Boeing Faces Cash Crunch and Ratings Downgrade as Machinists Union Goes on Strike

This is Naked Capitalism fundraising week. 1126 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in the financial realm. Please join us and participate via our donation page, which shows how to give via check, credit card, debit card, PayPal, Clover, or Wise. Read about why we’re doing this fundraiser, what we’ve accomplished in the last year, and our current goal, more original reporting.

Boeing is quickly going from the “falling apart airplanes” to the “falling apart company” category. The 32,000 strong Boing machinists’ union (out of a workforce of 170,000) voted overwhelmingly to strike. 95% and higher approval levels are just about never heard of in real life, signaling the depth of employee unhappiness with Boeing pay and practices:

BREAKING: A massive strike has been launched at Boeing.

32,000 workers have walked out at the aerospace giant.

95% of workers voted to reject Boeing’s offer, and 96% voted to strike.

— More Perfect Union (@MorePerfectUS) September 13, 2024

And the union members are stoked, per Labor Notes:

Third-shift workers walked out of Boeing’s giant factories at Renton and Everett, Washington, as their contract expired early Friday morning, blasting music and airhorns, shooting off fireworks, and waving hand-made signs. They immediately formed picket lines and began setting up homemade burn barrels with “IAM” carved in the side.

“People are really excited to strike,” said Ky Carlson, a third-shift assembler who walked out at midnight and was picketing the Everett plant at 3 am. She said they were aiming for what the union demanded at the beginning of negotiations, 40 percent raises and restoration of the pension.

The union’s negotiating committee recommended a tentative agreement to members on Sunday, to almost universal condemnation. That same day, workers marched through the Everett factory on their lunch break, then out the door, chanting “Strike, Strike!”

Union members snarled traffic with long lines to vote on Thursday, where 94.6 percent rejected the proposed contract and 96 percent voted to strike. Pay was the main sticking point.

We’ll use a new Wall Street Journal story on the impact on Boeing of this strike as a point of entry. The Journal account, not surprisingly, takes a management/investor perspective on how the strike has worsened the mess that Boeing is in. Based on some nuggets in this account, it seems likely that this strike will not be resolved quickly. The piece describes how ratings agencies are warning that if the labor action extends beyond a week or two, the resulting cash crunch will lead to a ratings downgrade to junk (as in below BBB-). Each ratings grade drop increases the manufacturers’ costs by roughly $100 million per year.

If we are correct (admittedly relying on the imperfect lens of reading tea leaves from a major story) and that Boeing will not make the concessions needed to settle the strike quickly, one might infer that a hardball stance is the result of Boeing (despite the wobbly rating) relying on a too-big-to-fail status. It is not simply that commercial aircraft have been a cozy duopoly. Too many major carriers depend on Boeing surviving so they can get parts. That is before considering that airlines also concentrate their buys on certain aircraft models so as to simplify training, maintenance, and inventories. If the US was willing to bail out airlines during Covid to the tune of $54 billion, they would surely rescue Boeing if its financial conditions worsens markedly. The model could be government guaranteed borrowing, the form of lifeline extended to Chrysler in the early 1980s.

However, back then, CEO Lee Iacocca took a salary of $1 (although my recollection is that he got cash and prizes after the carmaker recover. One somehow doubts the new CEO or any of his C suite peers would make such a sacrifice. By contrast, it seems likely that any Federal rescue would be accompanied by an attempt to cram down uncooperative unions. The high pay levels of the top brass was one of the issues that stuck in the craws of the rank and file:

Boeings new CEO is making 30 million a year, Strike until y'all drop if they can pay him that what's the problem with paying good wages

— GPress (@GailPreston4) September 13, 2024

The CEO’s home buy as the strike started was not a good look. From Fox:

[CEO Roberrt “Kelly”] Ortberg also closed on a $4.1 million mansion in a gated community in Seattle on Tuesday, according to Zillow.

Ortberg’s move comes as tens of thousands of Boeing factory workers went on strike this week after 96% of union members rejected a new contractor offer.

The 1928 Tudor revival home sold for $4,212,580 after taxes, according to a deed obtained by FOX 13 Seattle. The home is 4,180 square feet and sits on a 9,217 square foot lot.

For a 50,000 foot perspective, Emirates President Sir Tim Clark told Bloomberg a few months ago that it would take five years to turn Boeing around. And if you listen to his overview, he presupposes that the new CEO gets labor on his side. Another way to interpret Sir Clark’s take is that solving Boeing’s workforce problems is a necessary precondition to fixing Boeing’s production problems.

Clark, in a later interview, was explicit about the importance of care and feeding of the employees. From Newsweek:

In an interview given on the opening day of the Farnborough Airshow, Emirates President Tim Clark said that Boeing should cater to the needs of its workers as it attempts to solve its production and delivery issues, The Seattle Times reported.

“The guys on the shop floor, the engineers, the machinists, they know what to do,” Clark said.

Clark, who has served as president of the Dubai-based carrier since 2003, also voiced support for Boeing’s union, saying: “Don’t forget the workforce. Make sure they get a good deal. Make sure that you look after them.”

Now let’s turn to the Journal. This is how it frames the story:

When the jet maker’s largest union went on strike Friday, the walkout compounded the list of problems facing Kelly Ortberg, who took Boeing’s top job five weeks ago. Among them: rapid cash burn, a struggling supply base and a manufacturing quality crisis.

Hours after the walkout, debt-ratings firms warned that a prolonged work stoppage would prompt them to downgrade Boeing debt into junk status. With more than $45 billion in net debt, a ratings hit would drive up borrowing costs and hamper fundraising efforts….

The jet maker burned through more than $1 billion a month in the year’s first half and warned in July that the company would burn between $5 billion and $10 billion in cash this year. Largely to blame is Boeing’s slowed production of the 737 as the company works to address quality issues after a door plug blew off in midair on an Alaska Air flight in January.

The company is struggling with production slowdowns on other models, too, because of supplier shortages and other issues. Its defense business, which makes F-15 jet fighters and Chinook helicopters for the Pentagon, is also unprofitable.

Because this article focuses on the latest developments, it skips over the sorry history of how Boeing over decades has squeezed its workforce, including moving operations with a primary objective of getting seasoned, read expensive, engineers and factory workers to quit, and how it has also pressed its suppliers to get the lowest possible prices. The article later says Boeing has inventories piling up as it has not yet cut supplier orders despite lowering production, so one is left wondering about the “supplier shortages”.

Boeing gives the impression it was blindsided as to where the union rank and file stood. The magnitude of the vote against its offer says any new proposal would have to be considerably more generous to win approval.

Boeing may simply be playing its cards close to its chest, but this bland remark, which translates to “The union leadership was wildly out of touch” would not seem to bode well for the next phase of negotiations:

Boeing finance chief Brian West said the company will work on a second offer. He said the company was initially pleased with the outcome of talks given that union leaders unanimously signed off on the first deal.

An NPR interview with Jim Holden, the titular head of the machinists’ union, has an apologetic undertone consistent with not delivering anything close to what members wanted. Some snippets:

[NPR host SCOTT] DETROW: Let’s just start with that. The union negotiated a deal. You recommended approval. We heard the way you described it. Why, then, did 94% [actually 94.8%] of the members reject this deal? What was going on?

HOLDEN: You know, we did achieve a lot of success. We were able to get the wages to where we got them. We were able to reduce designated overtime. We were able to get important job security pieces. We were able to reduce some health care cost share. You know, we were able to make some other improvements. And all that came together on the last day, and we recommended it to get the offer to where it was at, but that was all that we could achieve in bargaining.

And so it was important for us to let our members know that, that it’s all we could achieve in bargaining short of a strike. And we had to place it in their hands. That’s where the power resides in our membership. It is on the shop floor. I can’t accept something for them. They must evaluate it. And they must vote, and they must determine their path. And they spoke loud and clear that it was not good enough. And there are some major issues that they are demanding and that we’re going to continue pushing forward for.

So if Holden is reporting correctly, and not simply showing he was captured by management, Boeing’s leadership really does not get how much it has to increase compensation to get its workers back on board. Holden mentions that briefly later:

DETROW: So what are the key issues here that the union is pushing for? Because we ticked through the wage increases, the keeping it union jobs. There was also – there’s also lowered health care costs, boosted retirement contributions. What wasn’t enough? What is the union pushing for right now?

HOLDEN: You know, what we’re hearing from our members is it’s all about wage increases, and it’s all about the defined benefit pension that we had lost in 2014. So those are the main issues. You know, when you look at the wages, there are some of our members not at max pay, and they’re struggling. It’s hard to, you know, rent an apartment. They don’t have a pathway to owning a home. They have to move 50 miles away from the plant just to afford a place to live, and it’s an issue that we have to address – wages and the loss of the defined benefit pension.

The Journal did take up Holden’s message:

Jon Holden, the union chapter’s president, said Ortberg was in a tough position as a newcomer trying to mitigate years of animosity between the union and Boeing leadership. Longtime machinists are angry about union concessions over the past 16 years that have eroded retirement and health benefits. Recent hires, meanwhile, point to the ever-increasing cost of living and the company’s stagnant starting wages.

“It’s hard to make up for 16 years,” Holden said. “And I think that’s the position he was in.”

Boeing is returning to negotiations with a Federal mediator on Tuesday. New CEO Ortberg has been meeting with people at factories, as he did before the strike vote. But IMHO the time for face time is past. Unless the pay component is increased materially, the machinists’ sound determined to hold the line.

This remark in the Journal story does not bode well for Boeing making the needed concessions:

[CFO Brian] West, speaking Friday, said the company was giving priority to its investment-grade rating.

On the other hand, the fear of losing its current rating could argue for Boeing knuckling under, particularly since the Journal cited an RBC analyst saying CEO Ortberg has to resolve the strike this week or suffer a serious loss of reputation. A beancounter would see $100 million in interest as $3,125 per year per machinists’ union worker. But the potential damage is far more than just the interest cost. The Journal mentions the impact on Boeing’s long-suffering suppliers:

A prolonged stoppage would hit suppliers, which had just begun to recover from shutdowns caused by the pandemic and the 20-month grounding of Boeing’s 737 MAX after fatal crashes in 2018 and 2019. Shutdowns have lingering effects, particularly on smaller parts makers that are forced to cut jobs when orders dry up and then must rehire and retrain workers.

As indicated, talks resume this Tuesday, so we get word of any progress mid-late this week. Stay tuned.