A Leeham News Editorial
Jan. 29, 2024, © Leeham News: If Boeing is to emerge from its latest crisis unscathed, it will need to commit to a culture change. That’s the consensus of industry watchers, and it’s one that we whole-heartedly endorse.
CEO Dave Calhoun will have a chance to show his commitment to that change starting in March, when Boeing Commercial Airplanes top management sits down with the bargaining team for its largest touch-labor union, IAM District 751.
For 20 years, Boeing has prosecuted a scorched-earth fight against its unions, in the name of cost-cutting. It has outsourced work all over the globe. It has built a whole new campus in union-hostile South Carolina, primarily to escape the “hostage” situation it faced before, with all of BCA’s deliveries at the mercy of one unionized labor force.
But while Boeing has won every battle in this long labor war, the result has not been a strategic victory. Instead, in 2024, the company finds itself badly trailing Airbus in both orders and deliveries, with little chance of catching up in the near term. This is in large part due to a series of high-profile self-inflicted failures, of which the near catastrophe on Alaska Flight 1282 on Jan. 5 is just the latest.
Boeing needs a top-to-bottom change of culture, and it can start by rebuilding its relationship with its touch-labor union.
- This year’s talks are the first in a decade.
- Boeing has zero leverage.
- Dropping union animus may be too much to ask.
Talks are the first in a decade
Talks between the company and the IAM 751 will begin on March 8. They had been scheduled for a late February kickoff, but both sides agreed to a delay in the wake of the AS 1282 incident and the subsequent FAA and NTSB investigations.
The contract expires at midnight Sept. 12. If talks follow historical norms, we can expect negotiators to meet off-and-on during the spring and early summer to work on non-economic contract clauses. The heavy lift usually comes at the end. After two-weeks of intensive face-to-face bargaining (typically at a hotel at Seattle Tacoma International Airport), somewhere around Sept. 5, Boeing will present the union with a “best and final” offer. Union members will have several days to review it before voting.
The contract vote would in all likelihood take place on Sept. 11. If it’s approved by a simple majority, it would take effect immediately. If it’s rejected by a two-thirds supermajority, the IAM would go out on strike. (And if it’s rejected by less than two-thirds of voters, the contract would be ratified by default.)
The 10-year IAM contract that expires this year was the result of an ugly battle in 2013-14 that involved Boeing threatening to take the 777X program out of Puget Sound unless the union agreed to a massive package of concessions that included giving up its defined benefit pension, as well as drastic limits on wage increases over the past decade.
A decade later, we’re still waiting for the first 777X delivery, and Boeing’s wage for hourly labor is no longer competitive in the Puget Sound marketplace. In fact, Boeing approached the IAM back in 2019 to ask for talks on raising pay, after reports that people were leaving entry-level jobs at Boeing to take better-paying roles as baristas or auto mechanics.
The 10-year contract bought a decade of labor peace for Boeing. But it’s expiring during a time of union resurgence, and it’s doubtful the union will settle on or near terms of previous recent contracts.
Boeing has zero leverage
Bank of America analyst Ron Epstein told us last week that he sees the AS 1282 incident as having stripped away any leverage Boeing had going into the negotiations with the Machinists. We think he’s absolutely right.
At last week’s Aviation Week suppliers conference in Universal City (CA), Epstein said 751 will seek a 40% wage hike over three years, pension improvements and job security in the form that the next Boeing airplane will be built in the greater Seattle area.
Union negotiations are all about raw power: Which side has the most leverage, and the most ability to cause the other side pain. Unlike any time in the past two decades, Boeing doesn’t have any real leverage:
- There’s no new airplane program to dangle, promising thousands of jobs in return for wage or benefit concessions.
- There’s not much work left to threaten to take away, particularly now that the FAA has throttled Boeing plans to increase production rates until it’s satisfied with changes to the manufacturing process.
Boeing’s constant outsourcing of parts and subassemblies has backfired. If a Boeing whistleblower is correct, it may have been Boeing mechanics who failed to reinstall the bolts that were supposed to hold the door plug in place – but the problem originated with supplier Spirit AeroSystems, either in Wichita, where the plug was placed in the fuselage, or a factory in Malaysia, where the door plug was built.
The FAA is going over Boeing production processes with a microscope and a hammer. Given that, further outsourcing threats would seem somewhat hollow.
Boeing is running out of allies
Boeing’s also fast running out of allies. For years, it could count on Washington state politicians to lean on the unions to keep them in line, and sometimes pro-business Democrats in “the other Washington” would step in as well. The company has spent tens of millions of dollars on lobbyists and campaign contributions to ensure this.
But the support is drying up. Outgoing Washington Gov. Jay Inslee has complained about being “mugged” by Boeing in 2014. In the current crisis, it’s striking to that the Senators calling loudest for the FAA to punish Boeing have been Maria Cantwell from Washington and Tammy Duckworth from Illinois – both Democrats from the two states where Boeing used to have corporate headquarters.
Take it a step further, and it’s unlikely that one-time Boeing board member, South Carolina’s former governor Nikki Haley, will spend any of her scarce political capital on the cause of a toxic aircraft builder. Her opponent, former president Donald Trump, likely won’t come to Calhoun’s rescue, not after Calhoun publicly complained about the Air Force One deal Trump personally negotiated with ex-Boeing boss Dennis Muilenberg.
On the other hand, President Biden is eager to shore up support among working-class voters. If the Machinists go out on strike, we won’t be surprised to see Biden on an IAM picket line, reprising his visit to the UAW this past summer.
Dropping union animus may be too much to ask
Calhoun himself isn’t likely to be directly involved. Ever since Boeing’s headquarters move to Chicago, CEOs delegated the task of negotiating contracts with their largest labor force to lower-level executives in BCA. But there’s no doubt he’ll be signing off on any big checks that the Machinists will seek.
We aren’t privy to the union’s opening ask (although see Epstein’s comment above), but it’s likely to be a combination of the contract gains won by the UAW and the Seattle Machinists’ Wichita union siblings last year. A 40% pay increase over three or four years seems a likely starting point, like it was for the UAW. An end to mandatory weekend overtime – like Wichita Machinists got at Spirit — is another one. The UAW convinced the Big Three to reduce the amount of time it takes new hires to get to the top of the pay scale to three years; at Boeing it’s currently six.
And given the history, it’s a pretty solid bet that IAM 751 will seek to restore some sort of defined benefit pension for its members.
Boeing will likely have to acquiesce to much of this. After Covid, the MAX-8 grounding, delays on the 777X, delays on the KC-46, off-and-on production halts on the 787 in Charleston and the end of the 747’s run, the company needs to simply build and deliver airplanes for a while – as we reported in our 2024 preview, just before the door plug flew off AS 1282.
The GEntrification of Boeing
The problem is that we’re talking about a senior leadership team that is steeped in Jack Welch’s GE management style, which is laser focused on cost containment generating free cash flow to boost share price, at the expense of all other factors.
Calhoun’s an old Welch protégé, and he was brought on to Boeing’s board by another one (Jim McNerney) just in time for the decision to punish the IAM by moving the second 787 line to Charleston.
Their mentor’s playbook relies on threats, playing one set of stakeholders against the others, to win concessions from all. Asking Calhoun to make peace with his unionized workforce may be simply too much to ask.
But we don’t see how Boeing can weather a strike in 2024.
Boeing has overcome existential crises in the past. A case in point was the 747 program. Coming on the heels of the Super Sonic Transport program’s collapse, the 747 was a Hail Mary that required a whole new aircraft built in a factory that was being completed as the first planes were assembled.
Boeing succeeded – and the 747 changed the history of aviation – in large part because its workforce went to superhuman lengths, famously sleeping in their cars in muddy lots so they could cram a few extra hours of work into each day.
After two decades of constant outsourcing, contract concessions and headquarters moves, Boeing doesn’t inspire that kind of loyalty anymore. To get somewhere close, Calhoun and his team will need to make fundamental changes from the bottom up, and that will require them to acknowledge that the course they’ve charted for Boeing for 20-plus years ultimately was wrong, and a new one is needed.
If they’re able to do that, we’ll see the first signs as the IAM talks get underway in March.
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