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L-1011 Tristar History

The new high-bypass turbofan engines, which launched the Boeing 747, also launched a parallel effort that proved less ambitious but better-suited to the workaday needs of the nation's domestic carriers. At American Airlines, the vice-president of engineering, Frank Kolk, was responsible for determining what type of equipment his airline would need and for working with the manufacturers [319] to get it. When Juan Trippe ordered his 747s, in April 1966, Kolk saw that this aircraft was far too large for his market. He quickly took the initiative in recommending the development of another new airliner, one that would offer wide-body comfort along with the economy of the new turbofans. His plane, however, would be intermediate in size between the earlier jets and the 747.

Kolk's initial concept was well suited to American's route structure, which featured large numbers of flights between New York and Chicago. Indeed, it was a little too well suited; it lacked the size and performance that other airlines demanded. Kolk held discussions with his counterparts at Eastern, TWA, United, and Delta, and together they agreed that the new airliner was to have three engines and a larger passenger capacity. These four carriers along with American would be the initial customers, and Kolk and his colleagues proceeded to develop a common set of requirements.

Two planebuilders, Lockheed and McDonnell Douglas, proceeded to craft designs. This, however, was no federal competition for a contract, wherein one would win and the other would lose; this was an exercise in free-market competition, in which both firms had the opportunity to vie for success. The designs that emerged, the DC-10 and L-1011, were highly similar in size, performance, and general appearance, reflecting their compliance with Kolk's specifications.

During 1966, Lockheed was matched with Boeing in a federal competition that was the mirror image of the one in 1965. That earlier bidding war had involved the C-5A; when Boeing lost, its management immediately moved to pursue the 747. In 1966, the focus of attention was the SST, with these same firms competing for the FAA contract, and this time it was Boeing's turn to win. Lockheed's president, Daniel Haughton, learned the news on the last day of the year. Like his counterparts at Boeing, he immediately ordered that the people who were working on the SST shift gears and turn their attention to Kolk's airliner.

In aerospace design, small details can have large consequences, and this would be true of the L-1011. This airliner was to install one of its engines at the rear end of the fuselage, receiving its air through a curving duct that ran beneath the vertical fin. At the outset, Lockheed's engineers knew that they needed a short engine to fit this installation. Neither General Electric nor Pratt & Whitney had what they wanted, but a third player was at hand: Britain's Rolls-Royce. That company had a design on paper for a new engine, the RB-211, along with a very aggressive head of its Aero Engine Department, David Huddie. Above all, he wanted to place his company's engines within America's new generation of wide-body jetliners. Rolls had never cracked the domestic market in America, the world's most lucrative, but Huddie saw his opportunity in the L-1011. He succeeded, and in return he later received knighthood from the Queen.

By 1971, however, Lockheed's Dan Haughton was finding that he had hatched some chickens that now were coming home to roost. This had happened during 1965, when he had presided over his company's bid for the C-5A. The company had needed the work quite badly; if it had lost the contract, it would have had to shut down a division in Georgia, a major operating arm. To guard against this, Haughton had "bought in," submitting an unrealistically low bid of $1.95 billion. Even the Air Force had estimated that $2.2 billion would be more like it.

Then, amid escalation of both inflation and the Vietnam War, the C-5A program encountered major strains and delays. Costs went through the roof. By 1971, the Pentagon had budgeted $1.3 billion to cover Lockheed's share of the overrun. Though most of this would be charged to the taxpayers, Lockheed would take its lumps as well. Early in 1971, Haughton, now chairman, agreed to accept an additional loss of $200 million. That wiped out a modest profit; it even cut into the company's net worth. This news would not be welcome at the annual meeting, but business was business, and this transaction meant that Lockheed could begin to put the messiness of the C-5A behind it.

Haughton executed the agreement, headed for the airport, and flew to London to talk about the L-1011 with people from Rolls-Royce. As he later put it, "For about fourteen hours I felt good." Rolls had been buying in as well, and for the same reason: it needed the business. Its 1968 contract with Lockheed had committed Rolls to develop its turbofan, the RB-211, for a fixed price of $156 million and Lockheed to pay $840,000 for each engine. Rolls was also pushing onto new ground. This became apparent as the development of the RB-211 proceeded.

Rolls had been pioneering in the use of carbon fiber, a strong and very lightweight material. In selling the RB-211, a key point had been the firm's intention to build its fan of Hyfil, a proprietary carbon-reinforced epoxy. Hyfil resembles plastics used in today's tennis rackets, and its use in the three engines of an L-1011 stood to save 900 pounds of weight. Such fans must stand up to collisions with seagulls in flight. Hyfil's merits would rest on its ability to pass the chicken test. This involved a cannon that would fire four-pound chicken carcasses at an engine operating at full speed on a test stand. The blades broke under the impact, which meant that these blades would have to use the conventional material, titanium. Titanium was heavier than Hyfil, and this change marked a sharp setback for the RB-211 program.

It was one of a number of problems that drove up the program's cost. As this cost escalated, Rolls reported a loss of $115 million for the first half of 1970. Its chairman, Sir Denning Pearson, turned to the recently-elected Tory government of Prime Minister Edward Heath. The Tories responded by offering a subsidy of $100 million. Pearson, however, had failed to control his costs and hence he would have to go; the firm would have a new chairman, Lord Cole. His board members would include a representative of the government, Ian Morrow, who specialized in healing sick companies. Morrow soon arranged for an independent accounting firm, Cooper Brothers, to audit Rolls' books.

There was ample opportunity for questions, for Pearson had been using accounting practices that made bankers wince. Since 1961, he had avoided debiting the expenses of jet-engine development in the years they were incurred. Rather, he held them over and debited them in subsequent years, as these engines reached their customers. This practice amounted to prorating the development cost against income from sales. In this fashion, Rolls had reported a string of profits prior to 1970. Now it was difficult to know the firm's total liabilities.

The Cooper audit even had difficulty in estimating the cost of completing the development of the RB-211. The 1968 contract had specified $156 million. Early in 1971, it was at least $408 million. In turn, Lockheed had contracted to pay $840,000 for each engine, a price that supposedly would allow Rolls to make a profit. However, the bare-bones cost of production, even without profit, would now be $1.1 million. In addition to this, Rolls would deliver the engines late. As a consequence, it faced penalties for late delivery of an additional $120 million.

All this meant that Rolls was well past the point where an extra $100 million from the government, or even $200 million, could make a difference. Late in January 1971, Lord Cole learned that he lacked the funds to proceed with the RB-211. His board of directors promptly voted to place the entire company in receivership. In a word, Rolls was bankrupt.

This would be very bad news for Haughton. Britain's bankruptcy laws are far more stringent than those in the United States. American law works to protect a company against its creditors, shielding the firm against debts and legal claims while seeking a reorganization that can open a path to profitability. In Britain, however, creditors come first. A company is not permitted to operate if it has no prospect of success. Rather, it must sell off its assets and go out of business.

Though the Rolls-Royce board reached this decision on January 26, it did not announce it publicly. A week later Haughton, newly arrived at the Hilton Hotel, received a phone call from Lord Cole of Rolls: Could they meet privately at the Grosvenor House? Cole proceeded to tell him the news, which was both unexpected and crushing. When other executives arrived, for a previously scheduled luncheon, they found Haughton looking "as if he had got a bullet between the eyes."

The bullet was aimed more at Lockheed than at its chairman, for those engine intakes on the L-1011 now were all too likely to suck the company into its own bankruptcy. There simply was no easy alternative to the Rolls engines. To turn to Pratt & Whitney for its JT-9D turbofan or to General Electric for its own commercial engine, the CF-6, would cost a year in time and $100 million in development costs. That was because neither of these engines would slip in neatly as a replacement. There would be need for extensive redesign of engine housings and installations, starting with wind-tunnel tests, proceeding through reconsideration of weight distributions, and ending with extensive new tests necessary to win FAA certification. Lockheed would receive a triple blow: a massive overrun, a set of prices charged to airlines that would bring further losses on each sale, and penalties payable to the airlines for late delivery.

In addition to this, Lockheed already was deep in hock, having drawn $350 million from a $400-million credit line held by a syndicate of its banks. It could not seek help from the Defense Department; the settlement of the C-5A had also settled other outstanding issues. The company's stock was depressed. Worse, the L-1011 itself was stirring little interest. Though it had pulled in as many as 168 orders back in 1968, the total since then had grown by only ten more. Lockheed had not booked a single order for it in over a year. Yet to abandon the L-1011 was unthinkable. Its overhang of bank debt could drive Lockheed into insolvency as well.

Rolls' receiver, Rupert Nicholson of Peat, Marwick, and Mitchell, took control of that company on February 4. On the same day, the bankruptcy was announced in the House of Commons. As one official told the magazine Fortune, "The news was like hearing that Westminster Abbey had become a brothel." Prime Minister Heath might have bailed everyone out by nationalizing the whole of Rolls, but he had excellent reason not to do so. His legal advisers held that by doing so, the government could become liable for Rolls's debts, the magnitude of which was unknown even to the auditors from Cooper Brothers. Instead, Heath would take over only the portions of the company that were building military equipment. The receiver could sell off the division that was building the famous motorcars, which was profitable and would readily find a buyer. As for the RB-211, Heath would leave it to twist slowly in the wind.

This approach drew vigorous objection in Parliament. Jeremy Thorpe, leader of the Liberal Party, stated that the L-1011 would then be "the largest glider in the world." Worse, a default on Rolls's contract with Lockheed would "throw into doubt our credibility, our commercial competence and our good faith in all spheres of advanced science." Labour M.P.'s raised the issue of jobs for the some 24,000 people who were working on the RB-211 at Rolls and at its subcontractors and suppliers.

Faced with such arguments, Heath unbent slightly, agreeing to have his defense minister take a closer look at the engine's prospects. This minister, Lord Carrington, appointed three investigators that he called his "ferrets," whose report a few weeks later struck a more hopeful note. The RB-211 was meeting its performance goals in runs on the test stand. This was important; it meant the engine after all could be a technical success. Moreover, its development could go to completion for an extra $288 million.

Even so, the odds were formidable against saving the RB-211, and hence Lockheed. Twenty-four banks were directly involved as Haughton's creditors. All were highly averse to risk. Nevertheless, they would have to live with it and accept more; they might even have to throw good money after bad. Nine customers also had ordered the L-1011. Each had its own financial problems and could solve them in part by enforcing contract provisions requiring Lockheed to pay out money as a penalty for late delivery.

Though his hand was weak, Haughton was not without cards of his own to play. The banks, after all, wanted him to succeed; a Lockheed bankruptcy would leave them with bad debts, whereas with forbearance they might yet continue to hold profitable loans. The customers also had reason to stick with the L-1011, for they had already laid out substantial down payments. They also had purchased this airliner on highly favorable terms. This had resulted from Lockheed's competition with the McDonnell Douglas DC-10, wherein Lockheed had won orders by lowering its price and sweetening the terms of sale.

Even under the best of circumstances, the problems with the program would bring delays of several months in delivering the L-1011. However, most major airlines had lost money in 1970. They were in no hurry to receive the new airliners in accordance with the contracted schedule. To the contrary, delays in delivery would also put off the dates when they would have to pay the balance of the purchase price. The chairman of TWA went so far as to suggest that "a delay of a year would have as many advantages as disadvantages, maybe more."

Hence, the report to Lord Carrington meant that the outlines of a deal could begin to emerge. In essence, it would call on everyone to go back to Square One and renegotiate their contracts, paying little heed to the legal commitments of the previous years. Heath would need assurance that Lockheed would indeed stay in business and would not abandon the L-1011. Haughton would need more money from his bankers to give him a base from which to offer such guarantees. He also would have to pay more for his engines, while waiving penalties for late deliveries. For their part, the airlines would have to accept higher prices and later deliveries for their airplanes, again without receiving penalty payments.

Haughton now was the man who had to make it come together. He had a prodigious capacity for work, on which he now drew. Often he had flown in from the East Coast in his Lockheed JetStar, sleeping en route on a couch, checking in at home for a quick shower, then reaching his desk at three or four in the morning to begin his day's work. He also had extensive experience as a salesman. In this business this certainly did not make him a Willy Loman in the play by Arthur Miller, riding on a smile and a shoeshine. It meant, rather, that although he was Lockheed's chairman, he had a strong personal involvement in its sales. If an airline executive raised a question, Haughton himself might turn up the next day in that person's office to answer it.

In dealing with his banks and airlines, Haughton had to do a lot of hand-holding. Two financiers, one a vice-president from Bank of America and the other a vice-president from Bankers Trust, accompanied him on his travels, as representatives of the entire banking syndicate. Still, each airline and every bank would have to agree that such a deal would represent the best possible outcome for its investors and stockholders. Each of them would naturally prefer to hold back and try for better terms. All would have to agree at the same time, however, or the chance for a deal would fall through. As Nixon's treasury secretary, John Connally, put it, "Dan, your trouble is you're chasing one possum at a time up a tree. What you've got to do is get all those possums up the tree at the same time."

The most elusive of those possums would be the U.S. government. Early that spring, Haughton became aware that he could build a fragile arch that might support Lockheed, Rolls, and the L-1011. Its keystone, however, would be a new line of bank credit totaling $250 million. Lockheed lacked the assets to pledge as collateral, and its creditors would certainly demand security. That might be available, however, through a federal loan guarantee, a pledge that the Treasury would reimburse the banks if Lockheed should fold. On May 6, Connally met with Nixon at the White House and announced that the Administration would send the necessary legislation to Congress.

There it would face a minefield of opposition. Congressman Wright Patman, chairman of the House Banking Committee, had blocked federal support for the bankrupt Penn Central Railroad only a year earlier. He was highly skeptical of the proposed Lockheed loan guarantee. Senator William Proxmire, slayer of the SST and a harsh critic of Lockheed, was ready to filibuster against the bill. Though Lockheed was an important defense contractor, the L-1011 was entirely a commercial venture. If the firm went bankrupt, the Pentagon would find a way to rescue its military projects, most likely by having other aerospace firms buy up the pertinent company divisions. Moreover, the L-1011 was to use British engines, a point that did not escape the attention of lawmakers with ties to General Electric and Pratt & Whitney. An alternative, the DC-10, was already on the verge of entering service.

Weighing against these arguments was a single word: jobs. Haughton, testifying before Patman's committee, stated that as many as 60,000 people would be out of work if the L-1011 were to fail. The Democratic Party, which controlled both House and Senate, was still the party of Senator Hubert Humphrey, the presidential nominee of 1968 and a strong labor man. Having shot down the SST as recently as March, Congress could not lightly affront the unions a second time, particularly since the country was still in a recession. Moreover, 1972 would be an election year.

The outcome was thin indeed. On July 30, the House approved the bill, 192 to 189. The measure then moved to the Senate, which was to recess for a month on Friday, August 6. Haughton, however, had warned that by September, Lockheed would be out of cash. The Senate leadership responded by bringing the bill to a vote the previous Monday. California's Senator Alan Cranston, a principal backer, had been doing the nose-counting and calculated that it would lose by the margin of a single vote. He tried to win over Lee Metcalf of Montana, whose no vote seemed soft, and as the calling of the roll reached its conclusion, Metcalf saw that his vote was likely to be decisive. He told Cranston, "I'm not going to be the one to put those thousands of people out of work." He voted yes, and the loan guarantee passed by a margin of 49 to 48.

With this, the main stone of Haughton's arch fitted into place. The threat of a Lockheed bankruptcy receded, while Rolls now could emerge from its own receivership. With its RB-211, it would become a leader in the business of building engines for wide-body airliners. In turn, Lockheed now was free to proceed with its L-1011.

The L-1011 did not succeed in the market. Though the program went through development and production, Lockheed went on to construct only 252 of these airliners, rolling out the last in 1983. The program did not earn back its development costs; in fact, this firm sold few if any at a profit, for this company faced strong competition first from the DC-10 and later from the Boeing 767 and Airbus A-300. Hence to win further sales, Lockheed had to offer prices that were very low. The program had received over $1.7 billion at the time of the near-collapse of Rolls; the final losses, at the time of program cancellation, came to $2.5 billion. With this, Lockheed retired from the ranks of the commercial planebuilders and proceeded to make its living entirely as a military contractor.

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Page last modified: 07-07-2011 02:33:50 ZULU