Boeing Battles Union Over 777X – Who’s Bluffing?

777XThe 32,000 members of the International Association of Machinists and Aerospace Workers (IAM) have rejected an eight year contract that would have kept the manufacturing of the Boeing 777X in Washington State. The Chief Executive of Boeing Commercial Airplanes Ray Conner issued a statement saying; “We are very disappointed in the outcome of the union vote. But without the terms of this contract extension, we’re left with no choice but to open the process competitively and pursue all options for the 777X.”

This is not an idle threat as the company has successfully moved some 787 Dreamliner manufacturing capabilities to non-union facilities like South Carolina.

The vote wasn’t even close with 67% of the union voting to reject the contract. When Local Union President Tom Wroblewski and the aerospace coordinator for the IAM Mark Johnson announced the result at the Seattle union hall, they were loudly booed. There seems to be a lot of confusion within the union. According to Robert Stallard of RBC Capital Markets; “secret negotiations between Boeing and the union’s head office were soundly rejected by local membership”

There is always lots of wiggle room in contract negotiations and this one isn’t over by a long shot. However, the main sticking point appears to be Boeing’s efforts to move away from a Defined Benefit Plan and transition to Defined Contribution.

Boeing will not back away from this demand. I believe this to be the single most important issue in the negotiations. Management is not blind to current trends and understands the history of these plans. The Defined Benefit Plan is going the way of the Dodo. In recent years they’ve been a contributing factor to many failed Fortune 500 companies. Industry just couldn’t survive the burden of benefits these plans mandate. Yes, there were a myriad of other problems at these companies but the role of the Defined Benefit Plan can’t be denied.

Modern day plans have moved to Defined Contribution i.e. 401k where both workers and company can contribute. Many of you reading this article probably have something similar.

According to the Seattle Times, Boeing is looking at Long Beach, CA (the C-17/Douglas facilities), Salt Lake City (UT) and Huntsville (AL). This is the last major aircraft initiative for the company until 2020. The 777x can hold 350 – 400 passengers. Governor Jay Inslee has been very aggressive and helped pass an $8.7 Billion incentives package to keep manufacturing in Washington.

What to Do with the Stock

The knee jerk reaction will be to sell the shares and I expect the stock to be down on the news. Use this as an opportunity to buy if not already long. Boeing is currently a decade ahead of its nearest competitor with regard to light weight, fuel efficient aircraft.

If the worst happens and an agreement can’t be reached, Boeing will use one of its many available options and re-locate manufacturing.

Given the landslide rejection of the contract and the bad blood between the union and management, it is doubtful a deal can be reached with minor changes. I am sure there are many areas where both sides can find common ground but the Defined Benefit Plan isn’t one of them.

Many believe that Boeing’s threat to move manufacturing of the 777X out of state is just a bluff. I don’t think so.

– David Nelson, CFA

Funds managed by Mr. Nelson currently own shares of Boeing (BA) at the time this article was written.