BRIEFING OF ASSISTANT SECRETARY OF DEFENSE (COMPTROLLER) TERENCE E. MCCLARY ON AIR AMERICA RENEGOTIATION PROBLEM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP76-00702R000200080005-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 16, 2016
• Document Release Date: November 29, 2004
• Sequence Number: 5
• Publication Date: August 22, 1974
• Content Type: BRIEF

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22 August 1974
SUBJECT: Briefing of Assistant Secretary of Defense (Comptroller)
Terence E. McClary on Air America Renegotiation
Problem
1. I briefed Mr. McClary yesterday in preparation for his
participation later in the morning in the meeting with Chairman
Whitehead of the Renegotiation Board with Deputy Secretary of
Defense William P. Clements, Jr. Whitehead had requested the
meeting.
2. Upon learning that Air America (AA) is wholly owned
by CIA and that the proceeds of its imminent dissolution will accrue
to the benefit of the Treasury, he agreed that the renegotiation is a
useless and wasteful exercise. Because much of the work and
reporting by AA has already been done, we discussed the possibility
that Whitehead might tell Clements that the Board will accept a
settlement of $2 million without hearings and that this would be a
suitable and preferable way for that part of the company's assets
to be returned to the Treasury. McClary accepted our position
that any additional work is undesirable, especially in that the
Board's report of the settlement could raise questions in Congress
and result in publicity. While Defense cannot force Whitehead to
follow its recommendations, McClary knows that Whitehead is
virtually powerless since he must rely on the Department of Justice
for enforcement and they are unwilling to act.
3. As a matter of interest, it has been reported that Mr.
Whitehead has tendered his resignation under pressure from Senator
Proxmire, but the General Counsel of the Board advised me on
Monday that he was now not certain the resignation would take place.
Whitehead has been criticized severely by Proxmire for his handling
of the renegotiation of McDonnell Douglas contracts and for an order
he apparently gave to his General Counsel not to permit a newly
appointed member of the Board to have access to the Board's
McDonnell Douglas files.
Acting General Counsel
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17 April 1974
BRIEFING NOTE FOR THE DIRECTOR
SUBJECT: The Renegotiation Board - Air America
1. Some months ago The Renegotiation Board contacted
Air America, requesting that Air America file appropriate
statistics with the Board for the years 1967 through 1973. The
Board is aware of Air America's ownership, and prior to 1967
it routinely granted Air America exemptions from the filing and
renegotiation process, which were fully authorized under
applicable law.
2. We contacted the Board after it approached Air
America last year, and we argued, in writing on a classified
basis, for an exemption on the basis that Air America was
Government owned and that renegotiation procedures ultimately
served no useful purpose. The Board did not agree, pointing
out it believed that under the law it was required to look into
the matter and to develop a proper record. Thus, it required
Air America to comply with filing requirements. We had hoped
that once the Board examined the figures it would make a
determination that it need go no further.
3. On April 4, 1974, however, the Board forwarded a
report to Air America, advising it that the profits subject to
renegotiation for the years 1967 through 1973 totaled $14, 400, 000,
Clearly, the Board intends to go forward with renegotiation
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procedures, but at this time we are unable to even guess at the
amounts it might claim should be returned to the Treasury. The
procedures will be time consuming and will require considerable
effort by Air America employees who are otherwise fully seized
with the problem of winding down the airline's affairs, including
matters involving Air Asia, which we are trying to sell as a
separate entity. Also, employees of the Board will expend
considerable time and effort in the procedures.
4. Looking at the over-all picture, it appears that no
useful purpose is served by these procedures, since ultimately
the U. S. Government is the recipient of all funds. Further,
the situation in 1967 through 1973 did not differ from that in
earlier years when the Board granted exemptions. On the
other hand, the Board feels that in the atmosphere in Washington
today it wants a full record that it has acted properly under law.
5. Hopefully, Mr. Ash might agree with our position.
Furthermore, there is a distinct possibility that the $20, 000, 000
from Air America which is intended as an offset in our appropriation 25
will not be fully available if the procedures are carried out.
LJOHN S, WARNER
General Counsel
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Remarks :
The briefing note on my meeting with
Assistant Secretary McClary for your use with
Deputy Secretary Clements. Also attached as
background is John Warner's briefing note of
17 April which pretty well summarizes our
dealings with the Board.
cc: DDCI
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Acting General Counsel
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FORM NO. 237 Use previous editions (40)
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 I I Renegotiation Board
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prior to the initiation of the progra .s. A memorandum that was issued June ons subcommittee headed by Sen. Prox-
As for the future of the EVS program, 21 by the White House Office of Tele- mire.
Butterfield said the existing leased system communications Policy will influence any Last week, Sen. Proxmire, who had
can handle presc;:, needs but an EVS- future FAA decision on whether to recommended Whitehead's removal, an-
type capability will be required for the relaunch a new EVS program or to lease nounced the board chairman's resigna-
upgradc:::.ird-generation air traffic con- from the Bell System. tion had been "requested and accepted"
trol syst:..;i. That memorandum said government by the White House.
He indicated FAA plans to discuss with agencies should lease commercial service The White House version was that
Bell System officials the current prospects unless it is not available when needed, is Whitehead had submitted his resignation,
of obtaining EVS-type capabilities from not adequate technically or operationally, and its acceptance by President Ford was
that company, as a possible alternative to or is "significantly more costly," But- a technicality. Board members serve at
launching a new program to develop terfield said at the hearing. the pleasure of the President, rather than
agency-owned equipment. The document said that for agency- for fixed terms. The White House also di-
The FAA's decision to procure its own owned and operated service to qualify as rected board member Norman B. Hous-
EVS was based on an analysis that indi- "significantly less costly," the "savings ton to serve as acting chairman.
cated the agency could expect to save $30 must exceed 10% of the cost of commer- During the period of board contention
million annually by 1994, compared to cial service and the cost estimate of the over the McDonnell Douglas case, Hous-
leasing Bell System hardware. non-commercial approach must include ton pursued a middle road between
The savings could be significantly all of the factor's specified in OMB circu- Whitehead and Chase. But he ultimately
larger if the EVS system were designed to lar A-76," Butterfield said. accepted the position of the majority.
make maximum possible use of leased The FAA administrator added that Chase and Houston are the two new
lon g-distance trunk lines, according to "we are not sure what the savings would members of the board, appointed in Oc-
one FAA engineer. This would involve be. That is something we have to investi- tober, 1973. Chase is former president of
continuous monitoring of trunk lines and gate. But we consider EVS an important Pacific National Bank of Washington, El-
automatic switching to utilize temporarily element of the upgraded third generation lensburg, Wash. Houston is former dep-
lightly loaded lines. air traffic control system." uty assistant secretary for administration
of the Health, Education and Welfare
C
By Katherine Johnsen
Washington-Clash between Sen. Wil-
liam Proxmire (D.-Wis.) and Chairman
William S. Whitehead of the five-mem-
ber Renegotiation Board over the settle-
ment of McDonnell Douglas Corp.'s ex-
cess profits case covering 1967-69 for $5
miihon culminated last week in White-
head's resignation.
A dissent to the board's 4-to-1 majority
opinion maintained that the excess prof-
its c.etermination against McDonnell
Douglas should have been more than $30
million. The dissent by board member
Goodwin Chase was supported by Sen.
Proxmire.
The highlight of a confrontation be-
tween Sen. Proxmire and Whitehead over
the McDonnell Douglas case was the dis-
closure that Whitehead had threatened to
have the board's general counsel, David
M. F. Lambert, fired for spending too
much time in supplying Chase with legal
guidance. The confrontation occurred at
a July 25 hearing before the Appropria-
DDd,C $ctron Protest Response Due Next Month
Washington-National Aeronautics and Space Administration will respond in about
n;d-September to Dynalectron Corp.'s protest over the award of a contract worth
potontia Iy $40-50 million to Lockheed Electronics Co. for operation of the Johnson
Space Center-White Sands Test Facility (AwasT July 29, p. 21).
The protest centers on overall contract costs that Dynalectron believes would be
substantially lower if it were awarded the contract.
"NASA has stated that after [contract cost] normalization procedures the cost dif-
ferentials between Dynalectron and Lockheed were not 'substantial' and that, ac-
cordingly, the source selection official made a decision solely on the basis of mission
suitability scores," Dynalectron said.
A comparison of manning and staffing approaches between the two competitors in-
dicates "Lockheed's proposed approach will result in an additional cost to the gov-
ernment [of] millions of dollars over the anticipated program period," Dynalectron
said.
Dynalectron received a number of "good" ratings on mission suitability criteria and
consistently was ranked second to Lockheed In this area during the competition, ac-
cording to Dynalectron.
"in view of the fact that NASA has officially rated Dynalectron's performance on its
current contract as 'excellent,' it is most difficult to accept NASA's failure to accord
Dynalectron's management team an overall rating of excellent," Dynalectron said.
Dept. Whitehead and board members
Rex M. Mattingly and D. Eldred Rine-
hart were appointed in 1969.
Calling Whitehead's removal "wel-
come news," Sen. Proxmire said the July
25 hearing on the McDonnell Douglas
case "demonstrated beyond question the
incompetency of Chairman Whitehead."
Sen. Proxmire added that "due to the
board's recent leadership, defense con-
tractors have been allowed to keep tens
of millions of dollars in excess profits
which should have been recovered for the
taxpayer."
The key issue in the McDonnell
Douglas case was whether its profits
should be averaged out for the corpora-
tion as a whole or considered separately
on a product-line or divisional basis.
Majority View
Under Whitehead's leadership, the ma-
jority took the first approach, and mem-
ber Chase the alternative approach.
Specifically, the majority determined
$5 million in excess profits for 1967 and
no excess profits for 1968 and 1969.
Chase's dissent said the excessive prof-
its amounted to $15 million for 1967, S16
million for 1968 and that there was not
sufficient information to make a finding
for 1969. Chase estimated that segments
of the corporation that previously were
Douglas Aircraft Co. had a profit of 5%
of sales, and the segments that previously
Mere McDonnell Corp., 9% of sales.
McDonnell and Douglas merged in mid-
1967. At that time McDonnell was in a
profit position and Douglas in a loss posi-
tion.
But profits-on-sales is only one factor
considered by the Renegotiation Board in
making its annual determinations of the
excessive profits of contractors on govern
ment business. Other factors include
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profits on capital investment, risk AJW it Combat Fight Radar
Burned by the contractor, contractor per- C ~J
formance and contribution to the defense
effort.
Senate subcommittee hearings, Proposals Sought by US ~~ F
Vv...1ichead said the board does make an
evaluation to determine the degree of dif-
ference in a contractor's products. If there
is sufficient dissimilarity, the renegotia-
tion law is applied separately by products
or by divisions.
uestion of Similarity
But in the case of McDonnell Douglas,
Whitehead said, "The board did not be-
lieve the products to be sufficiently dis-
similar to yield substantially different re-
sults for renegotiation purposes and it did
not seek out, and evaluate separately, the
financial and operating data on the
Douglas and McDonnell divisions."
Challenging Whitehead's position that
the products of McDonnell Douglas for
1967-69 are similar, Chase told the sub-
committee that "the F-4 Phantom jet is
completely unlike the Saturn stage or
launch support services or the manned
orbital laboratory."
Chase also protested that the board did
not develop cost details in arriving at the
$5 million: determination.
"If yqu want to know the reason-
ableness 'of a profit, you have to know the
reasonableness of the cost," John B.
Davis, Chase's assistant, told the subcom-
mittee. "There does not appear in the
record the details of the cost in order to
establish the reasonableness of profit."
Chase complained to the subcommittee
that he was told by Whitehead "not to go
and visit with any member of the staff,
general counsel, or any department head,
and that left me entirely alone with my
assistant to perform functions."
Whitehead responded that "this man
used an inordinate amount of the staff's
time for every nit-picking subject there
was that came up."
Chase said: "If the chairman is going
to take the position that . . . a defense
contractor in the U. S. with more than
$1.6 billion in contracts in one year, is
nit-picking, then I have lost my faith in
the renegotiation process."
General counsel Lambert told the sub-
committee that during the period Chase
was writing his dissent he was told by
Whitehead "to stop giving legal assist-
ance to Mr. Chase personally."
Asked by San. Proxmire whether
Whitehead threatened to fire him if he
did not stop, Lambert said: "He said that
action would take place."
In addition to being general counsel,
Lambert was also the attorney assigned to
the McDonnell Douglas case.
Sen. Proxmire expects to pursue the
McDonnell Douglas case and the renego-
tiation issues it has raised, including the
personnel situation at the board, follow-
ing the Aug. 23 to Sept. 4 Labor Day re-
cess.
Los Angeles-Air Force is seeking pro-
posals from avionics companies by Sept.
13 for development and flight test dem-
onstration of an airborne search and fire
control radar for the projected air combat
fighter (Aw&sT Aug. 5, p. 12).
The radar will be oriented primarily
toward the air-to-air roles envisioned for
the Air Force air combat fighter (ACF),
but will have growth provisions to handle
additional air-to-air ? and air-to-ground
roles of greater interest to prospective
foreign users of the new aircraft.
Air Force deputy for prototypes at Ae-
ronautical Systems Div. plans to pick two
contractors for the flight test demonstra-
tion phase of the radar development, to
be conducted on a tight timetable. Eval-
uation of proposals is scheduled to be
completed by mid-October and contract
awards made by Nov. 1. Flight tests, to
get under way by the fall of 1975, could
lead to selection of one company for full-
scale radar production in a manner simi-
lar to earlier choices of radar suppliers
for the McDonnell Douglas F-15 and
Boeing airborne warning and control sys-
tem (AWACS) aircraft.
Both Northrop and General Dynamics,
USAF's two lightweight fighter competi-
tors, will provide some assistance to the
Air Force in choosing.the two radar con-
tractors. Whichever company is picked to
build the ACF early next year will partic-
.ipate in the evaluation of the two com-
petitive systems and will have a choice in
any final contractor selection.
Basically, the Air Force wants a small
radar weighing a maximum of 220 lb.
with a 200-lb. goal considered more de-
sirable. The radar will be optimized for
dogfighting roles with a capability for
automatic off boresight target acquisition
from 500 ft. to 5 mi. The sensor is to have
planned growth to ground-map capabil-
ity as well as the ability to provide radar
guidance to an air-to-air missile like the
Raytheon Sparrow.
The radar has to be compatible with
both the General Dynamics YF-16 and
Northrop YF-17 contenders for the ACF
program, even though the volumetric en-
velopes available for containing the ra-
dars will necessitate different physical
configurations for the two aircraft.
Nine avionics companies have beep
asked to submit proposals in the radar
competition and at least five are expected
to do so. These include the three com-
panies that for over two years have been
investigating suitable radars under inter-
nal funding for the Northrop P-530-
Hughes Aircraft, Missile Systems Div. of
Rockwell International, and West-
inghouse.
Two other likely bidders are the Nor-
den Div. of United Aircraft and Emerson
Electric.
ERTS-1 Limited to Realtime Coverage
Washington-Earth Resources Technology Satellite (ERTS-1) is now providing only
realtime imagery following further degradation of the spacecraft's tape recorder.
Worldwide coverage by the spacecraft is no longer possible, but continuous U. S.
coverage is being maintained through ground stations in Canada, Alaska, California
and Maryland, according to Thomas W. Winchester of General Electric, manager of
the ERTS operations control center at the Goddard Space Flight Center. Additional
coverage Is being provided through the Brazilian ground station.
Starting about March, 1973, the spacecraft's tape recorder began giving GE and
National Aeronautics and Space Administration ground controllers problems. Since
then the unit had been used sparingly, to record selected areas such as drought-
stricken portions of Africa and to help fulfill a goal to obtain cloud-free images of all
land areas on earth.
"Our 'filling-in-the-world' requirement Is now gone," Winchester said, but the
spacecraft continues to perform well in realtime coverage of the U. S.
Problems in the tape recorder are believed to involve contamination on portions of
the tape or tape head. The unit's drive assembly continues to work well.
For the last several weeks, the recorder has been returning imagery with high error
counts or noise that has prevented ground processing equipment from producing us-
able pictures.
Prior to the most recent problems controllers had been using about 12 min. worth
of the recorder's 30-min. tape capability to store pictures over areas out of ground
station range.
The tape was divided into two 6-min. segments that were used separately to provide
a margin of redundancy.
Some engineering exercises are being conducted to see it the tape recorder can
be used again, but there is little hope a solution to its problems will be found.
"We've done other corrections In the past, but I think we're just kicking the corpse
now," Winchester said.
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