Boeing Machinists Strike Ends, Setting The Stage For A Lengthy Recovery

On the eve of the nation’s Presidential election, another important contest also marked by highly divided camps, came to resolution. Fifty nine percent of the members of the International Association of Machinists District 751 voted to accept Boeing’s latest offer of a 38 percent wage increase along with other concessions, and return to work.

The 53 day impasse shuttered plants in the Seattle area where Boeing 737 and 777 aircraft are assembled and halted deliveries through the complex supply chain of the industry. Workers will begin to return on November 6, but it will take months to restart deliveries of the aircraft at an appreciable level. Even then, Boeing will continue to lag its rival, Airbus, in delivery of the aircraft variants for years into the future, owing to limits imposed by regulators on production and certification in the wake of years of accidents and quality incidents.

In addition to an increase in wages, workers won a $12,000 ratification bonus, a 13 percent pay increase that begins immediately, a guaranteed 4 percent annual bonus and improved health insurance and 401K contributions. That final point was a major impediment to an agreement as the union was demanding a return to the defined benefit program it enjoyed until the last contract in 2014.

Why had the union acquiesced in losing this rare surviving benefit? Few companies still provide a defined benefit plan for their employees for the simple fact that they are very expensive, and the cost falls on the employer, whereas gains in 401K type programs come from the marketplace.

The 2014 agreement was narrowly accepted by the union in return for a promise by Boeing to build its next aircraft in the Puget Sound area. In the early 2000’s, Boeing had opted to move assembly of its then-new 787 aircraft to a facility in Charleston, South Carolina, which would be non-union, following a pattern set by automotive manufacturers who had moved production from Detroit to the southeast for similar reasons.

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The concession made sense at the time, but then over the last ten years, two major factors changed the landscape. First, living costs in the Seattle area skyrocketed with the flourishing of Amazon and other tech giants. Second, Boeing’s next new aircraft, the 777X, was hampered by continued design and certification delays. Originally planned for initial delivery in 2020, Boeing in late October indicated its certification would occur in 2026 - a prediction that few in industry believe can be met.

Therefore, coming into this most recent negotiation, one side was adamant about their need for wage restitution and the other side was reeling from existential challenges that began in 2018 with the twin crashes of the 737MAX that killed all on board. Rather than move quickly to meet demands in mid-September, Boeing proceeded through a stair step of offers from a 25 percent increase to the 38 percent that was accepted on November 4 - and burned over $2 Billion in cash, impacted major airline customers such as Southwest and Ryanair, and created a halt that will reverberate through the supply chain for months or more.

It is no surprise that the union also demanded a promise to build the next new aircraft, if it occurs within four years, to be in the Seattle area.

Nevertheless, the resolution is an important foundation on which new CEO Kelly Ortberg can move forward. In late October, the company raised $25 Billion in new credit and debt arrangements to cushion the cash crunch that will continue for at least a year. With a backlog of more than seven years and airlines clamoring for aircraft to meet demand that has returned following the pandemic, the strategy is clear - produce aircraft, realize profit on each unit delivered and dig out of the financial hole in which Boeing finds itself.

And along the way, Mr. Ortberg has to reorient the culture of the company to quality, not profit, as paramount, while reducing the white collar workforce of 170,000 by 10 percent. One of the means of achieving that goal is to restore the primary focus of the company to its core business of designing and producing aircraft that will successfully challenge those of Airbus, and China, in the long run.

Expect to see many of the aviation related services businesses, that were acquired in the early 2000’s when Boeing was trying to diversify, to be sold off. Because of the lack of new aircraft in the system, older aircraft that would normally be retired are now forced to fly longer, engendering heightened maintenance, repair and overhaul service. This market is booming, and Boeing will be in the happy position of a seller in a seller’s market.

It is important for the nation and the global economy, that Boeing succeeds in this endeavor. Yesterday’s resolution was the first critical step in that journey.