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CNN
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For a company that has lost $33 billion since 2019, a strike that virtually halts production of its major product is the last thing it needs. But that’s the reality for embattled aircraft maker Boeing.
How long the strike lasts will determine how serious the problems are for Boeing. If the strike lasts a week or so, it will barely be a blip on the bottom line of a company that has seen debt soar and its credit rating plunge as it sought to cover losses over the last five years. The last strike, which took place in 2008, was a $1.2 billion hit to Boeing’s net income. This strike could be similarly costly if it continues for months, as has happened in past work stoppages at Boeing.
“The strike will impact production and deliveries and operations and will jeopardize our recovery,” CEO Brian West told investors Friday, hours after the start of the walkout.
Boeing has a long way back to profitability, no matter how long the strike lasts. It is being limited in the rate it builds 737 Max jets, as the Federal Aviation Administration oversees efforts to improve the quality of its assembly line. Boeing’s next planned jet, the 777X, which is crucial to a return to profitability, ran into trouble on its test flights and is years overdue in being certified to carry passengers. Boeing has not had the cash it needs to develop a new model jet to serve the market, and its sales have fallen far behind rival Airbus.
So as bad as the strike might be for Boeing, it has plenty of other problems to deal with.
A key factor working in Boeing’s favor is that the company is part of a global duopoly with Airbus. Boeing and Airbus are the only manufacturers of full-size commercial jets and demand for aircraft orders is strong, with a backlog stretching for years. If an airline canceled an order with Boeing to make a similar order with Airbus, that airline would be stuck on a waiting list for years. And once an airline orders one model of a jet, they’re pretty much locked into using that model, because owning a competing model from the other manufacturer significantly increases operating costs. So even with financial problems that might kill another company, Boeing isn’t going anywhere.
Negotiations between Boeing, the union and federal mediators are expected to resume early this week. Despite both sides saying they want to reach a deal to end the work stoppage, the history of labor relations at Boeing, and the overwhelming rejection of the tentative agreement, suggest the strike could be a long one.
The company had offered the 33,000 production workers at its unionized factories in Washington state and at some parts centers elsewhere a four-year deal with raises of at least 25% over the life of the deal, including an immediate 11% pay hike, cost-of-living increases that could take pay even higher, more contributions to their 401(k) accounts and lower employee share of health insurance premiums. Boeing called it the best contract it ever offered the union, and union leadership called it the best contract it had ever negotiated with the company.
But 96% of the rank-and-file members who voted on the deal Thursday disagreed and walked out to strike a few hours later.
The strike in 2008 lasted for more than eight weeks. Boeing won’t necessarily lose sales from this strike, but the delay in deliveries will hurt its already damaged cash flow, since most of the money it receives from the sales of a plane come at the time of delivery.
Credit rating agencies Fitch and Moody’s signaled Friday that a downgrade of Boeing’s credit rating into junk bond status is now expected. Standard & Poor’s had already signaled such a downgrade was likely even before the strike.
In a memo to Boeing employees Monday, West said the company would take steps to preserve cash during the strike, which would include a hiring freeze, stopping “non-critical” travel, prohibiting first class or business class travel by executives and the possibility of temporary layoffs. When asked if Boeing would also prohibit use of its corporate jets for travel, a Boeing spokesperson said the company had no comment beyond West’s statement.
Boeing has said it is committed to finding a new deal that will be acceptable to union members. Despite the ongoing losses at the company, it will be able to afford the increased costs. Part of that is because actually assembling an aircraft makes up only about 15% of the cost, said Richard Aboulafia, a managing director at aerospace consulting firm AeroDynamic Advisory.
Most of the costs go to paying suppliers for airplane parts, from avionics to seats to the fuselage itself. The 15% that Boeing spends includes all costs, from the raw materials to operating the factories to the labor. So, paying the 33,000 production workers amounts to just a low single-digit percentage of an aircraft’s overall cost.
“They could have doubled everyone’s wages, and it wouldn’t have made a difference,” Aboulafia said.
That’s one of the reasons workers on the picket lines were so quick to reject Boeing’s offer, which appeared to be generous on first glance. Union members have gone 16 years with little in the way of pay increases and been forced to give up benefits like a traditional pension plan or be threatened with the loss of unionized jobs to nonunion factories that Boeing considered building. They were forced into those concessions when the company was making money, not during its current period of financial distress.
“If Boeing touts that we’re the best in the industry, they need to treat us like the best in the industry,” Jim Bloomer, a 28-year-old Boeing employee in Renton, Washington, told CNN affiliate KING-TV early Friday from the picket line outside the plant that builds the 737 Max. “If you’ve got a $180 million airplane, the percentage of (cost of) labor is miniscule.”