Boeing Can't Afford Another Strike

Round 1 is over. Machinists go back to work.

Round 2 - the SPEEA negotiations are ongoing.

What did Round 1 cost Boeing (BA)?

1. The 25 days of the strike reported in Q3 cost 35 cents in EPS or $188 million (see conference call).
2. The strike has gone on another 30 days. Mark that another $225 million.
3. It will take at least 55 days to get production back to speed. In their conference call, Boeing suggests it would take at least "day to day" to ramp back up production. Expect that to shave another 15 to 20 cents off earnings, so about $140 million.
4. Boeing made "whole" the 27,000 strikers by agreeing to give them a signing bonus of at least $5000 each payable this week. That's at least $135 million or 18 cents a share Boeing shells out after a very bruising strike. (They also have $1500 a year bonuses year 2 and 3.)
5. The company agrees to a 5% raise this year (plus further increases year 2 and 3). This year's total: over $73 million or 10 cents a share in profits, over the year.
6. Boeing protected 5000 jobs, did not shift health care costs to machinists, and increased pension payments. Cost: probably a great deal in the future. Boeing pays 100% of premiums of its lower priced health care plan.

Total cost this year of machinist strike and contract: over $1.15 EPS or $765 million.

Now, Boeing goes into its next round of negotiations with the SPEEA, its engineering and technicians' union. I think it's exhausted and the SPEEA has the upper hand. Boeing has gone through a 55 day strike that completely shut down its commercial production and set its 787 a long way back. It cannot afford another strike.

I expect the SPEEA to get as good a deal or better than the machinists including signing bonuses. Engineers make on average $83,000 and technicians $68,000 a year, significantly higher than machinists who earn $54,000. The SPEEA contract will be expensive, probably 40 cents a share or $293 million the first year, that is, if there is no strike.

Best outcome: down $1.55 in earnings over the next few quarters with a loss of $1.1 billion in lost earnings attributed to strike and contracts with increasing costs in the next 3 years of the contract.

What has Boeing gained? They've guaranteed jobs, decreased their outsourcing capabilities, done nothing to alleviate escalating health care costs. They have eaten "humble pie" with the SPEEA, all but admitting that it was a fiasco to outsource their 787 engineering work. Their production has been shut down. The 787 has been further delayed. Sure revenues are "deferred" -- they will build those planes but they have incurred a great cost, one that will eat into their margins.

Not a good year for Boeing. When companies try to weather difficult economic times, they cut costs. Boeing has been forced to do otherwise. Its cost of doing business just went up substantially. That's going to make the next four years a lot tougher. 

Disclosure: Author holds a short position in BA

Comments

[Steven Hansen:]

boeing is lucky its competition is airbus - a force fit, political hodgepodge. if the competition was in asia (it will be some time in the future), it will go the way of the detroit automakers.

2008 Nov 03 04:13 AM

[ARBE:]

BA started with SPEEA the same way as with IAM- BA Scott CARSON in March 08 made it clear that they wanted to bust the union(S). BA actions regarding SPEEA so far indicate they will still try. In the 2005 negotiations, BA snookered SPEEA on the medical for early retirees, and for new employees hiring in after Dec 31, 2006. BA then reneged on resolving the agreed on Letter of Understanding. During negotiations in 2005, BA presented an unusual award to the then Executive Director for SERVICE TO BOEING, an award above and beyond that normally allowable. He is now gone, and the new Executive Director is NOT beholden to Boeing. Bottom line - dont be too sure BA will roll over.

2008 Nov 03 10:42 AM

[notsosmart:]

n ot to worry. by the time these 4 year contracts are up china will be building commercial jets.if the quality is good(price will be) you can kiss boeing bye-bye.whose building all the new double hulled oil tankers?you guessed it.not us.

2008 Nov 03 11:39 AM

[User 232593:]

boeing should have let the strike continue.its no big deal.only 8% of the work force are in unions & some of them are in bed with the employer.cina will sell their planes soon.bye-bye airbus &boeing.

2008 Nov 03 02:04 PM