Sale hinted as low morale, losses hurt defense contractor

AAI IN TAILSPIN

May 10, 1993|By Ted Shelsby | Ted Shelsby,Staff Writer

These are tough times for AAI Corp., the Cockeysville defense contractor that state officials once touted as "a super company of the future" because of its rapid growth.

AAI prospered during the Reagan administration's defense buildup, feeding on Pentagon orders for products such as a flight simulator to train F-15 pilots and turrets for the Sergeant York anti-aircraft gun. From 1979 to 1987, its work force grew from 1,500 to 3,500.

But since then, AAI has eliminated nearly 2,000 jobs at its York Road complex. Two weeks ago, Thomas V. Murphy resigned under pressure after a three-year stint as president and chief executive. Friday, the company reported a first-quarter loss of $16.5 million. And morale is low as workers await word on layoffs this week that could affect as many as 225 employees.

"It's constant fear," said one middle manager who asked not be identified for fear of retribution by the company. "It's like you're living on a bubble; everyone feels their job is on the block."

The new layoffs could portend even greater change at AAI. There are strong signals from corporate parent United Industrial Corp. -- whose stock price has dropped more than 50 percent since the Reagan era -- that New York-based senior management is unhappy with its major subsidiary.

And as United Industrial stockholders prepare to meet tomorrow in New York, stock analysts say that the company -- and AAI, which accounts for about 80 percent of its revenue -- could be put up for sale.

Like other suppliers of military equipment, AAI has seen its major market shrink as the Cold War ended. Ironically, one of the company's major diversification moves -- the $15.9 million acquisition of Microflite Simulation International Corp. in 1991 -- soured for similar reasons.

"That was a disaster," Bernard Fein, president and chairman of United Industrial, said of the Microflite deal.

The purchase of the Binghamton, N.Y., company, which makes flight simulators used to train commercial pilots, was designed to lessen AAI's dependence on military contracts. Enthusiastic executives were predicting that Microflite could boost AAI's commercial sales from about 2 percent of revenues to 40 percent within a few years.

That never happened. The airline industry, plagued by overcapacity, has been shrinking and carriers have been laying off pilots. Microflite also was hurt by a $50 million lawsuit filed by CAE-Link Corp. alleging that Microflite violated patent rights related to building the simulators.

"Nobody was giving us any business because of the CAE lawsuit," Mr. Fein said. "CAE would call our customers and say, 'Don't do business with them, you might not be able to use the equipment.' "

The result: Microflite posted a loss of $5.8 million last year and United Industrial is trying to unload it.

Mr. Fein says the company is negotiating with a couple of potential buyers of Microflite and a sister plant in Orlando, Fla., that manufactures flight simulators for military planes.

Asked if the company might recover its investment, he laughed and said: "No, no. . . . We want to walk away from it and take our losses."

Mr. Fein calls the Microflite acquisition an honest mistake, one that he can understand. But he's not so understanding of other problems at AAI.

In a telephone interview last week, he lashed out at the subsidiary's management, accusing them of "trying to hide the fact that certain contracts were operating at a loss."

"I'm 85 and I used to be very active in the company," he said, "but now they think they can just bypass me."

Without directing his criticism at any one in particular, he added, "They took the approach of 'What . . . are you doing here? You belong in an old folks home.' "

He pointed to two other troubled AAI programs, a firefighting training system and an anti-submarine helicopter flight simulator, claiming that management was not forthright in disclosing financial details.

On the firefighting system, a commercial spinoff of a Navy contract to train crewmen to fight ship fires, Mr. Fein said AAI sought to conceal several things it had overlooked, including the high cost of insurance.

On the helicopter program, he said AAI completed construction of the equipment and still had to perform other services estimated to cost $5 million. "The whole contract was only $5 million," he added. "They tried to hide that loss from us."

He exclaimed, "I intend to have somebody there . . . a president who will communicate with us."

As an indication of his distance from AAI's operations, Mr. Fein seemed surprised to hear the subsidiary -- by its own count -- has cut employment from 3,500 workers in 1987 to about 1,530 today. "That's wrong," he said. "I don't believe that."

When asked about Mr. Murphy's sudden departure, Mr. Fein responded: "There were lots of reasons. He was not fired; he resigned. He probably knew what was coming because of the questions we were asking. He realized he made a boo-boo in the way he ran the company."

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