CHAPTER 14

THE $90-MILLION MISTAKE

HELICOPTERS

THE 1968 letter from Hughes to Lyndon Johnson about Boxcar contained a long and revealing preamble designed to stir the president’s sympathies:

You may not remember it, but years ago when you were in the Senate, you and I were acquainted, not intimately, but enough so that you would have recognized my name.

So, when you became President, I was strongly tempted to communicate with you, as one occasion after another developed in which I urgently needed your help.

The last of these was last year when I undertook the manufacture of a small 5-place helicopter for use in Viet Nam. I lost in excess of 1/5 of everything I possess in the world on this one project, purely because the price was miscalculated.

I was beseiged by my people to seek a renegotiation of the contract, and I was sorely influenced to contact you.

However, in this case, as in the past, I decided you were too busy for me to disturb you for anything with a purely selfish purpose.

So, we went ahead, spending more and more for overtime with only one objective: to build the 700 helicopters in shortest possible time. The loss was far greater than I have ever suffered in my lifetime. The price we collected for these machines was less than the bill of material alone.¹

It was Howard Hughes at his best, or worst. True, the loss on the helicopter contract was greater than he had sustained on any other single business venture. The loss, however, had not come about because some anonymous Hughes executive had simply “miscalculated.” In fact, it was the direct result of a scheme devised by Hughes to corner the market on one model of a military helicopter and simultaneously become a major aircraft manufacturer. Hughes had appealed to the wrong man, for President Johnson was well aware of the circumstances surrounding the helicopter debacle.

The story begins in 1953. That year, after establishing a new Hughes Aircraft Company, Hughes gave its stock to the Howard Hughes Medical Institute and transferred to that company almost all the operations of the original Hughes Aircraft Company that had been formed in 1932. Of more than seventeen thousand employees in the original Hughes Aircraft Company, all but a few dozen went to work for the new Hughes Aircraft and its new owner, the medical institute. Similarly, of more than $200 million in defense contracts, all but a few million dollars’ worth also were turned over to the new Hughes Aircraft. What was left of the original Hughes Aircraft—several dozen workers and several million dollars in military contracts—became the Hughes Tool Company Aircraft Division.

Although Hughes was the sole trustee of the medical institute, and therefore in control of Hughes Aircraft Company operations, the company was no longer a part of his personal portfolio. This distinction made the aircraft division of the Hughes Tool Company—his wholly owned holding company—all the more important to Hughes. In essence, the aircraft division was the lineal descendant of the first Hughes Aircraft Company which Hughes formed to build his racer and the D-2. The aircraft division, some of whose employees had worked for him on the flying boat, was Hughes’s tie to his halcyon flying days and it also represented the vehicle through which he might achieve the goal that had always eluded him—the mass production of commercial and military aircraft.

Once the medical institute gained responsibility for the Hughes Aircraft Company, Hughes severed all ties with the company. He never again interfered with its management. He never insisted on being consulted on major decisions. He seldom even communicated with the aircraft company’s general manager, Lawrence A. (Pat) Hyland. In short, he allowed the company to go its own way, and he granted Hyland the autonomy that he had denied to all Hyland’s predecessors. In the process, the Hughes Aircraft Company flourished, winning more and more defense contracts and rolling up multimillion-dollar profits. By fiscal 1960, its military prime contracts totaled $349.1 million, making it the country’s eleventh-largest defense contractor.²

In contrast, the aircraft division of Hughes Tool Company, directly under Hughes’s hand, did not flourish. Described as “a lousy, inept operation,” it sputtered along on a few modest army contracts worth less than 5 percent of the aircraft company’s volume.³ As aircraft division workers tinkered with experimental projects and rolled up substantial deficits, the division became a reminder of the days when the first Hughes Aircraft Company was little more than a hobby to its owner. Even the aircraft division’s modest gross-revenue figures were inflated, because the division received subcontracting work from the Hughes Aircraft Company in a self-dealing relationship that the Defense Department’s auditors chose to overlook. Conveniently, though, all work was performed at the same location, since the Hughes Aircraft Company and the aircraft division of Hughes Tool both occupied buildings centered on 1,317 acres in Culver City. The aircraft company occupied 96 percent of the more than one million square feet of plant space, the aircraft division the remainder.

James A. Carmack, a former vice-president of the aircraft division, testified that Hughes had insisted, when the flying-boat project was abandoned, that Rea E. Hopper, one of the engineers, and other members of the work force be kept on, prepared to undertake some new aviation venture:

It was my understanding that Hopper was left in charge of that group of artisans and told to keep them together, that Howard had plans for them. He never told them what the plans were. So Hopper kept them together and it got sort of boring to play cribbage and acey-deucey and poker, and so on, in that plant, so they began to look for a little work to try to keep them busy. I don’t mean to be facetious. This is my understanding of what actually took place. And they got into the subcontracting business…. They got to fiddling around with one thing and another, and one thing and another didn’t work, but in any event they were carrying out Howard’s directive to keep the crew together…. Howard told Raymond Holliday and Monty Montrose and the crew… “We’re going to become a major aircraft contractor.” Somewhere along the way they got into the helicopter business.⁴

In 1955, Hopper and his men at the aircraft division began design work on a two-seat helicopter, concentrating on simplicity and easy maintenance. The army bought five preproduction models and after extensive testing expressed an interest in the machine, but placed no orders. The aircraft division, meanwhile, set up an assembly line to manufacture the helicopter, Model 269A, for commercial sale. Production began in 1960, with the first deliveries in October 1961.⁵ It was a low-volume production line, and the sales were unprofitable. Nevertheless, for the first time in three decades Hughes was actually manufacturing aircraft.^* His interest sufficiently whetted, he prepared to enter the helicopter business in a big way. He meant to win what could be the largest military helicopter contract ever awarded.

Lawrence A. (Pat) Hyland, vice-president and general manager of Hughes Aircraft Company, the man generally credited with building the company into one of the nation’s leading defense contractors. Wide World Photos

This period—from the 1950s to the 1960s—was one of transition for the military. Needing the capability to wage a limited conventional or guerrilla war as well as a global nuclear conflict, military planners began to reorganize American ground forces. Strategists foresaw an army division that would be a self-contained, highly mobile fighting unit. It would operate independently and without regard for forests, mountains, and other obstacles that had dictated battlefield tactics so long as divisions moved on wheels. The new army division would move by air—specifically, by helicopter. It was a logical extension of the technology of warfare. The truck had replaced the horse. The helicopter would replace the truck.

Helicopters had come of age during the Korean War. While their most impressive achievements were recorded on medical-evacuation missions—in Korea the number of deaths from battlefield injuries dropped to the lowest level in the history of warfare—helicopters also were used to ferry troops and supplies. Now planners hoped to integrate helicopters into infantry combat operations. Helicopters would move artillery—a critical requirement in battles that had no clearly defined front lines. They would reconnoiter and serve as aerial command posts, and supply food, fuel, ammunition, and other equipment. Some helicopters would be the equivalent of flying tanks, armed with missiles and rockets and machine guns, able to go where no tank could go. The helicopter would, in effect, become a partner of the foot soldier, its pilot a member of the same division.

Such a division required helicopters not then in the army inventory, or even on the drawing boards. Chief among these was a light observation model that could maneuver better and fly faster than any existing machine. The army, however, lacked authority to deal directly with industry for the design and development of new aircraft. When the armed forces were realigned in 1947, the army’s very limited aircraft development program was given to the air force. In 1956, the navy was also authorized to buy aircraft for the army. While army personnel might be active in decision making—setting specifications and the like—all else was handled by another branch of the Pentagon. It was a system that rankled the army and one it wanted to end.

In October of 1960, the Bureau of Naval Weapons, acting on specifications prepared by army planners, invited design proposals for the light observation helicopter. Rumors abounded in the military-industrial community that the army would eventually buy upward of four thousand of the helicopters, and if that were true, the contract would be the largest ever granted by the government.

THE LOBBYING COUP

Everything about this contract appealed to Hughes. It would be the easiest and surest route to establish himself as a major manufacturer of aircraft. American demand for helicopters would surely be accompanied by a similar need among foreign military forces. More important, the civilian helicopter market had gone virtually untapped. With minor modification, a light observation helicopter built to military specifications could be converted to a commercial model that would fetch a fancy price from American business. The army contract would, of course, pay for the tooling and the assembly line that would turn out the commercial helicopters.

At the end of January 1961, Hughes and eleven other aircraft manufacturers—including some that had built only airplanes—submitted seventeen different design concepts for the competition. Because of the intense rivalry, the navy issued an order barring any lobbying by the manufacturers while the designs were being evaluated. “The interests of both industry and the government,” the navy declared, “will best be served by strict observance of this moratorium on sales efforts relating to this design.”⁶

Over the next several weeks, a team of navy officers made a technical evaluation of the seventeen proposals while the army evaluated them operationally. At conclusion, the navy team recommended a single manufacturer, the Hiller Aircraft Company, whose “design was the only one acceptable from a technical viewpoint.”⁷ The army team recommended two awards for the building of prototypes, one to Hiller and one to the Bell Helicopter Company. A Light Observation Helicopter Design Selection Board established by the army chief of staff would make the decision, but it was expected that the board would follow the recommendations of the evaluators. Hughes was out of the running.

On May 3, 1961, the selection board began a formal review of all seventeen proposals. The board was comprised of six army generals and a colonel, two navy admirals, and a marine corps general. Headed by Lieutenant General Gordon B. Rogers, deputy commanding general of the Continental Army Command, it became known as the Rogers Board. As the board listened to the reports of the army and navy evaluation teams, it eliminated the design entries one by one. There was no serious disagreement among the officers until the following day, when the proposed Hughes helicopter was rejected. After putting up a spirited defense of the Hughes machine, Brigadier General Clifton F. von Kann, director of army aviation in the office of the deputy chief of staff for military operations, bitterly denounced the competence of the navy evaluators. Captain Samuel R. Boyer, the army liaison officer who worked with the Bureau of Naval Weapons in drawing up the helicopter specifications, recalled that General von Kann “stood up and made some very strong accusations about the technical competence of the bureau, and that he did not believe some of the data that was being presented.”⁸ But General von Kann found little support among other board members. Even his fellow army generals dismissed the Hughes design, and one, Major General Richard D. Meyer, the army’s deputy chief of transportation, defended the work of the evaluators.

On May 6, 1961, the Rogers Board, accepting the advice of the army and navy evaluation teams, recommended to Lieutenant General Arthur G. Trudeau, army chief of research and development, that “the army develop the Bell D-250 design and the Hiller 1100 design for further competitive evaluation.”⁹ Because the light observation helicopter would become an integral part of the army equipment inventory, it was decided to have the two companies build prototypes, with the production contract to be awarded for the more effective machine. There was one dissenting opinion. In a minority report, General von Kann recommended the decision be revised “to provide for a competition between the Bell and Hughes entries, rather than Bell and Hiller.”¹⁰ His immediate superior, Lieutenant General Barksdale Hamlett, army deputy chief of staff for military operations, endorsed General von Kann’s recommendation and sent a memorandum to General Trudeau urging a “separate action to procure and test the Hughes helicopter.”¹¹ That same day, General Trudeau informed the army chief of staff that he, too, preferred to include the Hughes helicopter design in the final competition.

General Clyde D. Eddleman, then acting chief of staff, ordered the design selection board to meet again. On May 17—twenty-four hours after General Eddleman issued his directive—the board was reconvened. General Rogers announced that he had been instructed “to have the board reconsider its findings and accept the Hughes machine as a third entry in the race. The chairman then moved that the board add Hughes, requesting that all those in favor say ‘aye.’ All said ‘aye’ and the meeting was adjourned.”¹² The board wrote a second recommendation to the chief of staff, urging that Bell, Hiller, and Hughes all be given contracts to build prototypes. The amended decision was reached, it was said, after “a careful review” that lasted “about ten minutes.”¹³ The minutes of the meeting, if any were kept, were either “lost or destroyed.”¹⁴ And only the army board members attended. The navy and marine officers were not invited, even though the navy was ostensibly responsible for issuing the contract. Now Hughes was back in the running.

Some weeks after the Rogers Board reversed itself, Captain Boyer, the army liaison officer to the Bureau of Naval Weapons, was visiting the Hughes Tool Company Aircraft Division’s plant in Culver City when he happened to meet Albert W. Bayer, a Hughes vice-president.

“How in the devil did you people get in this competition?” the army officer asked Bayer.

“Well, I will tell you,” the Hughes executive said. “I was a house guest of General Eddleman during the Rogers Board review, and I was instrumental in getting this aircraft into competition.”

“Well, I guess that is a way of winning the competition,” the army captain replied.^15*

Whatever the merit of this particular claim, Albert Bayer was more than a casual name dropper. He had many close friends in the upper echelons of the army. One of the closest was General von Kann. While the evaluation was underway, General von Kann, despite the navy ban on discussions of design proposals with industry representatives, attended “a number of briefings” arranged by Bayer, who, the general remembered, “was very effective in telling the Hughes story.”¹⁶

Bayer’s official title was vice-president for marketing of the Hughes Tool Company Aircraft Division. Unofficially, he was the aircraft division’s chief Washington lobbyist. And in that, except for differences in style, his role was not unlike that of John W. Meyer, the affable Hughes Aircraft Company lobbyist of the 1940s. It was Meyer’s lavish entertainment and political connections that had helped Hughes win the contract in 1943 for 100 photo-reconnaissance planes. His lobbying efforts were documented in his expense accounts. Entry: “Entertainment by John W. Meyer: Beverly Hills Hotel—room and miscellaneous charges for Colonel Elliott Roosevelt, $576.83.” Entry: “Presents for four girls, $200.” Entry: “Dinner—Mocambo, $58.00; Ciro’s (late), $33.75 (Also in attendance, Lieutenant Colonel John W. Hoover).” Entry: “Girls at hotel (late), $50.”¹⁷

All that was back in the days of the Second World War. For the 1960s, Bayer altered the format and added new dimensions. Now there were coyote hunts by helicopter across the Texas prairies for Pentagon brass “and pretty nice parties afterward or before,” a former Hughes executive recalled. There was a moonlight barge trip “on the old canal up beside the Potomac River” in Washington that became “quite the talk of aviation circles.”¹⁸ In addition, expense accounts were processed with a new sophistication, for Meyer’s scrupulously detailed and itemized records had provided the most embarrassing and damaging moments of the Senate War Investigating Committee hearings in 1947 on Hughes’s flying-boat contract.

Hughes executives issued a standing order: the names of military personnel entertained were to be omitted from all expense accounts. Thus, when Bayer’s assistant, Carl Perry, whose “old friends” included Lieutenant General Barksdale Hamlett—the superior officer who seconded General von Kann’s recommendation on the Hughes helicopter—had a “breakfast conference” in his hotel room on November 29, 1962, his guest or guests were not identified on his Hughes expense account.¹⁹ “That was company procedure,” Perry explained.²⁰

There were other differences in style between Johnny Meyer and Albert Bayer. Whereas Meyer could be found at 21 or the Stork Club, with a starlet at his side, extending his ritualistic greetings to all who passed his table, “Hi, loveboat” or “Love ya,” Bayer was more likely to be found in the company of his scrapbook, wandering the corridors of the Washington bureaucracy, looking for just the right door to open.²¹ The scrapbook was an impressive catalog in words and pictures of Bayer’s contacts with official Washington. There were letters from high-level army officers thanking him for his assistance on some matter. There were photographs of senior officers with their arms around him. There was even a picture of Bayer playing golf with Major General Chester V. Clifton, the military aide to President John F. Kennedy.

Bayer once showed the scrapbook to William D. Rollnick, who at the time was in charge of military marketing at the Hiller Aircraft Company. It was “a very fancy letter-photo album,” Rollnick said. “It opened up, had celluloid pages and you inserted the letters and he went through this and showed letters and an invitation to the White House, and pictures of he and General Clifton on the golf course and letters from army generals, some social and some not, telling what a wonderful guy he was and how much they needed him. And it was impressive. There was one that I recall, and I cannot remember the man who wrote it, except I believe he was a vice chief of staff, and the reason I remember it is that he said, ‘Fanny and I send our regards.’”²² Among the letters pressed into the pages of Bayer’s scrapbook, Rollnick remembered, was one written by Brigadier General Clifton F. von Kann.

Bayer’s performance in the helicopter competition pleased the Hughes corporate hierarchy. Rea Hopper, the aircraft division’s general manager, raised Bayer’s salary from $29,000 to $35,000 a year, increased his yearly bonus to $15,000, and boosted his flight pay to $5,000, giving the lobbyist an annual income of $55,000. The tool company arranged a $17,300 no-interest loan for Bayer when he purchased a house. The loan was given with the understanding that it would some day be forgiven.

Even though the aircraft division was back in the helicopter design sweepstakes, much remained to be done. Hughes had to win the approval of other levels in the army bureaucracy. There was the troublesome stricture against direct dealing between the army and the aviation industry and the irksome fact that the navy still supported the Hiller and Bell machines.

But the Hughes people need not have worried. The army had simply decided to ignore the fourteen-year-old directive. On May 25, the army advised Dr. Harold Brown, the newly appointed director of research and engineering for the Department of Defense, that “development contracts for the light observation helicopter aircraft would be awarded directly to industry by the Army.”²³ Dr. Brown, the czar of Pentagon weaponry, was prepared to give the army its way. He was also prepared to approve the awarding of contracts to Bell and Hiller. But he questioned the third contract to Hughes. Why spend so many millions for the simultaneous development of three versions of the same helicopter? The army, however, continued to lobby on Hughes’s behalf, and in June Dr. Brown gave his approval. “I still have reservations regarding taking a course which results in three parallel developments to meet a single requirement,” he said. “However, if the Army is sincerely convinced that this is necessary for satisfactory fulfillment of its requirements, I withdraw the restrictions on the third approach.”²⁴

On November 13, 1961, the army awarded contracts in varying amounts for the production of five helicopters of each design. Bell received $5.78 million; Hiller, $6.54 million; and Hughes, $6.35 million. All three models were to be powered by the “T-63 engine which had been under development as a routine Army research project at the Allison Division of General Motors Corporation.” The contracts required the three aircraft manufacturers to deliver the helicopters “at a rate of one per month beginning November 1963.”²⁵

Building the prototype, however, was not so easy. Bell, Hiller, and Hughes all encountered technical problems and missed the first delivery deadline. Bell finally produced one helicopter and Hiller two in January of 1964, two months behind schedule. In February, Bell and Hiller each delivered two more, while Hughes turned out its first. In March, Bell delivered two more and Hiller one, thereby fulfilling their commitments. Hughes delivered two that month, and one each in April and May. From January until mid-July, army pilots logged nearly five thousand hours flight-testing the helicopters at Fort Rucker, Alabama, and Edwards Air Force Base, California. Afterward, weeks more were devoted to analyzing the performance data and making economic comparisons. Based on confidential financial information supplied by the three companies, army and independent analysts developed estimates of the cost of producing each model in lots of 714, 3,000, and 4,000.

Throughout these months, the Hughes Tool Company Aircraft Division mounted a coordinated lobbying and corporate espionage campaign to sell the army its helicopter, to find out what Bell’s and Hiller’s would cost, and generally to monitor the progress of the competition. An intelligence manual was prepared, spelling out procedures to safeguard the data collected and to protect the identity of the sources who furnished it. Nothing was left to chance. Section three of the Hughes intelligence field-report system directed: “At your discretion, instead of naming names when this may be more than a normal necessity, use instead ‘reliable source.’”²⁶

Intelligence reports flowed into Culver City from Hughes operatives across the country. In St. Louis, Robert P. Pettengill, Hughes’s representative to the Army Aviation Materiel Command, had lunch at the Playboy Club with his close friend William Leathwood, a materiel command official, on the same day that Leathwood returned from a conference at Fort Meade, Maryland, on the secret pricing data submitted by Bell, Hiller, and Hughes. Afterwards, Pettengill sent a memorandum to headquarters advising that: “Hiller’s end item price was lower than Hughes’ up through the 714th unit. As we surmised, Hiller has a slight edge.”²⁷

In October of 1964, the army chief of staff appointed a second design selection board with different members, this one made up of seven army generals, headed by Lieutenant General Charles G. Dodge, to select the winner of the helicopter competition. For two weeks the board deliberated secretly. Accepting the recommendation of the army’s flight-test evaluators, the board rejected the Bell helicopter because it had more armament and therefore was slightly heavier and slower than the two other prototypes. The board found the Hiller and Hughes helicopters about equal in performance and cost. A financial analysis showed that the Hiller machine would be slightly cheaper on a contract for 714, the Hughes machine slightly cheaper on a contract for 3,000 or 4,000. Because the two helicopters were so evenly matched, the board “recommended to the chief of staff that a fixed price contract be awarded for at least 1,000 aircraft to be delivered over a three-year period” to the company that submitted the lowest bid.²⁸

Hughes’s light observation helicopter on a test flight in 1963.
United Press International

On October 14—after the selection board had reached its decision, but before the still-secret decision had been delivered to the secretary of the army—General von Kann, Eugene L. Vidal (a highly respected aviation pioneer friendly to Hughes), and Albert Bayer met for a leisurely dinner at the Madison Hotel in Washington, where they talked about light observation helicopters. Bayer was no longer employed by the Hughes Tool Company Aircraft Division, having lost his job in the wake of an unsuccessful struggle with Hopper. But he remained on friendly terms with other Hughes executives, and was still very much interested in the outcome of the helicopter competition.^*

The following day, Bayer dropped by the Washington office of the Hiller Aircraft Company to talk with Stanley Hiller, Jr., the company’s president, about possible employment. The meeting between the two men lasted thirty to forty-five minutes, and when Bayer left, Hiller emerged from his office “visibly shaken, actually white,” according to Warren T. Rockwell, the company’s Washington representative, who had been working in an adjoining room. “You just won’t believe it, but I have just been told what the army is going to do,” Hiller said.²⁹ Rockwell recalled that Hiller then related what Bayer had told him about the selection board’s decision. “Number one, of course, that it would be a three-year cost competition between Hiller and Hughes. Number two, that this competition on a three-year basis would be for a total quantity of 1,000 aircraft.”³⁰ The quantity particularly shook Hiller and Rockewell. They had assumed all along that the contract would be for fewer than a thousand aircraft, most likely 714, and had compiled their financial estimates accordingly. “We had never heard that before,” Rockwell said, “because the cost data we had already submitted to the Fort Meade evaluation group were on lower quantities.”³¹ Even more startling, Bayer had told Hiller that the costs of the Hiller helicopter were “lower than Hughes,” a piece of information which indicated that confidential financial reports Hiller had given to the army had been leaked to Hughes.³²

Hiller immediately lodged a complaint with the army and an investigation was ordered. But it came to nothing. “An analysis of all the evidence,” Secretary of the Army Stephen Ailes reported three months later, “fails to substantiate the contention that Hughes has received information concerning your costs from army sources directly, or through a third party.”³³ The army had cleared itself of any wrongdoing even though Bayer knew to the smallest detail the results of the selection board’s confidential decision and the army’s secret pricing comparisons of the Hiller and Hughes helicopters. Hiller and Hughes were invited to submit bids for the building of 1,071 helicopters.^†

THE “BUY-IN”

At the Hughes Tool Company Aircraft Division offices executives agonized over the final price. They knew that the army had calculated the cost of the Hiller model to be somewhat below theirs. But how much lower might Hiller go in the final bidding? Having made it to the last round, Howard Hughes had no intention of losing—no matter what the cost. With Hughes’s personal blessing, the aircraft division prepared a bid that would yield a $10-million loss on a $30-million project, but assure the contract and gain a foothold in the helicopter-manufacturing business.

In technical terms, Hughes planned a “buy-in,” a practice forbidden under Department of Defense procurement regulations because “its long term effects may diminish competition and it may result in poor contract performance.”³⁴ Experience had established that after a buy-in, manufacturers often raised prices during the life of the contract through change orders or an inflated follow-on contract.

Hughes had estimated the unit cost of building the helicopters at $30,200. If he absorbed a $10,000 loss on each, he could submit a bid of $20,200. But Hopper wanted to drop the price “a little under the $20,000,” and so the bid was fixed at $19,860. It was not “really a very good figure,” Hopper said later, with some understatement. “That is not the way people are supposed to price things, I don’t think.”³⁵ When the bid arrived at the Army Aviation Materiel Command in St. Louis, a contract officer there, assuming that a stenographic error had been made, wired Hughes asking for confirmation of the numbers. The answer came back: the $19,860 figure was accurate. The Hiller bid, tied to actual production costs, was $29,415—nearly 50 percent higher.^* On May 26, 1965, the army awarded the contract to Hughes. After two unsuccessful attempts at building airplanes for the military during the Second World War, Howard Hughes was going to get a third chance to become an aircraft manufacturer.

Hughes executives were jubilant. They forecast “orders over the next ten years for up to 7,000 aircraft from the army and other United States military services,” and expected “a commercial and foreign military market for an additional several thousand aircraft.” The result would be “one of the largest helicopter production efforts ever undertaken.”^36†

Stanley Hiller summed it up bitterly. “We were not in a competition. We were in an auction,” he said. “I have been in many, many competitions over a long period of time with the government, none like this. I suspect that because the Hughes company had never been successful in the aviation business, that they looked upon this as a good possibility to get in.”³⁷ William Rollnick, Hiller’s military marketing chief, viewed the Hughes bid philosophically. “They were totally out of their minds,” he said. “They used the old adage: ‘Use a sledgehammer to kill a fly. They really kill them.’”³⁸

The army contract called for Hughes to produce eighty-eight of the helicopters, designated the OH-6A—a two-seat machine with room in the cabin for cargo or four fully equipped soldiers—in fiscal year 1967, with the first to be delivered in June of 1966. Until the awarding of the contract, the army’s planners had assumed there would be no significant need for the helicopters in the immediate future. But 1965 marked a turning point for the United States in the Vietnam War.

The year started with 23,000 American noncombat troops in South Vietnam serving in an advice-and-support capacity. In March, more than a hundred American jets carried out the largest air strike of the war—and the first nonretaliatory raid—bombing a North Vietnamese munitions depot. In June, the first army combat forces landed, more than doubling American troop strength. In July, President Johnson announced that he was stepping up the United States commitment to South Vietnam from 75,000 to 125,000 troops—a 443-percent increase since January. The American mission had changed from advice and support to search and destroy. In September, the army’s First Cavalry Division (Airmobile) arrived—the division that would test on the battlefield the air-mobility strategy so painstakingly drawn on paper as the decade began. The division’s arrival brought the number of helicopters in South Vietnam from about four hundred fifty to nearly a thousand. Vietnam had become an American war. By December, the full impact of the escalating conflict reached the United States.

For the first time since Korea, newspapers and magazines routinely published photographs of American soldiers in battle, wounded and dead GIs. For the first time ever, a war came into American homes in living color on television’s nightly news. In Columbus, Georgia, and nearby Fort Benning, where more than twenty-two hundred families of First Cavalry Division soldiers lived, the anonymous Western Union messenger, delivering formal notification of death, was becoming a familiar figure. In Culver City, the Hughes Tool Company Aircraft Division received a special request from the army for 121 additional light observation helicopters to meet the urgent demand in Vietnam. The army wanted the helicopters concurrently with the eighty-eight scheduled for production between July of 1966 and June of 1967.

The third week in January 1966, Hughes advised the army that he would be willing to manufacture 121 more helicopters, but for rather more money. The price tag on each helicopter would be $55,927—a 182-percent increase over the contract signed seven months earlier. Now that he was the army’s sole supplier of light observation helicopters, Hughes intended to recover, as quickly as possible, the loss he had deliberately taken to win the contract, and reap in addition a windfall profit. Colonel A. M. Steinkrauss, a contracting officer at the Army Materiel Command in St. Louis, was stunned when he received news of the increase. He fired off a letter to the commanding general of the Army Materiel Command in Washington. “There appears to be no foundation or rational basis for the dramatic increase in price,” Steinkrauss wrote. “The variance is so great between the contractor’s bid and his current proposal that the issue is not only money but has also become a matter of principle.”³⁹ In Washington, the army high command, which desperately wanted the helicopters, ordered Steinkrauss to negotiate a more realistic price. Over the next several months, Hughes and the army bargained while American troops continued to stream into South Vietnam. Hughes lowered his selling price to $49,500—still a 149-percent price increase—and then refused to negotiate further.

In Washington, the army bureaucracy, too desperate for aircraft to be concerned about price or principle, was prepared to pay the price. But late in April the generals had a change of heart. As the cost of the war spiraled, Congress scrutinized military expenditures more closely. When the Defense Department submitted a request for a $15-billion supplemental appropriation—part of it earmarked for the 121 additional helicopters—members of the House Armed Services Committee seized upon the astronomical price increase for the Hughes machines. L. Mendel Rivers, the South Carolina Democrat who chaired the committee, ordered an inquiry by the Subcommittee for Special Investigations. Confronted with a potentially damaging congressional investigation, the army quietly withdrew its request for the 121 additional helicopters late in April. The subcommittee, however, now curious about this strange contract, pushed ahead with the probe. In the field in South Vietnam, commanders eventually substituted the older Bell Iroquois helicopter, a larger, heavier, slower, less maneuverable machine. It was not a satisfactory solution. The Hughes helicopter was a multiple-mission aircraft. The Iroquois was not.

Even if the army and Hughes had agreed on a price, the extra helicopters could not have been delivered on schedule. Hughes was already having trouble delivering the eighty-eight machines called for in the first year of the contract, an embarrassment that no one spoke of publicly. The company of Howard Hughes, the man who set aviation records, whose name was synonymous with the development of the aviation industry, had engineered a production nightmare. In fact, there was precious little production. And it looked as though the war might well be over before Hughes got his helicopters off the assembly line. The first machine was owed to the army in June of 1966. It arrived in August. When House investigators visited the Hughes plant in September and October, they were appalled at what they found. “There wasn’t a blessed thing going on when we sent our people out there,” Porter Hardy, the chairman of the Subcommittee for Special Investigations, recalled later. “They took pictures of the production line, or what should have been a production [line]. And anybody with two grains of sense examining those pictures would have known it was impossible for this delivery schedule to be met.”⁴⁰

Feeling the pressure of the congressional investigation, the army asked the Defense Department to conduct its own survey of the Hughes plant. Carried out by an air force contract specialist, the study concluded that Hughes’s problems stemmed from “a lack of experience” and “a lack of proper and timely planning.”⁴¹ In addition, it was found that space at the Culver City plant was “poorly utilized.”⁴² There was inadequate tooling and a shortage of skilled workers. There was difficulty molding the sheet metal. All of this was eerily reminiscent of Hughes’s performance two decades earlier, when he failed to put into production either his flying boat or photo-reconnaissance airplane. His inability to deliver on those projects was attributed to a “complete lack of experience in the design and construction of airplanes,” “poor planning and insufficient supervision,” and “unsatisfactory tooling.”⁴³ In twenty years, Howard Hughes had learned nothing about aircraft manufacturing.

By January of 1967, Hughes was to have delivered sixty-six helicopters to the army; only twelve had made it off the assembly line. In March 1967, the month the army meant to have over a hundred light observation helicopters in Vietnam by accelerating production, not one arrived.⁴⁴ By July, with the war raging more furiously than ever in South Vietnam, the army prepared to place an order for 2,200 more light observation helicopters. Under normal circumstances, this would have simply been a follow-on contract. The price would be negotiated, a new contract drawn up and signed. It was unofficial Defense Department policy that once a manufacturer became the supplier of a piece of military equipment—whether a rifle, a tank, or an airplane—it normally remained the supplier as long as that equipment was in service. But these were not normal circumstances.

The House Subcommittee for Special Investigations, after a series of largely closed hearings, had issued a blistering report on the army’s handling of the original helicopter contract. The subcommittee had recommended that “the secretary of defense strictly enforce his directive that research and development of army aircraft be the responsibility of the air force or navy until the competence of the army in this area has been firmly established” and that contractors be required to pay damages “for failure to meet delivery schedules.”⁴⁵ More to the point, the subcommittee urged that “consideration be given to alternate sources for the light observation helicopter.”⁴⁶

The army preferred to give the 2,200-helicopter order to Hughes, no matter what the cost, rather than operate and maintain two separate models of aircraft to serve the same purpose. Not wanting to antagonize the House Armed Services Committee again, however, it announced a request for new competitive bids.⁴⁷

For some months, it looked as though Hughes would be the only bidder. Amid industry charges that the army had “structured the competition to favor Hughes,” little interest was expressed by other manufacturers.⁴⁸ The most logical contender, Hiller, now the Fairchild-Hiller Corporation, declined to compete. Only Bell was a serious contender. After the army had rejected Bell’s model the first time around, Bell had successfully converted its military prototype to a business helicopter. Called the Bell JetRanger, the helicopter had proved both a commercial and a technical success. With modifications, the JetRanger could be reconverted to a light observation helicopter.

Howard Hughes was in serious trouble. He had assumed that the army would give him the follow-on contract and that he would negotiate a price enabling him to recover his losses under the original agreement. Now he was back where he had started. In fact, he was considerably farther back. The Hughes Tool Company Aircraft Division had lost $23.2 million in 1967, more than double the $10-million loss projected over the life of the helicopter contract.⁴⁹ It was predicted that the loss for 1968 would approximate $41.2 million, a deficit so large as to create a net loss for the parent Hughes Tool Company.⁵⁰ Not even the profits of the oil-tool division, which had sustained Hughes’s extravagances for four decades, could offset the anticipated deficit. To cover the loss and provide additional working capital, Hughes had to dip into his personal bank accounts to pump $45.7 million in cash into the aircraft division in 1967. Another $44.1 million would be needed in 1968. Hughes Tool Company executives issued orders to other divisions “to reduce expenses or attempt to defer until 1969 any expenses that can be deferred.”⁵¹

Incredibly, Hughes was losing more than $62,000 on every helicopter he produced. To make matters worse, the army had exercised its option and ordered the 357 additional helicopters at the $19,860 price. Thus, these huge losses would continue through 1969. If he lost the follow-on contract, he would never recoup his millions. Yet he could not afford to submit another bid below cost. His bid had to be both profitable and less than Bell’s bid—no easy task. Bell was the military’s largest supplier of helicopters, manufacturing twelve different helicopter models, ranging from two-place to fifteen-place aircraft.⁵² Bell had far more production experience than the Hughes Tool Company Aircraft Division, and a more efficient and reliable plant. It had compiled a record ten consecutive years of on-time deliveries. Bell was sure to have an edge in a pricing competition.

To make certain that nothing went wrong this time, Hughes took charge of the bidding for the second contract. He solicited financial information and proposed bids not only from Rea Hopper at the aircraft division’s plant but also from Raymond Cook, his lawyer, and Jack Real, the Lockheed executive and longtime business confidant. As Hughes lay in his Desert Inn bedroom pondering what to charge, he was gripped by the mental paralysis that so often afflicted him in times of decision. Cook had suggested a bid of $66,000. Hopper had proposed $58,500. Real had recommended $57,500. Cook, mindful of the enormous losses Hughes was running up in the helicopter business and of the steady erosion of his bank accounts, wanted to insure that a second army contract would not be as financially devastating as the first. He was wary of the calculations of both Hopper and Real. “I have talked to Jack Real and tried to reconcile his cost breakdown and ours,” Cook said to Hughes. “My conclusion, and I believe Jack’s, is that his $57,500 is a highly optimistic one which is remotely achievable, but with low probability under normal pricing tests.”⁵³

Hughes, always casting about for the loophole in his contracts when doing so fitted his needs, began to think of bailing out of the existing contract if Bell won the competition. By halting production, he could at least cut his losses.⁵⁴ Cook pointed out the flaw in Hughes’s logic. “The Army needs your helicopters substantially on the schedule contracted for,” he wrote. “It may be that in 1969 and following the Army will have a preference for the ship which is acquired in this follow-on competition, but I am certain that win or lose we cannot avoid performance under the existing contract. Furthermore, the Army could never justify with Congress a decision to cancel 700 helicopters at $20,000 each in order to buy at a price several times that.”⁵⁵

After further sparring with Cook, Hughes settled on a bid amount of $59,700. As the hours to the bid deadline ticked away, the tension on him mounted. At one point, an aide walked into the bedroom and handed Hughes an urgent message: “Our man is waiting at the phone now, and the time is critical. Shall we send him out to look for a closer phone and have him out of touch, or could we get word to him by half past. It will take him about half an hour to fill out the forms and go to the bid opening.”⁵⁶ It was TWA all over again as a frantic Hughes agent waited, one eye on the clock, for the indecisive industrialist to flash instructions. Once it was done, Hughes, reflecting the strain, told Howard Eckersley, the aide on duty, that he did not want to be disturbed any more. “I don’t want any messages or upsetment on this deal either way,” he said.⁵⁷

Exactly when Hughes received the bad news, or whose lot it was to deliver it, is uncertain. But on March 10, the army announced that the Bell Helicopter Company had won the contract, worth $123 million. Bell’s bid of $53,450 per helicopter was $6,250 below Hughes’s offer. Hughes faced two more years of huge deficits at the aircraft division, and no chance of recovering his losses after that. When the last Hughes helicopter came off the assembly line, the company’s loss on that one contract would total a monumental $90 million.⁵⁸ Someone, as Hughes opined to President Johnson in 1968, had indeed “miscalculated,” and that someone was Howard Hughes himself.