Will Boeing Go the Way of the Hostess Twinkie?

When negotiations with its unions fell apart last week, Twinkie-maker Hostess was forced to shutter its factories and liquidate the company. Could Boeing (NYSE: BA  ) be in similar straits?

It seems like only yesterday that Boeing (NYSE: BA  ) put an end to its labor disputes with the International Association of Machinists, and the Society of Professional Engineering Employees in Aerospace (SPEEA). In reality, four years have elapsed since those heated negotiations nearly derailed development of the 787 Dreamliner. The contract forged from those fires expired in October, and now, Boeing and its engineers are back at the bargaining table, negotiating a new contract.

Bad news: It's not going well.

Last month, SPEEA issued an angry press release, castigating Boeing for refusing to re-up on the last labor agreement, and offering a contract that:

  • Gave salary raises "at or below the rate of Inflation" -- so, effectively, a pay cut.
  • Required employees to chip in more on their health insurance.
  • Denied pensions to future employees.

Add it all up, and SPEEA leadership called Boeing's offer "unsalvageable." More than 95% of the union's 23,000 members voted to reject Boeing's offer. Since then, Boeing says it has "improved" the terms, but the union's still balking, saying the offer still gives worse pay and benefits than its members were getting under the old contract.

And here's the problem: When SPEEA rejected Boeing's previous offer, the parties entered into a 60-day extension of the original contracts. That extra time runs out Sunday, at which point SPEEA could call for a vote and stage a labor strike. It might decide not to strike -- indeed, SPEEA's scheduled to resume talks with Boeing next week. But the possibility's still out there.

History doesn't always repeat itself
And here's where things get tricky. Last time we found ourselves in this situation, Boeing was having trouble getting its 787 design finalized and ready for sale. A strike, while inconvenient, at least wouldn't have greatly delayed production of a plane that Boeing wasn't yet ready to produce.

Today, though, the 787 is ready for prime time. It's been tested and FAA-approved, it's begun deliveries, and it has a waiting list several years long. A strike today could cost Boeing significant dinero -- not just on 787s, but on the very in-demand 737 as well. Right now, Boeing's building planes of various makes and models at the rate of 52 per month, and bringing in revenue at the rate of perhaps $8 billion per month at list prices. Meanwhile, Boeing has some 4,000 plane orders in its backlog.

So if SPEEA calls a strike, the company will fall nearly two entire planes behind schedule for every day the strike goes on. The company could lose more than a quarter-billion dollars in sales, per day.

Huge stakes for Boeing ...
So Boeing can't allow negotiations to drag on for too long. Problem is, it can't concede too much to the union, either. The company's already offered its engineers pay raises of about 4.25% per year over the next four years. Its technical workers would get roughly a 3.25% annual bump. If you assume an annual inflation rate of 3%, therefore, the union's claim that Boeing is offering raises "below the rate of inflation" no longer holds water. What's more, Boeing says it's also lowered employees' out-of-pocket contributions for health care and eliminated hospital co-pays, among other concessions.

Put it all together, and this is a much better offer than the one Hostess' union was offered. Yet SPEEA's eyeing Boeing's $4.3 billion in trailing profits (and its still more impressive $4.5 billion in free cash flow) and demanding the company share more of the wealth.

... and not just for Boeing
That's a problem for Boeing, which can't reasonably plead poverty in its negotiations, as it did back in 2008, when it was burning cash at the rate of $2.1 billion a year. Today's negotiations could be tougher and drag on longer than they did last time around. This is also, incidentally, a problem for Boeing's suppliers -- companies such as Spirit Aerosystems (NYSE: SPR  ) , Honeywell (NYSE: HON  ) , and General Electric (NYSE: GE  ) -- that need Boeing to keep its production lines humming, to maintain demand for their own components.

Of the three, Spirit appears most vulnerable to a Boeing work stoppage. The company just reported a $211 quarterly operating loss, and last week it lost its leader, when CEO Jeff Turner announced his retirement.

Honeywell, at least, has the nascent recovery in homebuilding to fall back on. Its Automation and Control Solutions business, tied to the housing market, provides more than 40% of Honeywell's business and is actually bigger than Honeywell's vaunted Aerospace division.

Similarly, GE is such a vastly diversified conglomerate that a slowdown at any one customer, even one as big as Boeing, shouldn't hurt it too much. If worse comes to worst, GE can deploy more capital toward its rapidly expanding energy business, where the company recently announced a "partnership" to help Clean Energy Fuels (Nasdaq: CLNE  ) expand its network of natural gas refueling stations.

If Boeing shareholders are hoping for a quick end to Boeing's labor troubles, they won't be the only ones.

With great opportunity comes great responsibility. For Boeing, which operates as a major player in a multitrillion-dollar market, the opportunity to sell planes to a growing world is absolutely massive. However, the company's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In this premium research report, two of the Fool's best industrial industry minds have collaborated to provide investors with the key must-know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.


Read/Post Comments (7) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 24, 2012, at 11:04 AM, revealedin71 wrote:

    It seems as if the main goal of the unions now is to destroy the companies they work for. They are not getting the picture, we are entering a period of deleveraging..and...long term..deflation. That means wages..and prices..gradually..over a prolonged number of years will trend downward. The average wage of these Boeing engineers is already in the stratosphere...Gravity must eventually take over..But the union doesn't seem to get it.

  • Report this Comment On November 24, 2012, at 11:17 AM, wolfman225 wrote:

    As long as federal regs and agencies such as the pro-union NLRB continue to try to hobble Boeings attempts to stabilize it's production (ie, the move to "right to work" states), and as long unions feel that the reelection of Barack Obama and other liberal Democrats have strengthened their hands such that they don't need to contemplate concessions, the failure of future corporations, not just Boeing and Hostess, are virtually assured.

    Someone needs to sit Trumpka and other union "leaders" down and remind them of the parable of the Golden Goose.

  • Report this Comment On November 24, 2012, at 11:50 AM, mariks1701 wrote:

    As a Union member. (not a good one AFA) The purpose of a Union is protect its members from the Attorneys whose job is to make the most money for the CEOs and Shareholders. Yes some unions are self serving, but the original purpose was to protect laborers from unscrupulous business owners. Think Scrooge, or modern day CEO Jeff Smiseck.

    We wouldn't need Unions if it wasn't for greed!

  • Report this Comment On November 24, 2012, at 4:37 PM, sciencedave wrote:

    Bottom line: Boeing appears to be a bad investment choice over the long term unless they can bring labor costs under control. However this is assuming the government and NLRB stays out of all negotiations (which they won't if the strike occurs and goes on for awhile). Remember, Boeing is also a defense contractor, and too big to fail in the eyes of the government.

  • Report this Comment On November 24, 2012, at 8:33 PM, AnAmericanWoman wrote:

    In these (harsh times of a great financial depression) that we are in---they should be thankful they even HAVE a wonderful job...

    These greedy UNUION slobs are bitting the hand that is feeding them! Not well done.

    Maybe Boeing should fire them ALL and hire ALL "NEW people" who would LOVE to work for 1/3 less of what these morons are getting with NO union...

    Just saying---there are a snotload of (certified-airplane workers) who would LOVE to work out there. Come to TEXAS and hire & pay to move them & their families to come work for Boeing---and they would be ever so greatful and totally LOYAL... :-)

  • Report this Comment On November 24, 2012, at 8:37 PM, AnAmericanWoman wrote:

    Unions were good (way back when)---now it seems they are there to bust the companies back they are working for... Boeing can COME to Texas---we would love to have their business here... :-)

  • Report this Comment On November 28, 2012, at 12:00 AM, DudeMcFarland wrote:

    I love the comments about how the unions are greedy and hard working common people should be willing to take a pay cut, pay out more for benefits and give up their pensions while the executive team makes millions and often walk away with millions after running business after business into the ground.

    Employees wanting a living wage and devoting years of their lives to a company like Boeing are not the problem. A union standing up for their members and stopping a company from turning everyone into indentured servants are not the issue.

    Keep pushing for lower pay and benefit cuts people. The majority of you won't be happy until we are all living in an economic prison slaving away for peanuts so a few at the top can fill their money bags to the brim while the rest of us live in poverty and debt.

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