Lockheed’s winning price. By early 1971, Lockheed faced a $1.8 billion cost overrun on the C-5A program, Aerospace DAILY reported. Adjusted for inflation, the equivalent amount today is $11.5 billion.
Senior defense officials decided to intervene to spare Lockheed from insolvency and preserve the C-5A production line for the Air Force. Deputy Defense Secretary David Packard proposed to have the Pentagon cover Lockheed’s entire $1.8 billion cost overrun on the C-5A, with Lockheed required to repay only $200 million in installments. The agreement was finalized on Feb. 1, Aerospace DAILY reported the following day.
Another financial crisis, however, was already brewing for Lockheed as the ink dried on the Pentagon agreement, and this time their top military customer would be powerless to help.
On Feb. 4, 1971, Lockheed CEO Dan Haughton arrived in London. He was joined on the trip by Clarence “Kelly” Johnson, the founder of Lockheed’s already legendary Skunk Works. They had come to the UK for a scheduled quarterly update by Rolls-Royce, the engine supplier for the Lockheed L-1011 TriStar. Such routine progress reports seldom required the attendance of Lockheed’s top executives, but Haughton knew Rolls-Royce was in trouble. Three months earlier, Rolls-Royce reported serious technical problems with the development of the RB.211-22 engine for the L-1011. The financial cost to resolve the problems pushed Rolls-Royce to the brink of insolvency, but the UK government had agreed in November on a financial bailout, with £42 million advanced directly to the engine manufacturer and £18 million provided from a syndicate of 24 banks, Aerospace DAILY reported.
In Feb. 1971, Lockheed’s UK-based liaison with Rolls-Royce was Alan Brown, who would later manage development of the F-117. In an oral history interview recorded in 2010 by the Huntington Library, Brown recalled the moment when he, Haughton and Johnson settled into a Rolls-Royce conference room in Derby. A Rolls-Royce engineer started delivering a routine update on the redesign of a turbine blade. Then, precisely as the clock struck 10 a.m., a man in a dark blue suit entered the conference room.
“As of this moment Rolls-Royce is calling in the receivers,” the unidentified man announced to the room.
“Our Lockheed people, Dan Haughton and Kelly [Johnson] and Willis Hawkins, turned around and looked at us with that, ‘Why the hell didn’t you know?’ expression on their faces. Because that was a part of our job—to know what was going on [at Rolls-Royce]—and we hadn’t a clue,” Brown recalled nearly 40 years later.
The alarmed reaction by Lockheed’s senior executives was sensible. If the engine supplier for the L-1011 was bankrupt, the contract for the RB.211-22 engine would be nullified.
Lockheed released a statement the following day: “We are now carefully studying the statement of the Rolls company which would repudiate the Rolls contract with Lockheed and the announcements of the withdrawal of government and outside financial support,” Aerospace DAILY reported on Feb. 5.
The L-1011 had flown for the first time on Nov. 16, 1970, but it wasn’t scheduled to be introduced into service until later in 1971. Lockheed couldn’t afford to start over with a new engine supplier. The company already had $652 million tied up in development and production costs for the L-1011. Even receiving the C-5A bailout from the Pentagon, Lockheed’s liabilities still exceeded current assets by $38.5 million in mid-1971, according a 1972 report by the General Accounting Office (now called the Government Accountability Office, or GAO). Needing an emergency supply of cash, the company turned to the financial community. A consortium of U.S. banks considered Lockheed’s loan application, but decided it was too risky without a government backstop.
That’s when Congress got involved. In 1971, Lockheed was already the Pentagon’s most significant supplier, with contractual commitments totaling $1.5 billion annually. In addition to the troubled C-5A, Lockheed also was supplying the armed services with C-130, P-3 and S-3A aircraft, plus the Poseidon, Polaris and Trident ballistic missiles. Tens of thousands of employees spread over congressional districts across the country also could lose their jobs.
On Aug. 9, 1971, Congress passed the Emergency Loan Guarantee Act, which authorized a newly created Emergency Loan Guarantee Board to backstop up to $250 million in private loans to major businesses. Although the law allowed any large company to apply for loan guarantees, the legislators understood that the authority was created to support Lockheed, which, in fact, became the board’s only applicant. On Sept. 14, 1971, the Board agreed to guarantee up to $250 million in loans for Lockheed, according to the GAO report. As a result, the consortium of banks agreed to expand an existing credit line for Lockheed by that amount.
In the end, the bailout proved to be a profitable investment for the government. In addition to preserving the company’s production lines and jobs, the loan guarantees generated $30 million in fees paid by Lockheed to the Treasury over the next six years. In 1977, Aviation Week reported the program had backstopped $245 million in loans to Lockheed, with a $60 million balance remaining.
The Lockheed bailout of the 1970s proves a point learned later during the automotive company bailouts of the 2008 financial crisis and Great Recession: government bailouts, when properly designed, can be both lucrative for taxpayers and maintain critical manufacturing capability.
Better yet, if you assume the innovations the companies achieved much later—Lockheed’s many leading-edge products today such as hypersonics, or Detroit’s push into electric cars—it is reasonable to draw a line back to the bailouts. The key, of course, is making sure the bailouts are properly applied—somehow, the bailout must be tied to the companies moving forward, not just paying off over-due bills. If Washington can again strike this balance with Boeing, another round of loan guarantees for the world’s largest aerospace company could be worth it.
Related Content
