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A. B. Wilson Communications
Transitions: Where We Were...Where We Are... Where We Are Going

This was the retirement speech of McDonnell Douglas President Gerald A. Johnston. Johnston compared his recovery from a serious illness to the turnaround effort then underway at McDonnell Douglas.

It is a real pleasure to be here to address the St. Louis Management Club. As most of you know, I will be leaving McDonnell Douglas around the end of this year. So this is omething of a leave-taking for me. This is probably the last time that I will speak to you from this podium as president of McDonnell Douglas...Time then for some "famous last words."

There was once a Roman emperor who passed away, saying, "Methinks I am becoming a god." In something of the same spirit, I say to you, "Methinks I am becoming a Sage." (Note: There is a "Sages Club" for McDonnell Douglas retirees.)

However, before I ride off into the sunset to join Bob Little, Don Malvern, and other worthies in the Sages Club, I would like to share a few thoughts with you on the state of our company -- where we were...where we are...and where we are  going.

It seems to me that McDonnell Douglas and the larger environment of which we are a part -- not just the defense industry but the nation and, indeed, the world -- are in a state of transition.

Transitions are a necessary part of life -- for individuals, organizations, and even nations. A transition marks the end of one journey and the beginning of another. Many transitions are predictable -- such as the change from childhood to adolescence; or, in my case, going out to pasture with the other "Sages." But even if they are predictable, transitions are often troubling, because they involve complicated, fundamental, internal change.

In her book Passages, Gail Sheehy noted that we, as human beings, are not unlike a certain creature that scuttles around on the ocean floor. Gail Sheehy wrote: "The lobster grows by developing and shedding a series of hard, protective shells. Each time it expands within, the confining shell must be sloughed off. It is left vulnerable and exposed until, in time, a new covering grows to replace the old."

The point is that the lobster has to get rid of its shell in order to grow. It must go through recurring periods of increased risk and exposure.

The  real test of our basic toughness and adaptability is how well we cope with those periods in our lives when the protective shell has been momentarily cast aside -- and we are suddenly very open and exposed.

Today the Russians are experiencing the shock of an abrupt and far-reaching transition. They have cast off the hard and confining shell of communism -- which they had carried on their backs for three quarters of a century.

Now they are struggling to grow the softer and more accommodating shell that we take for granted -- living in peace and freedom, under the rule of law, in a democratic, capitalist society.

Two years ago, I experienced an abrupt transition of my own. I became ill -- and was suddenly faced with the shocking discovery that my life was no longer encased in a protective shell of good health. The doctors thought I had only one chance in five of living. In their eyes I was a goner.

My wife was probably even more determined than I was to prove them wrong. Jackie wasn't about to let any pessimism creep into my thinking. When the orderlies were getting ready to wheel me into surgery, a priest came into the room and told her that he would like to give the last rites. She told him no.

She said, "Gerry was supposed to go to Warsaw when this happened and he still thinks he's ready to go. I want him to go right on thinking that way."

The funny thing is: In the transition from good health to bad, and back again, through a long, slow period of recovery, I gained something valuable. I found out -- all over again -- how close and important my family is to me. I found out how important my wife is to me. I also learned I am pretty tough. And that is something I have to go on proving to myself day after day.

In a way, I believe that McDonnell Douglas, as a corporation, has undergone a similar experience. A couple of years ago, the bubble of good health that has always surrounded this corporation disappeared. It just suddenly evaporated. We were on the top of the heap -- and then suddenly we were on the bottom.

In quick succession, we experienced the cancellation of the A-12, the loss of the Advanced Tactical Fighter, and several other setbacks in both the military and commercial businesses. The price of our stock -- which had been as high as $94 a share in 1989 -- dropped all the way down to $27 a share a few days after the A-12 was canceled in early January 1991.

A group of financial speculators -- known as short sellers -- took a large position against the company, betting that the stock price would drop still further. Fanned by the shorts, there were rampant rumors to the effect that the company was headed for Chapter Eleven bankruptcy.

As we  were scrambling to put our house back into order, two great earthquakes hit the aerospace industry.

First, of course, there was the end of the Cold War -- which has meant the beginning of a long period of steep and ongoing reductions in defense spending. And second, there was the recession in the airline industry, which has brought a three-year drought in commercial aircraft orders.

In retrospect, I believe it is a good thing for us that McDonnell Douglas got into trouble ahead of the rest of the aerospace industry.

Adversity is a stern taskmaster. As a company, we have been smart enough -- and tough enough -- to learn from our mistakes.

Having gotten into trouble as a result of the complacency and arrogance that comes from being at the top for a long time, we concentrated our minds on becoming a more cost-conscious and a more fiercely competitive company.

Ahead of most of our peers in the aerospace industry, we began to take strong, preemptive actions in reducing cost structures in advance of anticipated declines in production.

Across the corporation, we have  made deep, permanent cuts in our cost structures. We have tightened up operations. And we have beaten down doors all over the world to get new business.

Largely as a result of  our cost reduction efforts, our pre-tax return on sales at MDA-East, for example, is now running consistently at 10% or above, and our return on net assets (or RONA) is up to about 41%. That is very good indeed.

Improved financial results have been accompanied by some excellent results in securing new business in an increasingly competitive environment. All four of our existing combat aircraft programs -- the F/A-18, the F-15, the AV-8B, and the Apache -- have come up winners in international competitions. The F/A-18 E/F is now established as the cornerstone of naval aviation well into the next century. Our "Phantom Works" in St. Louis is doing exciting work on new technology and new generations of aircraft.

You know you are getting somewhere when a long-time rival like Grumman admits you have got them beat. Here's what Renso Caporali, the chairman of Grumman, had to say in the most recent issue of their employee magazine. He said:

"We simply can't retain the ability to compete as an airframe prime contractor. A couple of months ago, Secretary of Defense Les Aspin invited defense CEOs to Washington for a preliminary discussion of the results of the bottom-up review. We were shown a chart indicating the number of fighter aircraft primes in the business now -- five -- and the number that will survive by the end of the decade. The number was two. It's obvious that Lockheed and McDonnell Douglas are the odds-on favorites. They have the programs and the resources to ride it out. We just don't."

Thank you, Mr. Caporali.

If you look at how our other businesses are doing, you see dramatic progress there too -- progress that has been made in the face of declining business volumes; progress that is measurable in hard dollars-and-cents.

Douglas Aircraft Company has now been continuously profitable for two and a half years. In the past, DAC had to build over 100 MD-80s a year in order to show a profit. Now they have lowered their break-even point to under 30 aircraft a year. That translates into continued profitability -- and real staying power -- in a lean market. It is not too difficult to lower unit costs while maintaining or increasing production rates. But it is another matter when you are in the midst of cutting production rates. But DAC has managed to do so -- and they deserve a lot of credit for that. DAC isn't just talking lean manufacturing; they have put it into practice.

We had some good news recently on commercial aircraft placements. Under a new arrangement, Garuda agreed to take three new MD-11s from DAC under a 12-year lease arrangement. This event eliminates the final "white tails" from our 1993 inventories.

We are hoping for more good news in the near future, as we await an announcement from Saudia Airlines on a major fleet expansion. DAC is definitely in the running with a package of MD-11s and MD-90s.

There have been a string of recent achievements as well from our other business units -- missiles, helicopters, the C-17 military transport, and space.

Our missiles business has been outstandingly profitable -- truly outstanding. Our helicopter business is solidly in the black as well. Recent milestones for the helicopter business include the first public flight of the Longbow Apache with a functional radar, and expansion of the flight test program for the all-new MD Explorer eight-place, twin-engine helicopter.

We expect to hear important news concerning the fate of the C-17 program in the very near future. I can tell you that we are cautiously optimistic. This program is absolutely critical to the whole concept of rapid deployment. And there is no doubt that we have made considerable strides over the last year in improving productivity and "in-position" completion of work in this program.

I will ask your indulgence if I sound a trifle partisan in talking about the space company. This is where I have spent 31 out of 38 years at McDonnell Douglas. I can't help getting excited about some of the things that are happening at the space company.

As all of you know, our Delta Clipper Experimental reusable launch vehicle has confounded all kinds of skeptics by completing a series of supposedly "impossible" maneuvers.

Scientists, engineers, and physicists in the U.S., Japan and other countries scoffed when we proposed to build a true rocket that is able to do many of the things that conventional aircraft do. They said you can't build a rocket -- fired by rocket engines -- that will hover like a helicopter, that is capable of lateral flight, and that is able to extend its own landing gears and make a vertical landing.

Well, in three successful flights since mid-August, the Delta Clipper has proven it can do all those supposedly impossible things. In doing so, it has provided a strong indication that practical, routine travel in space -- while not here yet -- is truly within our reach.

Another one of our programs -- the Delta II -- stands for consistency and reliability in the satellite launch business. As such, it may be compared with the great baseball player -- Joe DiMaggio.

DiMaggio symbolized all-around excellence and reliability on the baseball diamond. His name was synonymous with grace and dependability. Remember the haunting words of the Simon and Garfunkle song: "Where have you gone Joe DiMaggio? A nation turns its lonely eyes to you."

In 1941, DiMaggio hit safely in 56 consecutive games -- a record that many experts consider to be the greatest of all baseball feats. DiMaggio broke the previous record, held by another player, when he hit safely in his 43rd consecutive game. With every hit after that up to 56, Joltin' Joe set a new record.

The Delta II program is now in the same position in the satellite launch business. On August 30, the Delta II made its 44th consecutive successful flight, setting a new world record. Like DiMaggio, the Delta II will break its own record with every successful flight from here on out.

Though we were disappointed when NASA selected another company to serve as prime contractor for building a redesigned Space Station, we fully expect to play a major role in this program as a subcontractor to Boeing. I am glad to see the President's continuation of our country's commitment to space exploration.

Looking across the spectrum of our businesses and programs, I am extremely proud of the progress that McDonnell Douglas has made over the past three years. There were many people who counted us out -- and we have proved them wrong. The people who shorted our stock -- and went out of their way to speak ill of the company -- have been scurrying for cover over the last year. Since early 1991, the price of our stock has more than tripled, and is now trading close to an all-time high.

As Winston Churchill once said, "Nothing in life is so exhilarating as to be shot at -- without result."

Not only have we come back financially, but  we have shown that McDonnell Douglas is both psychologically and technologically prepared to be a leader for a long, long time to come.

No one can say the past few years have not been stressful -- for all of us. I can tell you that the most difficult part of my job as company president over the last five years has been in being a part of tough but necessary decisions that have cost many people their jobs. You know you are going to be hurting people; but you also know that you have to do it for the good of the people who remain. The hard truth is that you cannot maintain the same work force with a declining business base.

It has been a true pleasure -- and a real privilege -- to have a boss of the caliber of John McDonnell. I have truly enjoyed working with him -- and I can't say that about every guy I've worked for over the course of my career. I believe John has been a very good leader for the company -- during the extremely stressful period we have been in. He is a model of calm and intelligent determination. In the words of Rudyard Kipling, John McDonnell is the kind of man who can "meet with Triumph and Disaster -- and treat both of those impostors just the same."

As I said at the outset, the world defense environment is in a state of transition; so is our industry; and so is our company.

I continue to believe that the world will be a better place as a result of the end of the Cold War. We are part of a pioneering industry that will continue to turn impossible dreams -- such as routine travel in space -- into practical realities in the years ahead. And I firmly expect McDonnell Douglas to be out there in front -- leading the way.


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Andrew B. Wilson

26 Taylor Place Drive
St. Louis, MO 63108
Phone: (314) 361-1195

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