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Last week Haughton capitulated. Lockheed and the Pentagon expect to sign a renegotiated contract that will be a cost-plus deal—or really cost-minus. Essentially, the Government will pay Lockheed whatever is needed to complete production of 81 planes (current estimate is $3.7 billion). In return, Lockheed will refund $200 million, accepting that as a fixed loss. Lockheed has already written off $100 million of that as production costs for which it will not be reimbursed; it will pay the second $100 million in annual installments of $10 million, or 10% of pretax profits, whichever is greater, beginning in 1974. In addition, Lockheed will have to swallow "unallowed" costs, such as interest on funds that it borrowed to keep C-5A production going. The company estimates these costs at $40 million.
The C-5A deal will bring to $480 million Lockheed's total loss on four defense projects. The other three are the Cheyenne helicopter, the SRAM air-to-ground missile and nine Navy ship contracts. Lockheed had posted profits of $10.3 million for the first nine months of 1970 but will wind up reporting a full-year deficit of $80 million on sales of about $2 billion.
Continuing Cliffhanger. Despite the huge losses, Lockheed at midweek appeared to have escaped with a whole skin. For one thing, it expected to conclude within a month an agreement to borrow $600 million from 24 banks and three airlines to finance production of the L-1011 airbus. The banks had been holding up the credit to see how Lockheed made out in its negotiations with the Pentagon. Then the Rolls-Royce collapse turned everything upside down again.
Conceivably, Lockheed could buy engines for the L-1011 from either General Electric or Pratt & Whitney. But redesigning the plane for a different engine would cost so much time and money that Lockheed might be conceding an insurmountable competitive lead to McDonnell Douglas, maker of the DC-10 airbus. Eastern Air Lines announced last week that it is "exploring other options" to the L-1011; they include making fuller use of present equipment or buying DC-10s instead of the Lockheed TriStar. Moreover, Lockheed's bankers will hardly be eager to finance the L-1011 until the company can find some engines to put in the plane.
The Nixon Administration decided months ago that it could not permit a Lockheed bankruptcy. Such a failure would shake the company's 55,000 shareholders and 85,000 employees, its bankers, thousands of subcontractors that supply Lockheed and the economies of California and Georgia, where Lockheed production is concentrated. Washington will hardly be in a mood to let the British government force that disaster by reneging on the engine contract —and the U.S. does not lack clout in negotiating with London. For Lockheed and the governments of two old allies, the story promises to be a cliffhanger for months.