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Boeing Should Let the Union Walk

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Fellow Boeing (NYSE: BA  ) shareholders, would you mind if I said something crazy today? Something so counterintuitive that you'll never hear it from the mainstream media?

OK. Here goes: Boeing should not fear the strike. In fact, Boeing might even welcome it.

Hold on there, Tex. That's a little too crazy.
Bear with me for a moment. You see, the conventional wisdom holds that Boeing is in crisis today. Yesterday, 27,000 Boeing-employed members of the International Association of Machinists cast votes for and against (a) rejecting Boeing's offer of more than $30,000 in additional pay and benefits, and (b) declaring a strike because this offer was so un-"exceptional."

The results were strange: 80% of union workers voted to reject Boeing's offer; 87% wanted to strike over it. The union argues that Boeing's offer falls short in several key respects:

  • It offers a total of 11% in pay increases over three years (5% in year one, 3% more in years two and three). The union wants at least 13% total.
  • Certain "other benefits" are reduced, and employees are asked to bear a larger portion of their health-care costs.
  • Finally, the union wants guarantees of "job security" and less outsourcing from Boeing.

The upshot of all this is: The union is prepared to strike. It's authorized to strike. Heck, that 87% figure tells us it's downright eager to strike. But it's given Boeing 48 hours to improve on what Boeing has already said was its "best and final" offer.

Why the delay?
Well, the union hopes that Boeing wasn't entirely candid about its offer being truly "best and final." Workers know that Boeing earned more than $4.2 billion over the past year, and with a backlog of more than 3,400 aircraft awaiting construction, they know it's a safe bet that Boeing can afford to pay more than it actually wants to pay. In short, they're hoping that management will weigh the consequences of a strike -- $100 million a day in lost revenue, or more than $6 million a day in lost profit -- and see the light.

They may be right ...
A little back-of-the-envelope mathematics explains the logic. The two-percentage-point difference separating Boeing's offer and the union's demand works out to about $35 million a year in additional salary for Boeing's 27,000 machinists. So it takes only six days of work stoppage for Boeing's benefits of scrimping on salaries to get outweighed by the costs of lost profits.  

... Or I may be crazy
Here's how I think Boeing could benefit in permitting the strike to go forward: First and foremost, Boeing saves some money -- and Lord knows it could use it. Much political hay has been made of the company's $4.2 billion in annual profits, sure, but with a profit margin of just 6.3%, Boeing actually earns less per revenue dollar than fellow aeronautical giants like Lockheed Martin (NYSE: LMT  ) , Textron (NYSE: TXT  ) , and United Technologies (NYSE: UTX  ) . (On the other hand, at least it's making money, which is something Euro-rival EADS cannot say.)

Secondly, by standing pat, Boeing preserves credibility. It said that 11% was its final offer. Back down now, and similar language in future negotiations will have little credibility.

Third and finally (and here's the crazy part) ... here's a trivia question for you: What's Boeing's biggest headache right now?

Um, duh!
Right: its Logistical Nightmare Liner, aka the "Boeing 787 Dreamliner." Fifteen months late for delivery (and counting), Boeing risks getting dinged with penalty payments for tardy delivery to customers who've already ordered planes. But perhaps Boeing could dodge those penalties, if, say, failure to deliver on time was caused by events outside of its control.

There's a phrase for that
If Boeing has a "force majeure" clause in its contract, a legal concept present in most well-drafted sales contracts, that could excuse its failure to perform (say, by not delivering planes when it promised to) because of events outside its control (say, a strike).

Recent financial history is replete with examples of companies using force majeure to gain wiggle room on their contractual obligations. ExxonMobil (NYSE: XOM  ) invoked its clause in response to strikes in Nigeria in April. Bunge (NYSE: BG  ) used this excuse when agriculture workers struck in Argentina in March. Potash Corp. of Saskatchewan (NYSE: POT  ) cited strikes at three Canadian mines in raising the possibility just last month.

By standing pat and allowing a strike to go forward, Boeing could conceivably save itself millions in "late fees" it would otherwise owe to its customers -- perhaps even save enough to offset the profits lost because of a work stoppage. Meanwhile, as Boeing machinists sit idle and watch their bank accounts dwindle, Boeing's subcontractors -- who by all accounts are the primary reason for production delays at the 787 project -- could continue working out the kinks in Boeing's supply chain.

When all's said and done, I suspect a strike could actually work out to Boeing's advantage. Crazy idea? Sure. But maybe just crazy enough to work.

Read more about Boeing's supply chain train wreck in:

Fool contributor Rich Smith owns shares of Boeing. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (11)

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 September 05, 2008, at 8:41 AM, VitoBo wrote:

    Being pro-union and anti-big corporate pigs, I'll be the first to say that a strike doesn't benefit any one. In this day and age with the work force dwindling and company's like where I work (Pratt and Whitney Aircraft, a division of UTC and a supplier of aircraft engines to Boeing.) Company's are not replacing the workers that are accepting these Voluntary early retirement packages or the ones that are retiring on their own. There are no "young" workers, the average age at our plant in Connecticut is 57 1/2. How much "job security" can the union expect? Our company has out-soarsed more work in the last 10 years to Poland and China, and has left us with scraps to work on, Boeing will or is already doing this and one of these days the big fat corporate pigs are going to move all of our jobs out of the USA, and we'll all be flying on jets with foreign stickers on them. Boeing machinists, we don't have the huge membership and numbers that used to strike fear into these company's... not anymore, they don't fear us. So don't strike, go back to work and make all the money you can, work all the OT that you can NOW, because tomorrow there may not be a Boeing to go punch your time card.

  • Report this Comment On September 05, 2008, at 1:28 PM, getjosh wrote:

    This article is seriously flawed. As a member of the IAM union and an employee of the Boeing Company, I can say that the author is speaking from a position of ignorance.

    First, his theory regarding the differed penalties on late deliveries because a labor strike is out of the control of the company does not hold water. This might have been true in the past, but the airline customers are wise to this ploy and most contacts now do not include this clause. Also, let us consider the actual offer. If Boeing was trying to defer penalties, then they would have presented a low ball offer.

    Second, what most people do not understand is that the workers are not striking over pay. I, and many of my co-workers, voted to strike out of spite. Scott Carson and Doug Kight repeatedly stated that the final offer was just that...Final. was a "take what we give you and like it offer". They left the table five days early betting that 1/3 of the membership would like it enough not to strike. And now they are scrambling to avoid a strike.

    On the surface the offer was, no doubt, generous. It is a contract that most workers anywhere would love to have. But what is not displayed in the media is the fine print. Loss of survivor benefits in the pension plan, expiration of retiree medical at the end of the contract, 2011 Labor Day left out of the contract, the COLA adjustments for the last period of this contract and the next was left out... Everything presented in the media, on the surface, was nothing more than a bribe. We are all smart enough to know when we are trying to be bought off.

    We, just like the Boeing Company, are looking for a sustaining future. As they sit down and analyze what this contract will mean 10 years down the road, so are we. We understand that the instant gratification that the bonuses bring will not last. And it was insulting for the company to think that loading the front of the contract with cash would make us loose site of our future.

    Boeing touts itself as a world class company. There profits have been through the roof in the last five years. And this is how they treat the workers that have brought them to this point.

    After seeing how the company has acted and treated its own work force during these negotiations, it is no wonder we lost the tanker bid. Not to mention the managements track record with ethics.

    We shall see if the words of Scott Carson and Doug Kight have more weight than 100 million dollars a day.

  • Report this Comment On September 05, 2008, at 4:26 PM, nhfine wrote:

    Obviously the author has never negotiated a contract with a union. The real final offer is the one that settles the contract. No one knows what the final offer will be that both sides will agree upon. 11% over three years is not very generous when the real CPI is rapidly growing every month. It is almost impossible to believe that the cost of food and fuel will not be more than 11% higher in three years.

    old time negotiator

  • Report this Comment On September 06, 2008, at 10:44 AM, huckleberrytmf wrote:

    As an experienced management side labor lawyer, veteran of negotiations, strikes, etc; it is interesting that I agree somewhat with the pro-labor principles espoused above.

    Force majeur is positively NOT an accepted principle for escaping late fees when the cause is a DOMESTIC strike. Force majeur protects a supplier from things typically referred to as "Acts of God." Hurricane, Mt. St. Helen, earthquake, what have you. That said, Boeing needs to get its act together on the 787, because more delays are not going to be well received. Remember, it was not long ago at all that it appeared Airbus was poised to basically end Boeing's commercial air division. While Boeing has rallied, this business can turn on a dime.

    Also, the term "best and final" is a legal term and should not necessarily be construed in terms normal people (read: non-lawyers) would use. "Best and final" simply protects management if it wants to force its contract on the employees (in the event they don't strike).

    As getjosh explained, the strike vote is about spite, at least in part. You cannot correlate any relationship between the contract rejection and strike vote - unless you were present at the meeting. You can say this, however, the fact that strike support exceeds opposition to the contract tends to show this union is very serious.

    Boeing undoubtedly can take a strike. Many employees, on the other hand, simply cannot sustain a long strike. They often find their benefits stopped, they are not entitled to unemployment in most states and union "strike benefits" are often laughable. Try feeding a family in the Seattle area on $110/week.

  • Report this Comment On September 12, 2008, at 11:55 AM, goodyear1688 wrote:

    I'd be a little suspicious about someone claiming to be a labor lawyer but being unable to spell "force majeure". But to proceed ...

    The standard force majeure clause only gets you out of liability to the extent that the issues are beyond your reasonable control. This probably does include a strike, but strike would not be the reason that the planes are 15 months late. The clause might get Boeing out of penalty payments relating to the duration of the strike, but they do not wipe the slate clean for what has gone before.

    The first two reasons in the article are good ones. The third is not.

  • Report this Comment On September 12, 2008, at 5:38 PM, thsmith100 wrote:

    3400 backlog? I don't think so! That sounds like world market over next x years, maybe, but you've got to book a sale to call it backlog.

    Boeing has stronger competition now than it had before when there were multiple airliner manufactures, so a disruption in the 7x7 lines is a stupid move by the union. Those recent profits are what pay for continued R&D to stay ahead of Airbus.

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