“Best And Final” offering features Boeing vs. Machinists Round 2

Earlier this month, Boeing and the leadership of the International Association of Machinists (IAM) failed to understand IAM members' fierce resistance to compromise on their demands. The union voted almost unanimously (96%) to reject its leadership's compromise of 25% wage increases, up from the 40% it had sought. The IAM leadership quickly changed course and vigorously supported its membership with renewed zeal when the IAM withdrew. The strike has now been going on for two weeks as federal mediators try to bring the two sides together.

Against this backdrop, Boeing offered a “best and final” offer that included a 30% wage increase and an improvement in contract bonuses, health care cost-sharing, and retirement benefits – a package that still fell far short of the IAM's demands. Not surprisingly, the IAM leadership, after being fooled “once” by its approval of a Boeing offer, decided not to even put the offer to the vote of its members.

Just as Punxatawney Phil saw his shadow and retreated to his hole in Gobblers Knob, Pennsylvania, on Groundhog Day, the forecast is for more winter — but probably not for six weeks. Neither side can afford a prolonged strike. Boeing is estimated to have already lost $1.3 billion due to the work stoppage. Union members cannot survive much longer on the strike payments that have just begun.

And the supply base cannot keep up either. Spirit AeroSystems, the provider of fuselages and other structural components for the Boeing 737, is reportedly considering furlough days if the strike lasts longer than another three weeks. And smaller suppliers with weaker balance sheets will quickly suffer if the strike lasts longer. There have only been a handful of strikes at Boeing over the past few decades, and all have been resolved within a month or two at most.

Then the question arises: How could all this happen? The workforce has fallen behind in recent decades, leading to hard-fought redress in many industries, including writers and actors in Hollywood and auto workers in Detroit. Boeing has long chafed at the strength of its Puget Sound workforce and opened an assembly line for its new Boeing 787 planes in non-union South Carolina in the early 2000s. (One of the IAM demands that Boeing agreed to was that the next new aircraft be built in Washington state.)

In other words, there has been little loss of love between the two sides over the years. However, starting in 2018, Boeing faced severe headwinds. The two tragic and fatal crashes of the Boeing 737 MAX aircraft led to serious questions about its safety and quality systems and its overall culture. The pandemic led to upheaval in the workforce with layoffs and the permanent loss of the most experienced employees. And air travel's lengthy recovery has resulted in financial losses and debt accumulation totaling nearly $60 billion every year since 2018.

And just when it seemed like things were getting back to somewhat normal, the bursting of a door plug on an Alaska Airlines 737 MAX plane in January of this year narrowly avoided another tragedy and put the company back into a restricted state Production collapsed, the FAA tightened control and fired the CEO of the aircraft division and searched for a new head of the entire company.

It is unfortunate that this new leader, Kelly Ortberg, did not have more time on the ground before the labor confrontation. Mr. Ortberg, an industry veteran, arrived in August and quickly tried to move around the assembly lines to build a new relationship with the workforce. But Boeing's last two offerings seem to come straight from old-school thinking.

Neither the board nor the management has changed much. The result was an offer that the union deemed so inadequate that it immediately died rather than use the opportunity to signal a new partnership with its workforce. The financial impact of the 10% put-ask gap is not insignificant—it's worth billions of dollars over the next few decades—but union labor costs only account for about 5% of the total cost.

And Boeing has an order backlog for the 737 MAX that is three times its installed base of 1,600 MAXs, ensuring production for nearly a decade. Boeing will not fail. As the country's national champion and largest exporter, the country will not allow this. The company could suffer a debt downgrade and may need to raise new equity capital. The path forward, however, is to restore stability and get production up and running to capture the profits included in future MAX deliveries to the airlines that are clamoring for it.

This could be greatly supported by a motivated and qualified workforce. Regrettably, the unnecessary prolongation of a standoff that will undoubtedly be resolved in a few weeks at a level very close to the union's demands will perpetuate the old school perspective and show the world that culture change is necessary for both sides even further away.