Boeing’s troubled year just got worse. The aerospace company, already battered by delays on its 787 Dreamliner program and a stunning loss of a $35 billion aerial tanker program, now faces billions of dollars in lost revenues from a strike by its largest union.
Production of Boeing’s commercial airplanes came to a halt Saturday after last-ditch contract talks failed and members of Machinists union Local 751 walked off the job.
The union's previous three-year contract, which covered 27,000 Boeing workers in Washington, Oregon and Wichita, Kan., expired Sept. 1, and union members overwhelmingly rejected the company's latest offer in a vote Wednesday. More than 80 percent backed the union leadership by rejecting the contract and supporting a strike.
The walkout was delayed 48 hours at the request of Washington Gov. Christine Gregoire and a federal madiator, but union officials said Friday that contract talks were fruitless and pickets went up shortly after midnight Saturday.
While the strike is yet another setback for Boeing, the company will be able to survive relatively unscathed if the walkout lasts for only a few days. But if union members strike for a month, as they did in 2005, the financial impact could be devastating, and it will further strain a difficult relationship between management and the union.
Aviation analyst Scott Hamilton with Leeham Co. LLC. in Seattle, estimates Boeing could lose $2 billion to $2.8 billion for every month the union is on strike.
The ripple effect could amount to about $100 million per day in deferred revenues. Airline customers typically pay for airplanes upon delivery. So the longer the strike lasts, the longer it takes airlines to get their airplanes and the longer it takes Boeing to receive payment.
Boeing most likely will not have to pay penalties to airlines as a result of delivery delays because the company’s sales contracts are said to have a clause that excludes penalties due to strike.
The strike’s impact on Boeing will be mainly to its bottom line and its customer relations, leaving its credibility in the aerospace community intact, Hamilton said.
Most airlines have had labor disputes and strikes of their own, so they will understand the nature of Boeing’s labor negotiations. “But the longer the strike goes on, the more unhappy the airlines are going to be because they can’t get their airplanes.”
The effect of the strike will depend on its duration, particularly for Boeing's 737 and 777 production lines, which are running at capacity, with 31 of the 737s and seven 777s produced monthly, Hamilton said.
In 2005, the Machinists strike delayed the delivery of 30 jets, costing the company an estimated $1 billion. Today, Boeing’s airplane production rates are at peak levels because of a record backlog.
“The 737 and 777 lines are at current capacity, based on the supply chain, and for every month a strike continues, it will be that much more difficult for Boeing to catch up on deferred deliveries,’’ Hamilton said in a commercial aviation report. “There is also the possibility that the ripple effect of the strike, given the current economic environment, may result in lost sales, so it’s impossible to guess whether the revenue affected by a strike is permanently lost or eventually recoverable.’’
The strike also will impact the much-delayed 787 Dreamliner program. “There is a theory that a strike will enable Boeing to mask continuing problems with the 787 and blame delays on the strike,” Hamilton said in his report.
Boeing has set the first test flight for November and delivery for the third quarter of 2009, at least 14 months late because of parts shortages and a new assembly process. But there is already buzz in the industry that the 787 program continues to be a challenge and that the first flight is slipping to December or even into the first quarter of next year.
“Kiss goodbye Boeing’s pledge of 25 787 deliveries in 2009,’’ Hamilton said, noting that Wall Street analysts already were predicting as few as 10 deliveries, even before the strike. “Nobody ever wins in a strike.’’
Boeing management had boasted that its “best and final” contract proposal was among the top ever offered to American workers. But union workers denounced the offer as woefully inadequate.
The company’s proposal, delivered to the union last week, would have increased pay by 11 percent on average over three years. The offer also included a $2,500 bonus for workers if the agreement was ratified.
“With Boeing making record profits, upping shareholder dividends, maintaining the share buyback plan and holding record backlogs, the unions are understandably saying, 'We want ours” and making outsourcing a big issues — particularly in light of the production problems with the 787,'’’ Hamilton says.
Labor experts say the strike could have lasting impact on the tenuous relationship between Boeing and its biggest union.
“The problem with strikes in general is that the parties will have to eventually come back together,’’ said Hugh Judd, a lecturer on labor relations at the University of Washington. “The tensions and bitterness that arise are never easy to reconcile when the parties come together. The posturing and statements that are made in the heat of the battle are not easily forgotten.”