AVIATION: Out of the Spin

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With a sigh of relief, the U.S. aircraft industry learned last week that the Defense Department would pay its bills after all. To 28 major airframe and missile contractors, Defense Secretary Neil H. McElroy sent a telegram rescinding the harsh 25% reduction in progress payment on contracts that recently threw manufacturers into a tail spin (TIME, Oct. 28). In its place, the Defense Department announced a new, less rigid series of payment "targets," under which the planemakers would get at least 80%, and possibly 90%, of their costs for work in progress.

What caused the Pentagon's turnabout was a decision by the Administration to pay out an additional $400 million for defense programs in the second quarter of fiscal 1958 and to give $300 million of it to the Air Force. It had little alternative. Despite all economies, the Defense Department spent $10.3 billion in the first fiscal quarter, leaving only $9.8 billion for the second three months. Since program stretchouts are slow to take hold, this would have meant either 1) enormous cuts to bring the budget back into line by the end of the second quarter—something military planners refused to accept, or 2) forcing the aircraft industry to borrow huge sums to pay the Government's bills.

While the new funds will not solve all the industry's problems, they will ease much of the strain. Originally, planemakers estimated that they might be forced to borrow between $1.5 billion and $2 billion to keep going without full progress payments on contracts. Fortnight ago, after a calmer calculation, the spread was down to $800 million. Now with an additional $300 million available, the gap is only $500 million all told. Of this amount, the industry will probably have to borrow $300 million, while the Air Force hopes to find enough loose change in its various financial pigeonholes to take care of the remaining $200 million.

Most of the planemakers will probably have to find some new financing. Boeing Airplane Co., which rolled out its first civilian 707 jet transport last week and has a $2.1 billion backlog of military orders, estimates that it will have to borrow between $150 million and $200 million to meet payrolls and other costs. But after all the rumbles of wholesale layoffs shutdown plants and delays in plane deliveries, Boeing President William McPherson Allen seemed satisfied with the new targets. He expected to escape ''precipitous'' job cutbacks; he also predicted that both the Air Force's production schedules and Boeing's booming profits would remain intact.

The Defense Department last week also eased the industry's fear that charges on new financing could not be recovered from the Air Force. While the Government will not specifically pay interest charges on any funds the planemakers borrow, it will revise contracts to allow borrowers a bigger profit, in effect paying them back for interest charges. As matters stood at week's end, the darkening clouds over the U.S. aircraft industry looked far less threatening.