Three weeks into the Machinists strike at Boeing, the company and union appear determined not to blink. The strike is shaping up to be long and damaging. A one-month stoppage could cost Boeing around $1.3 billion in profits that won't be recouped for years.
More than three weeks into a production stoppage that has idled more than 27,000 workers, neither Boeing nor the Machinists union is ready to blink. The 2008 strike is shaping up to be long, costly and damaging.
Extrapolating from company documents detailing the cost of the last strike, Boeing’s lost profits from even a one-month strike would be at least $1.3 billion — earnings that won’t be recouped for years.
Likewise, an extended strike will bite deeply into the living standards and retirement plans of thousands of Machinists.
Yet both sides seem determined to take a firm stand.
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Many rank-and-file Machinists are convinced this is a rare moment when they have the power to break the company’s will. They believe Boeing’s five-year run of $13 billion in net profits means the company can readily give what the union demands, and that a record order backlog of almost 3,700 jets rules out a prolonged period without building planes.
With the aviation business teetering on the edge of a major downturn, however, Boeing management remains adamant the company must rein in long-term costs and cannot offer concessions on job security.
Boeing also knows that making big concessions increases the chance of another strike in 2011. And sooner than that, any job-guarantee commitment to the IAM invites matching demands from the Society of Professional Engineering Employees in Aerospace, the engineering union that has just begun contract negotiations.
Doug Kight, Boeing’s top labor negotiator, said federal mediators are in constant touch with both sides. But there have been no direct talks since the strike and no progress.
“The differences in our positions are wide,” said Kight.
Agreed Mark Blondin, national aerospace coordinator for the International Association of Machinists: “There’s no movement.”
Most Machinists display a firm resolve to stay out, while handling the strike in individual ways.
On Thursday, Jayleen Roman, a younger machinist on the 787 program, began a 10-day Hawaiian vacation with her parents. Her dad is a 28-year veteran machinist. They had long planned and saved for both the vacation and the strike.
“We’re ready to stay out as long as it takes,” said Roman.
Stephen Watkins, an electrician on the 777 program, has been building a fence for his brother-in-law while on strike, and will move on to do some work for his father-in-law.
Like many veterans, Michael Spears, a team leader on the 777 jet program in Everett, has borrowed from his 401(k) retirement funds and set aside money for his mortgage payments through January.
If the strike lasts a month or two, he expects to repay the loan from a signing bonus typically part of any IAM strike settlement. If it’s more drawn out, he said he’ll plan to work until 57 instead of retiring at 55.
For now, Spears is enjoying the break from the heavy noise and vibration of his workplace.
“For the past 18 months I’ve been working 10-hour days, seven days a week, sometimes a month straight. My body is appreciating the downtime.”
The Machinists missed their first paycheck Thursday and on Saturday collected their initial slim $150 weekly strike checks from the union.
Despite the Machinists’ confidence, industry analysts question the strength of the union’s leverage given the precarious state of the airlines.
Alaska Airlines and Southwest Airlines are among the Boeing customers whose plane deliveries have already been delayed by the strike. But like most domestic carriers, both have announced significant capacity cuts for this winter.
“Don’t tell me they are dying for their new planes,” said Adam Pilarski of consulting firm Avitas. “The union’s timing is not good.”
Blondin says the possibility of a downturn in aviation — with the potential for layoffs at Boeing — makes the union demand for an end to outsourcing “that much more important to fight for now.”
“We need to get that job-security stuff solved first and the rest is doable,” he said.
Time to be nimble
Kight counters that the option to outsource work or slow production in a downturn is key. Boeing, he said, must be able to “react nimbly to what can be very sudden and dramatic changes in our marketplace.”
Kight said the Puget Sound area sees the upside in good times. Even while Boeing has outsourced some work as part of overseas sales agreements, it has added about 8,700 machinists locally since the 2005 contract talks.
As for the economic issues of wages, pensions and the cost of health care, Kight doesn’t see those as easy.
A Seattle Times analysis using the company’s online wage and benefit calculator shows that the current offer over three years gives the average Machinist approximately an extra $22,000 over the 2008 compensation level. (The company has said the contract adds $34,000 but it acknowledges that figure ignores substantial extras included in 2008 pay, including a lump-sum bonus.)
Average pay with overtime and bonuses, all totaling $68,000 in 2008, will rise to $80,000 in 2011, said Boeing spokesman Tim Healy.
Based on those averages, the company offer would increase Boeing’s total annual cost for its IAM work force by some $550 million, from $2.43 billion this year to about $3 billion in 2011.
A detailed breakdown of benefits available using the company online calculator suggests that health care accounts for about 12 percent of that total, and pensions 6 percent.
Boeing must weigh its goal of capping those future costs against the reality of profits drained away in the present.
Strike’s cost to Boeing
After the 2005 Machinists strike, which lasted 28 days, Boeing’s regulatory filings pegged the hit to its profits at up to $300 million for that year.
However, those filings do not reflect the full financial impact because Boeing spreads its program costs over hundreds of airplanes and about four years of production.
“Boeing’s accounting disclosures don’t reveal the true cost of the strike,” said an analyst at a Wall Street firm that doesn’t allow him to be quoted.
A solid estimate for the real cost of the 2005 strike is revealed in an internal Boeing document obtained by The Seattle Times. It was prepared for then-Chief Executive Alan Mulally and his senior management team in October 2005, soon after the Machinists went back to work.
The document projected that over a four-year period through the end of 2009, the net loss of profits due to the 2005 strike would be just over $700 million.
That figure included profits deferred from the planes not delivered during those four years, as well as more than $200 million in “abnormal costs” including penalties paid to suppliers.
The implication of the projection is that three years after the 2005 strike — and in the first month of a new IAM strike — Boeing has still to make up that $700 million in missed profits.
After the strike ended in 2005, Boeing decided not to catch up on deliveries by ramping up production beyond its long-range plan. Instead, it simply pushed the entire delivery schedule out one month, so that the financial impact flows right through to today.
Extrapolating from the 2005 projection, based on today’s much higher production rates and profit margins, the Wall Street analyst estimated that the total hit to profits for a one-month strike now would be at least $1.3 billion.
Balancing that, Boeing has plenty of money in reserve: more than $10 billion at last report, compared with $8 billion three years ago.
“The company is in a strong financial position should … this situation get extended,” said Kight.
Aside from the strike’s cost in foregone profits, Boeing must be concerned about the added delay to its crucial new jetliner program.
Inside the 787 production bay in Everett, engineers have Dreamliner No. 1 close to ready for the ground tests that precede first flight.
“The plane is essentially done,” said a senior Boeing engineer, who requested anonymity because he’s not authorized to speak about the program. “We’re taking advantage of the strike to clean things up and get the factory spit-and-polished.”
A similar cleanup during the last strike made the 777 line “amazingly more productive” when the strike ended, he said.
Still, Dreamliner No. 1 cannot fly until the Machinists come back. Among other things, the extensive work done on the plane since rollout means the paint needs to be retouched for its high-profile flight debut.
“We can’t paint the plane without the IAM,” the engineer said.
Dominic Gates: 206-464-2963 or email@example.com