More than 4,000 workers have walked off the job at General Dynamics (NYSE:GD) massive Bath Iron Works shipyard in Maine after rejecting a new three-year contract. The development is a fresh complication for what has been a troubled operation at GD and creates fresh headaches for the Pentagon.

Workers represented by the Machinists Union Local S6 went on strike Monday, seeking changes in work rules, seniority, and subcontracting. The shipyard is already months behind on production, in part because of the COVID-19 pandemic, but the work stoppage figures to further delay deliveries.

Long-simmering tensions come to a boil

The Bath operation is one of three major shipyards in the General Dynamics portfolio. Although the jewels of the GD portfolio, the company's nuclear submarines, are built down the coast in Groton, Conn., Bath is responsible for production of the Navy's destroyers and other mid-sized ships.

Labor issues at Bath have been building for years, dating back to concessions the union accepted in the last round of negotiations to try to help the shipyard lure new business. But despite the concessions, the yard lost out in both a Coast Guard competition in 2016 and a frigate deal last year.

A destroyer is commissioned at Bath Iron Works.

Image source: Getty Images.

The pandemic added to tensions, with the union unsuccessfully calling for a two-week closure to avoid the spread of COVID-19. The Pentagon had classified Bath as an essential business, and it remained open.

Management's offer this time around came with a 3% pay raise, but workers objected to other provisions including the use of subcontractors and proposals to alter shifts that the union said was a challenge to seniority.

"Despite our repeated warnings to the management of Bath Iron Works, this employer has continued to take taxpayer dollars and outsource good Maine jobs to out-of-state contractors," Robert Martinez Jr., president of the International Association of Machinists and Aerospace Workers, said in a statement. "The company is engaged in flat-out union-busting, and is exploiting the current pandemic to attempt to outsource work from its dedicated employees, who are risking their health to build ships that protect our national security."

There's no easy answer here

On the surface this is a minor blip for General Dynamics, with Bath accounting for less than 5% of total company sales. The yard has a total backlog of only 11 warships, and Bath as noted pales in importance to the defense contractor's Electric Boat sub facility in Connecticut.

Still, the strike complicates GD's outlook for surface ships. Bath competes with yards in lower-cost regions including Huntington Ingalls' Pascagoula, Miss., operation and Eastern Shipbuilding Group of Panama City, Fla., which won the Coast Guard contract back in 2016. Management needs to be careful not to price itself out of the market for future business, which is part of the reason GD is pushing for more subcontractor work in the new deal.

The Pentagon, too, will be watching closely. The Navy has been vocal about its concerns with the health of its dwindling industrial base. Ove the last 60 years 17 defense-related yards have either closed or walked away from defense, while only one new shipyard has opened.

The Navy has aggressive expansion plans but also faces a growing budget pinch. So, the service both needs General Dynamics to bring down Bath costs, while also smoothing out labor issues and getting the yard up to full production.

This is an unneeded distraction

General Dynamics holders are familiar with rough waters, with the stock vastly underperforming other large defense contractors over the past five years. The trouble during that time has largely been the company's aerospace unit, as the Gulfstream business jets was mired in a slump for nearly a decade.

NOC Chart

Defense data by YCharts.

Before the pandemic, Gulfstream was beginning to show signs of life, and getting that division airborne is the single most important thing management can do to close the gap with other defense primes. But shipbuilding is an important piece of the puzzle for GD, and while Electric Boat gets most of the attention, management desperately needs to figure out a way to make Bath work.

Bath is a small but important part of General Dynamics. The sooner management can get the strike resolved, the better.

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