Nine months ago AAI Corp. was in a death spiral. Earnings were plunging, more than 2,000 jobs had been eliminated, the company's president had resigned under fire and hostile shareholders were demanding that the firm be sold while there ** was something to salvage.

So why would Richard R. Erke neff take the job as chief executive of the Cockeysville-based defense contractor when its parent company, United Industrial Corp., came calling?

"I really didn't know all the details [of AAI's problems]," he says, breaking into a laugh.

Then, more seriously: "I was aware that AAI was caught seriously in the downturn of the defense industry and that UIC was not happy with the management here, but I saw this job as an opportunity and a challenge."

Challenge indeed. AAI, once touted by the state as "a super company of the future," had become a victim of management blunders and the sharp decline in Pentagon spending after the flush Reagan years.

But Mr. Erkeneff, 58, viewed what needed to be done at AAI as an extension of what he had already accomplished as senior vice president at McDonnell Douglas' Aerospace Group, a $400 million operation based in Huntington Beach, Calif.

"When I looked at the job description, it looked like what I had been doing in recent years at McDonnell Douglas. We had to think about how to cut costs. We had to reorganize and we had to improve our processes to be more competitive," he said. With 35 years of service at McDonnell Douglas, Mr. Erkeneff was able to take advantage of an early retirement plan to accept the AAI position.

AAI reached its heyday during the closing years of the Cold War. Feeding on Pentagon orders for products such as a flight simulator to train F-15 pilots and munitions and turrets for the Sergeant York anti-aircraft gun, it was one of the fastest-growing companies in Maryland. It posted annual sales gains, and operating income grew yearly in the 12 percent to 15 percent range. From 1979 to 1987, its work force expanded from 1,500 to 3,500.

But like many defense contractors, its fall came fast and hard as government contracts dwindled. AAI's operating income dropped from $19 million in 1991 to a deficit of more than $20 million last year. Employment has been slashed by two-thirds, to slightly more than 1,000.

"It's been sad," said Claud Asbury, the security guard in the lobby of AAI's administrative building on York Road. "Very, very sad. I've seen a lot of good people go out of here in tears."

Mr. Erkeneff hopes to put that period behind AAI by returning it to profitability.

He's done little things, like turning up the thermostat to 78 degrees to cut air-conditioning costs, and selling a parking lot to a Cadillac dealer.

But there are more substantive things on which the future of AAI rests. Mr. Erkeneff has ordered a major restructuring designed to move the company into new commercial markets, such as building electric trolley buses, to lessen its dependence on military sales.

But first, Mr Erkeneff had "to stop the bleeding" from at least four unprofitable business lines that were draining AAI.

There are signs the plan is beginning to pay off.

"Things seem to be getting better," said Joyce Stroll, an administrative secretary who joined the company six years ago. "We used toring a bell every time we won a new contract. They are doing that again in the finance department. It's a nice thing for people to hear. It seems to pick everybody up. If we keep getting contracts we'll survive."

To keep the bell ringing, Mr. Erkeneff has restructured AAI into five operating units: defense, transportation, weather, firefighter trainers and fluid tests. The move is designed to have the company "better focused on the needs of our defense and commercial customers," he said.

Timothy F. Bepler, an analyst with Value Line newsletter, said the restructuring should have a positive effect on its parent company's bottom line.

AAI accounts for 80 percent of United Industrial Corp.'s revenues.

Mr. Bepler projects earnings to rebound to 50 cents a share this year(compared with a loss of 90 cents a share last year) and 55 cents in 1995. But he recommended that only risk-tolerant investors consider UIC's stock now.

Mr. Erkeneff is nearly as cautious in his own assessment of AAI's future. He sees better times ahead, but not great times. And he admits that he doesn't expect AAI to ever return to the days when it had more than 3,000 workers at its Cockeysville complex.

He said there will be more layoffs -- between 10 and 15 jobs in coming weeks -- before employment stabilizes and starts to go up again. His outlook is for employment to reach only 1,150 to 1,200 over the next couple of years.

Mr. Erkeneff anticipates that AAI will post a modest profit this year with level sales. He sees a slight growth in sales next year, then a return to a 10-percent or 15-percentrise in annual sales.

One of Mr. Erkeneff's first moves was to address what he calls the company's "trouble programs." They included a money-losing venture in the entertainment business, in which AAI provided a simulated amusement park ride for the Luxor Las Vegas Hotel, which is owned by Circus Circus Enterprises Inc.

AAI was also drained by other unprofitable contracts, such as the production of a helicopter flight simulator and a firefighter trainer it built at the Dallas/Fort Worth Airport and used to train people in combating aircraft fires.

While he says the worst of those problems are behind the company, they still resulted in a $25 million write-off last year.

"They were bleeding the company to death, and they needed immediate attention," Mr. Erkeneff said. "We would have had a pretty good year ifit were not for these programs."

But AAI's future rests with the success of its diversification program. If things go as planned, AAI could be drawing 50 percent to 55 percent of its sales from commercial markets by the end of 1996. By comparison, almost 90 percent of its business came from the Department of Defense in the past. Mr. Erkeneff provides this assessment of AAI's business segments:

* Weather. The primary part of this business is a system the company builds for the Federal Aviation Administration, used at commercial airports to supply weather information to pilots as they are landing and taking off. The company has been awarded a $180 million contract, of which $124 million has already been paid.

Mr. Erkeneff said the company is talking with customers around the globe, including Russia, concerning the sale of the system. It is also looking into building a less-sophisticated and less-expensive system that it can sell to state and municipal airports.

As an offshoot of this business, AAI is developing sensors that can be used to monitor water pollution.

* Firefighter trainer. Despite the loss of about $3.5 million on the unit it built at the Dallas/Fort Worth Airport, Mr. Erkeneff sees this as a promising business. Earlier this year it acquired Symtron Systems Inc., a privately owned company in Fair Lawn, N.J., that was its chief competitor in the field.

Today, this component generates about $12 million a year in sales, and AAI anticipates that it will grow to $45 million or $50 million annually over the next three years. There is also the potential for another $40 million to $50 million in sales to Japan.

* Transportation. Last month AAI and its partner, SKODA of the Czech Republic, were selected to supply the city of Dayton, Ohio, with up to 91 electric trolley buses. The contract, worth about $43 million, is expected to be signed shortly after Labor Day.

Mr. Erkeneff describes the contract as a "critical" win for AAI -- one that should allow it to sell the electric-powered buses to other cities. Without that first contract, the company would likely have abandoned the business, he said.

AAI moved into another phase of the transportation market last year when it teamed with Siemens Duewag Corp. of Sacramento, Calif., a U.S. division of the German transportation company, and won a $205 million contract to build 72 light rail cars for Los Angeles.

AAI has also designed a suspended light rail system that would operate above street level. It has been holding talks with cities in California and Florida for the purchase of the system, but has yet to find a buyer.

* Fluid test. The company manufactures test stands for checking the operations of hydraulic valves used on aircraft. Mr. Erkeneff said it is about a $10-million-a-year business now but is expected to grow as the commercial aviation industry makes a comeback.

* Defense. This is still regarded as the "the mainstay of our profit-making and the biggest portion of our revenues each year." AAI believes there are some bright spots ahead, despite the cuts in government military contracts.

One of those bright spots turned into a big chunk of business Friday when the Navy awarded Pioneer UAV Inc. a $20.2 million contract to build another 20 tiny aerial reconnaissance planes and support equipment. The pilotless planes carry small television cameras and were used by the U.S. in the Persian Gulf War. Pioneer UAV is a joint venture between AAI and Israel Aircraft Industries. Mr. Erkeneff said AAI's share of the contract will be about $10 million.

AAI was an industry leader in the development of simulator equipment used by the military to train officers in the use of electronic warfare equipment -- at one point dominating 80 percent of the market.

But this has dropped to about 15 percent to 20 percent, primarily because of lack of attention that allowed competitors to grab much of the business. "One of the strategic goals we have now is to regain that lost market share," Mr. Erkeneff said.

AAI is teamed with United Defense Corp. (formerly FMC Corp.) to build a high-speed amphibious vehicle for the Marine Corps. A contract is expected to be awarded next year and if the AAI team wins, Mr. Erkeneff said it would represent $100 million to $150 million in business at Cockeysville.

While AAI is making progress, Mr. Erkeneff acknowledges that morale has suffered. "The issue of jobs is really draining morale," he said. "A little bit of good news like the recent [contracts] and people really feel good."

If AAI's restructuring works, Mr. Erkeneff says there will be more good times for the company.

@4 But he cautions, "the report card is still out."