RichardAboulafia.com 

:: January 2014 Letter ::

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Dear Fellow Sudden Aircraft Industry Labor Relations Watchers,

“It's such a fine line between clever and stupid.” Thus opined David St. Hubbins of the mock rock band Spinal Tap. This idea has never been better illustrated than the recent Boeing/IAM 751 contract vote/777X site selection fracas. The fine line: a 51-49% vote margin. If the union had rejected Boeing’s second final (not “second and final;” rather, “second final”) contract offer, Boeing management would have looked incredibly stupid. They would have faced a choice: either continue with their disingenuous and farcical 777X site selection process (motto: “spreading false hope over dozens of states”), thereby looking dumb, or they would have needed to come up with a “third final” offer for Puget Sound workers, looking even dumber.

However, the union approved the contract, by a 600 vote margin, a narrow victory that made management look rather clever. While they didn’t save as much money as they would have with the first final offer, they still got rid of fixed pensions, and generally dealt a decisive blow against their most troublesome union. Enabled by many ludicrous state government 777X site bids (and paradoxically by an IAM International management that’s blissfully ignorant of the aircraft industry), Boeing’s tough approach succeeded.

Cleverness, of course, is in the eye of the beholder. Wall Street and the anti-labor crowd loved it. One Wall Street analyst called it a “watershed event.” Yet others, myself included, question how this contract could not result in lasting resentment and perhaps even blowback. It’s quite clear that even though 51% of the machinists voted yes, many did so because they felt their jobs were at risk, not because they felt it was a good deal. As a result, we could see lower productivity and a less cooperative attitude, particularly when workers are asked to go the extra mile during times of crisis (like the one we just saw with the 787). We’ll also certainly see a more contentious next round of negotiations with the engineers at SPEEA, particularly since Boeing has announced plans to spread 777X engineering work all over the globe (the current SPEEA contract expires in October 2016). Assuming Charleston workers are paying attention, this experience will do more than anything else to encourage unionization there.

Since final assembly labor costs aren’t that big a part of the total cost buildup of an aircraft, management’s approach to labor might just be counterproductive and short-sighted. Howard Rubel, an otherwise smart Wall Street analyst at Jeffries, said the deal could cut operating costs by $250-$500 million per year for BCA and that “the lower future cost of doing business creates an incentive for the company to hire and train new employees and expand its technology base.” Reality check. BCA just finished a record year, with over $50 billion in revenues. The company recently announced a $10 billion stock buyback and raised its dividend by 50%. It also secured an $8.7 billion incentive package from Washington state to keep the 777X line where it is. In this context, is there anyone who really believes a few hundred million per year in savings will have any impact whatsoever on Boeing’s behavior or its competitiveness?

Those tiny savings numbers looks even more trivial when you consider the indirect damage to Boeing from this experience. Is there a Boeing executive who now dares to talk about “skills shortages” or the need for more government assistance for training? Where’s the incentive for workers to make Boeing a career? And the next time Boeing tries to play the economic patriotism card (for the next tanker competition, for example) it might just find that it has lost support from the states involved in the 777X site selection process.

Boeing management’s approach to labor is part of a broader problem. Many companies see workers as a cost, rather than a source of profit, a problem ably described by Adam Davidson in a recent New York Times piece (http://www.nytimes.com/2014/01/05/magazine/thinking-outside-the-big-box.html). Looking at the retail sector, Davidson concludes that if store management understood the potential virtues of cooperation with labor, “they’d make a lot more money.”

For a useful contrast, compare the recent unrest with 2011’s Boeing/labor management accord to build the 737MAX in Renton. It was a cooperative effort. It had none of the all-too-public grandstanding seen this time, and it produced a net gain for both sides. Boeing gave a little, and the workers gave a little, with very modest raises and higher health care costs. The resulting economics enabled one of the strongest new product launches in jetliner history, with labor/management goodwill to spare. As with the 777X, the 737MAX is a major derivative, so it was clearly in everyone’s interest to keep the line where it was. “It’s hopefully the start of a new day of doing business, when it comes to working with Boeing Co.” 751 president Tom Wroblewski said after the agreement. “We have never had this type of language, ever, and this is precedent-setting language.”

Unfortunately, BCA now has different management, with a different attitude. Meanwhile, Jim McNerney’s approach to labor has less to do with economics and more to do with CEO locker room bragging rights. In the absence of a compelling strategic vision, for some people, getting tough on labor is an acceptable substitute.

When looking at the labor situation, it’s important to consider context. For several decades now I’ve maintained that Boeing’s widebody strategy is superior to Airbus’s; I still believe that, and the very successful 777X and 787-10 launches last year illustrate that superiority. Our forecasts call for the company to maintain a 55% market share by value over the next ten years. The broader commercial market has grown at record rates over the past five years, and fears of a bubble have largely receded. In terms of revenue, market share, and profit, BCA never had it so good.

This backdrop of strong competitiveness, along with record revenues and profits, makes management’s approach to the 777X labor contract inexplicable, and rather shortsighted. Usually, you get nasty labor disputes when a company is desperately trying to restructure to avert bankruptcy, as with General Motors or Pan Am. There is absolutely no rationale, from a company health and outlook perspective, for Boeing’s aggressive approach with labor.

Managing a large blue-chip aerospace company like Boeing is like steering a supertanker. Most CEOs are there to make sure the company doesn’t hit the rocks, and not much else. The good ship Boeing is in fine shape, and it’s sailing through rather peaceful waters. But then again, posting signs saying THE BEATINGS WILL CONTINUE UNTIL MORALE IMPROVES does nothing to boost a ship’s performance. When McNerney’s replacement takes the helm in 2015, he’d better start thinking of ways to repair the damage. Left unchecked, the current situation could produce an even more toxic labor environment than Boeing has seen in the past.

The start of the year brings a new Teal World Aircraft Overview. Other Teal Aircraft reports this month include the S-92, AW101, SuperJet, ERJ 145, E-6, A340, C-212, and MiG-29. Steer clear of Polar Vortexes.

Yours, ‘Til Bipartisanship Returns (To BCA And Washington DC),
Richard Aboulafia
 

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