(FORTUNE Magazine) – ONCE AGAIN bad news has jolted McDonnell Douglas. Often enmeshed in controversy and scandal in the 1970s and 1980s, the $15-billion-a-year aerospace manufacturer must now contend with two fatal accidents, half a world apart, involving its DC-10 airplanes. The first was in Sioux City, Iowa, where 111 people died in a United Airlines crash. Seven days later another 88 people were killed when a fog-encircled Korean Air DC-10 missed the runway in Tripoli, Libya. If investigators determine that design flaws contributed to either accident, it could seriously undermine the already precarious recovery of the company's commercial airplane business. Publicly, McDonnell Douglas officials express full faith in the DC-10, which has been involved in three other well-publicized crashes in the past 15 years. ''From all I've seen, there's been nothing to shake my confidence in the DC-10,'' CEO John McDonnell told FORTUNE in his first interview since the accidents. After 18 years the company is replacing the DC-10 with a new model and delivered the last one to Nigeria Airways in July. Even if its plane gets a clean bill of health, McDonnell Douglas has plenty of tough flying ahead. As the nation's largest military supplier ($8 billion in contracts last year), it historically gets two-thirds of its sales from the government. It is already seeing aircraft programs trimmed away by Pentagon budget cutters, and more reductions are on the runway. Production schedules for all four of its major fighter planes may be stretched out beyond their normal spans, putting a brake on profit margins. Defense Secretary Dick Cheney wants to stop two other programs after fiscal year 1991, the F-15 Eagle attack plane and the Army's AH-64 Apache helicopter, wiping out $5.2 billion in revenues for the company and its subcontractors. Worse, production bottlenecks and a jarring reorganization are causing losses in its commercial airliner business. Thanks to aggressive salesmanship and a worldwide updraft in air travel, the company's backlog of airplane | orders is at an all-time high. But its Douglas Aircraft division, which also makes military cargo planes, has been unable to ramp up production to meet demand. It reported operating losses of $224 million in the first half of this year. CEO McDonnell, 51, is convinced that he can put the family-run firm back on course. ''Our goal,'' he asserts, ''is to produce higher-quality products at lower cost.'' That may seem like an obvious objective, but it is a new tack for an organization where sales have long dominated manufacturing. McDonnell, a detail-minded manager who sports a neatly trimmed beard, is the son of James S. McDonnell, the legendary ''Mr. Mac,'' who founded the company in 1939 and ran it until his death at 81 in 1980. McDonnell became the top officer at the St. Louis-based company after his cousin, Sanford, retired last year. McDonnell Douglas reported a loss overall of $58 million in the first six months of 1989, excluding a one-time gain of $179 million from an accounting standard change. Cost overruns in airliner production are largely to blame, but the company has also stumbled trying to diversify into less cyclical businesses. Last month it said it would sell off a big chunk of its information services unit to British Telecom, thereby abandoning hopes of becoming a major player in that field. The losses come at a bad time. McDonnell Douglas has increased its debt load 41% in the past 18 months to $2.3 billion, partly to finance the manufacture of its new 325-passenger wide-body jet, the MD-11. The plane, essentially a modernized version of the DC-10, won't be delivered to customers -- and therefore won't begin generating revenues -- until the autumn of 1990, some three months behind schedule. If the Federal Aviation Administration orders design changes in the MD-11 after the Sioux City crash, certification could be delayed, putting an even greater strain on profits. Despite its success as a defense contractor, McDonnell Douglas has been bedeviled by the commercial aviation business ever since it took over failing Douglas Aircraft Co. in 1967. During the late 1970s and early 1980s it lost buckets of money as it grappled with stronger competitors and the effects of a DC-10 crash in Chicago in 1979 that killed 273 people, still the worst U.S. aviation disaster. McDonnell Douglas considered getting out of the business in the early 1980s. In 1983, however, James Worsham, a supersalesman who headed the Douglas division, persuaded American Airlines to lease 20 MD-80s on a trial basis. American liked the planes but was especially fond of the bargain- basement terms Worsham offered. The following year American bought 67 more of the 150-passenger aircraft, and McDonnell was back in business to stay -- albeit at a cost. According to Phil Friedman, a Drexel Burnham Lambert analyst, low-ball pricing tactics have helped produce cumulative losses of $200 million in the past decade.

Though it still lags behind competitors Boeing and Airbus (see chart), today the Douglas division has a record order backlog of $18 billion. The 401 firm orders for the MD-80 are enough to make the production lines at the Douglas plant in Long Beach, California, hum well into 1993. Another 518 options, if exercised, would keep the work force occupied almost to the end of the century. The company has also logged 95 firm orders and 220 options for the MD-11, the new wide-body. Revenues at Douglas could balloon from $4.9 billion in 1988 to an estimated $10 billion in 1991. But after its long famine, Douglas has trouble coping with the feast. ''That was probably a more ambitious growth program than they should have committed themselves to,'' says Paul Nisbet, an aerospace analyst at Prudential-Bache Securities. After a hiring spree between 1984 and 1988 that more than doubled employment to 44,000, Douglas is handicapped by inexperienced workers who require costly training programs. Initial quality has slipped, forcing expensive and time-consuming repair work. Outside suppliers cannot keep pace with increased orders, and Douglas cannot even build enough of its own parts to meet demand. So tangled are the assembly lines that Douglas lost money building the ten-year-old MD-80 in the first half of 1989.

Chairman McDonnell insists the factory problems can be fixed. ''Our solution,'' he explains, ''is to change the way we do things.'' He's not kidding. In January, McDonnell appointed Robert Hood, whose forte is manufacturing, to replace the retiring Worsham. Next, the company introduced a sweeping reorganization plan called the Total Quality Management System. It scraps the old functional setup in which engineers worked on several different classes of aircraft and replaces it with a product-oriented system that allows them to focus on a single plane. Every one of Douglas's 5,000 managerial and supervisory positions was eliminated. The former occupants of those jobs can apply for just 2,800 newly created posts. The 2,200 who lose out will be ! stripped of their line managerial responsibilities. Most will be put to work as technicians on Japanese-style manufacturing teams both in design offices and on the production lines. McDonnell hopes the reorganization will improve communication, cut bureaucracy, and put an end to what he calls ''finger pointing and frustration caused by a lack of authority and accountability.'' Maybe so, but the execution was clumsy. ''They've created chaos,'' complains Richard Shevell, a former senior engineer at Douglas who is professor emeritus of aeronautics at Stanford. ''These kinds of business managers don't care about design or about the wonders of air transport. All they care about is organizational charts.'' McDonnell Douglas concedes that TQMS has cost more money than it has saved so far. THE COMPANY also has to win over its often restive blue-collar workers, represented by the machinists and the auto workers unions, who remain suspicious of the managers' talk about teamwork and expanded worker responsibilities. Opposition is especially stiff at the missile systems operations in St. Louis where TQMS has just been introduced. ''They've been kicking us in the butt, and now they want to kiss us on the jaw,'' says Cassell Williams, president of the 12,000-member District 837 of the International Association of Machinists. ''They've got to build our trust first before we take them seriously.'' By now, McDonnell Douglas is well experienced in coping with crashes, labor problems, and government cutbacks. To date, it has shown an admirable ability for surviving its problems, if not necessarily solving them. The company's current challenge is to sustain its profitable defense business while proving that it can produce and deliver commercial airliners as efficiently as it can sell them.

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