A dark cloud will be hanging over Boeing Co. when it releases its third-quarter earnings report Wednesday morning and Chief Executive Officer Kelly Ortberg, who has only been in the job since August, presides over his first quarterly conference call with analysts for the storied planemaker. That’s because on the same day striking machinists will vote on a preliminary agreement that the company reached with union leadership over the weekend, and it’s unclear if the new terms are enough to mollify the deep anger that runs among the 33,000 workers, 95% of whom voted down Boeing’s first proposal on Sept. 12.
Investors already know Boeing will report charges of $5 billion, mostly for delayed planes, and an operating cash-flow loss of $1.3 billion. The company has also announced plans to cut its workforce by 10% and is seeking to sell new shares to raise about $15 billion. So, the results of the union vote on the contract proposal, which are expected Wednesday night, will overshadow everything else.
Will the union accept the deal? It includes a 35% general wage increase over four years, a $7,000 one-time signing bonus, revival of an annual bonus with a guaranteed minimum payout of 4%, and a 401(K) pension match of 100%. The raise is front-loaded, and if compounded annually comes out to 40%, JPMorgan Chase analyst Seth Seifman wrote in a research note, which is what the union originally demanded. Boeing didn't budge on reinitiating the defined-pension benefit, but did kick in an extra $5,000 to the 401(K).
Workers see this moment as a chance to claw back what they gave up in 2014 when Boeing used the threat of moving production of a new version of the 777 out of the Seattle area to ram through a labor deal. Beaten down workers ended up voting in favor of eliminating their defined-pension plan, boosting healthcare costs and accepting a paltry 4% wage increase over eight years in exchange for an immediate $15,000 cash bonus.
And yet, approval from rank-and-file union members is far from assured. Sure, the tentative deal reached being Boeing and union leadership, aided by the nudging of Acting Secretary of Labor Julie Su, only needs a majority of votes from members. But workers had been preparing for the chance to clap back at a company that ran roughshod over them in 2014. Then-CEO Jim McNerney had already located the factory for the new 787 widebody aircraft in North Carolina and had solicited offers from states to win production of the new 777X.
Perhaps even more offensive to workers was that, after squeezing them at the bargaining table and locking them into an eight-year contract, McNerney tapped Boeing’s rising profits to dramatically increase dividends to investors and boost share buybacks beginning in 2014. The buyback spree continued under his successor, Dennis Muilenburg, until the company began unraveling after the second fatal crash of the 737 Max in March 2019.
Boeing’s bare-knuckle bargaining approach turned out to be counterproductive. The acrimony between labor and management has been part of a gradual work-culture degradation as decision-making shifted from engineers to the finance department. The decision to build the 737 Max on a platform that dates back to the 1960s instead of starting a completely new aircraft eventually lead to disaster. The company covered up a key software change as part of the design in a misguided effort to tamp down pilot training costs on the Max. This infamous software addition caused two accidents that killed 346 people. The world was astonished to discover the disarray on the factory floor that was made blatant by a January accident in which a door plug on a Boeing airplane blew out during flight.
Once a mighty symbol of American manufacturing prowess, Boeing had descended into chaos with lawsuits from victims’ families and the Justice Department. Embarrassing congressional hearings documented from whistleblowers the pursuit of profit at the expense of safety. The Federal Aviation Administration, under fire for its lax oversight, has had to intervene to teach Boeing how to manufacture quality, safe planes. The company now is bleeding cash and is putting suppliers in jeopardy.
Boeing simply must end this strike to begin the healing process that Ortberg was hired to nurse. Union members know this. They also know they are in the strongest position ever to make demands. Let’s hope that union members’ thirst for revenge is trumped by the satisfaction that they finally got the better of Boeing on this latest offer. Even more important, let’s hope they want to form part of the solution to return the company to its position as a world-class manufacturer.
If the deal is accepted, Ortberg and Boeing management need to do their part to heal the rift with workers. The turnaround that investors are banking on in the form of a massive cash haul waiting to be unlocked from a backlog of about 5,500 aircraft will depend on machinists embracing Ortberg’s vision. No more threatening to move production to undercut the union. The Commercial Airplane business better be humming along and new airplanes on their way before Boeing reinstates the dividend. Ortberg should maybe just forgo the notion of share buybacks.
For his part, Ortberg, who was trained as a mechanical engineer at the University of Iowa, needs to listen to the engineers rather than the finance department when making decisions. His choice to work from the Seattle area is a good sign. He should now move Boeing’s headquarters back to the Puget Sound area from Arlington, Virginia.
If a majority of union members vote in favor of this proposal, the contract will last four years. That’s a very short period in an industry that requires years to design, certify and produce an aircraft. Ortberg needs not only labor peace but a labor partner to pull Boeing out of the deep hole in which it has sunk. Hopefully, the machinists will decide that it’s time to heal.
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