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Losing Winner. The engine crisis climaxed a week in which Lockheed set a corporate speed record for careening between dangers. Only 72 hours before the Rolls debacle. Lockheed had escaped a threat of bankruptcy by settling an old contract dispute with the Pentagon—at the price of agreeing to take a $240 million loss on the C-5A cargo planes that it is building for the Air Force. The settlement came only a month before Lockheed was due to run out of the money needed to keep its military production lines going.
Ironically, Lockheed fell into the spin by "winning" the same sort of fixed-price pact that it later offered to Rolls-Royce. In 1965, it outbid Boeing and Douglas Aircraft (now part of McDonnell Douglas) for the contract to build the C-5A, the world's largest plane. The award was the first under a Pentagon policy, since abandoned, called "total package procurement" (TPP). It called for a manufacturer to do all the research, development and production for a major project at a price that could not exceed a certain ceiling. The idea was to reward the contractor who kept costs down by allowing him a large profit, and penalize the inefficient contractor by making him take a loss. The complex contracts also had clauses that were supposed to guard against windfall profits or catastrophic losses.
Lockheed agreed to produce up to 115 C-5As for a ceiling price of $2.3 billion. That turned out to be a severe miscalculation. The Viet Nam War increased demands on the aerospace industry so much that Lockheed had difficulty getting parts from suppliers. Inflation raised the price of everything. Lockheed found that in order to keep the plane's weight within Air Force requirements it had to use costly stainless steel, titanium and beryllium in place of cheaper plain steel and aluminum. Its planners also had overlooked such details as the fact that the C-5A's tail is six stories tall, and workers use up many costly man-hours just climbing down to the bathrooms. The plane turned out to be a technological triumph but a financial fiasco. In the mid-1960s Lockheed had been flying high, with three straight years of profits over $50 million, but by early 1970 Chairman Haughton informed the Pentagon that C-5A costs were busting Lockheed. His pleas for relief touched off a long dispute about who should pay how much of the cost overruns.
Deputy Defense Secretary David Packard last month offered Lockheed two choices: accept a fixed loss of $200 million, or fight the matter out in the courts. Haughton first chose to fight, expecting that Lockheed meanwhile would keep getting production money from the Pentagon; Congress had voted $200 million to keep Lockheed running. Two weeks ago, Packard withdrew the offer and delivered a virtual ultimatum. He notified Haughton that the Pentagon could find "no precedent" for making any payments on a contract under litigation. If the dispute dragged on, that meant a cutoff of Washington money —and bankruptcy for Lockheed.