An extended Machinists strike will be very expensive for Boeing. A three-month strike would cost the aerospace giant a hefty $1.1 billion in operating profits...
An extended Machinists strike will be very expensive for Boeing.
A three-month strike would cost the aerospace giant a hefty $1.1 billion in operating profits, according to an internal company analysis prepared for top executives. That’s more than the commercial-airplanes unit’s profit for all of last year.
A one-month strike would be much less costly. But even that could potentially delay by a month the debut of the company’s new 787 jet.
To avoid that, Boeing is considering alternative suppliers for parts originally scheduled to be made by Machinists at its Auburn plant.
The strike by 18,300 Machinists is 2 weeks old, and there are no signs of renewed talks, much less a settlement.
The strike’s impacts are projected in a key company document prepared in March in advance of the contract negotiations, and obtained by The Seattle Times this week.
The Boeing analysis shows the company could recover some lost revenue by accelerating airplane production over the next four years. With ramped-up production, the company could limit the lost earnings from a one-month strike to $169 million, according to the projections.
Boeing’s analysis of strike costs
One-month strike scenario
Missed jet deliveries: 31
Loss of revenue, 2005: $2.15 billion
Recovery period: 2005-2008
Net loss of earnings (2005-2009): $169 million
Three-month strike scenario
Missed jet deliveries: 80
Loss of revenue, 2005: $5.33 billion
Recovery period: 2005-2009
Net loss of earnings (2005-2009): $1.1 billion
Source: Boeing internal document prepared in March
But for a three-month strike, the lost earnings remain above $1 billion even after four years of recovery.
Analyst J.B. Groh of D.A. Davidson said Boeing must balance the cost of a longer strike against what it has to give up to reach an agreement with the Machinists.
“If those numbers are correct, that puts a cap on the strike of 90 days from the company’s perspective,” Groh said. “But it puts a floor on it of at least 30 days.”
Informed of the company’s bottom-line projections, Mark Blondin, District 751 president and lead negotiator for the International Association of Machinists (IAM), said, “Nobody likes to see that — that they are going to lose that kind of money.
“You’d think it would be an impetus for [Boeing Chief Executive Jim] McNerney or [commercial-unit chief Alan] Mulally to get to the table,” he added.
Boeing spokesman Charles Bickers said the figures in the document represent a preliminary assessment and that the company would not comment on internal studies.
“We’re not speculating on the potential impact of the strike, because we don’t know how long it will last,” he said.
Howard Rubel, an analyst with Jefferies Group, who has a “buy” rating on Boeing stock, differed with Groh. He said Wall Street could live with the plunge in profit predicted in the analysis.
“If that’s the price they have to pay to become more competitive, most investors will accept it,” said Rubel.
The last Machinists strike in 1995 had a relatively modest financial effect. Rubel estimated that that 10-week strike cost the company at most $150 million in earnings. Boeing did not entirely cease production then, using supervisors to complete airplanes that were nearly finished before the walkout. Production rates were much lower then, with only about 30 airplanes missing delivery dates.
The March document projects a much bigger impact this time.
If the work stoppage lasts one month, the document projects Boeing will miss 31 deliveries this year, including 22 for the single-aisle 737 jets and five for the widebody 777s. That would reduce revenue by a projected $2.15 billion for the year.
If the stoppage lasts three months, the internal analysis forecasts 80 missed deliveries in 2005, including 60 for the 737s and 12 for the 777s. That would reduce revenue by a projected $5.33 billion for the year.
The internal analysis may underestimate the costs of missed deliveries, as production rates have increased since March. At a conference in Phoenix, Ariz., Wednesday — only two weeks into the strike — Boeing Chief Financial Officer James Bell cited a figure of 25 to 30 scheduled deliveries that “obviously won’t be met and made.”
The analysis predicts further missed deliveries in 2006 but shows a plan to recover through an aggressive overtime schedule and peak staffing.
The recovery plan for a one-month strike extends to 2008, for a three-month strike to 2009.
However, some deliveries are expected to be permanently lost as customers shift their orders — 20 airplanes in the case of the longer strike. So even though extra planes are produced in the years after the strike, the projection shows Boeing cannot make up the earnings gap.
In Phoenix, Bell told analysts the opportunity to make up the delivery shortfall “diminishes over time as the strike goes on.”
The commercial division reported $941 million in operating profit in all of 2004. With business booming, it made $864 million in the first half of this year.
Before a recovery period, Boeing must also deal with large immediate earnings losses for this year, the analysis predicts.
For a one-month strike, Boeing projects an operating-profit plunge of $467 million in 2005; for a three-month strike, $1.2 billion in 2005.
The strike also could damage Boeing’s standing with customers.
Airlines immediately affected include Etihad of Abu Dhabi, awaiting 777s; and Ryanair of Ireland and Aeromexico of Mexico, awaiting 737s. Altogether, 114 customers will be affected by a three-month stoppage, the document estimates.
Jorge Salas, fleet planning director for Aeromexico, confirmed the document’s assessment that a three-month strike would delay five 737 deliveries in the airline’s peak winter season and two 777 deliveries next spring.
The potential delay to the 787 program is a surprise, since no production work on the new plane will begin here until 2007.
Even the one-month 787 delay projected in the internal Boeing analysis could be a serious embarrassment, since it would threaten delivery of some of the first 787s to Chinese airlines in time for the summer Olympics in 2008.
The strike is affecting work at the Auburn plant to produce parts for the three large air-cargo freighters needed to ferry in large sections of the 787 for final assembly in Everett. That work, done by Machinists, is now suspended.
The air freighters are used 747s, which must be modified in Taiwan to add a new upper fuselage, a new cargo floor and a swinging tail to allow loading of massive parts.
The schedule for producing them is very tight, with the first two airplanes planned to enter service at the beginning of 2007, and a third later. The first 787 must come together that summer to begin flight tests.
Because of the tight deadlines for the Chinese deliveries, “we are going to do everything we can to maintain the schedule,” said 787 program spokeswoman Yvonne Leach. Though no decision has been made, Boeing managers are looking at alternative suppliers for the cargo-plane parts, she said.
Total contract costs
The internal document also gives a look at the potential total cost of the IAM contract to Boeing.
The baseline scenario outlined — with terms equivalent to those the union got in its last contract in 2002 — would cost $7.9 billion during the three years of the contract.
The actual final offer presented to the union last month includes terms that would likely raise the total contract cost above $8 billion.
For example, a proposed boost to the pension payout of $6 per month per year of service — not included in that baseline calculation — would add an estimated $200 million to Boeing’s cost, according to an actuarial analysis by The Times.
According to an e-mail from Mulally to Boeing managers last week, the gap between the union’s proposal and the company’s current offer was around $1 billion.
Is there a breakpoint when this strike becomes too expensive for the company?
“That’s a judgment call,” said analyst Rubel. “Fifty percent of this is judgment and 50 percent is emotion.”
Rubel pointed out that union members lose big, too — at least $263 million in lost wages alone during a 12-week strike.
Dominic Gates: 206-464-2963 or email@example.com. The Associated Press contributed to this report.