Boeing’s stock was up 3.7% on Monday following the announcement of a tentative agreement between the aerospace company and its largest union, which represents more than 32,000 workers. That deal effectively prevented a possible strike and gave investors more confidence. The moment is an important one for Boeing’s new chief executive, Kelly Ortberg, who has led this negotiation just one month into his new job and is trying to get the ailing company back on track.
Negotiation-Success Despite Difficulties
As his first major test since he came on board as CEO, Kelly Ortberg was charged with turning around the recent troubles of Boeing. His performance in these talks has been greeted with enthusiasm by shareholders and IAM union hailing the tentative four-year contract as the most favorable it had ever won. Its a good enough deal as a tentative agreement, but one that remains in jeopardy until the workers actually vote on it.
Upcoming Vote and Potential Strike
The union members, who build Boeing’s best-selling 737 commercial jets, are set to vote on the contract on September 12. A strike could happen as early as September 13 if they reject the offer and opt for an immediate walkout. Now, the unfolding decision carries significant consequences for Boeing, which is mired in its own financial and operational tests, trying to restore production of the 737 MAX after its safety crisis.
Restoring Investor Confidence
The tentative agreement comes at a critical time for Boeing, which is striving to restore confidence among investors and customers in the planemaker. Since late January, Boeing has been under increasing scrutiny after a critical incident when a door plug detached in mid-flight from a near-new 737 MAX, spurring fear and oversight from regulators. The aftermath of the event sent Boeing’s stock to dip by 37%, trailing the Dow Jones Industrial Average, which went up 7.7% during that stretch. That deal is a start of trying to right the shaking Boeing ship.
U.S. Manufacturing Commitment
The contract term under discussion includes a commitment that Boeing would design and produce a successor to its venerable 737 jet in the company’s U.S. It also encompasses facilities in the Pacific Northwest provided the project starts during the four-year term of the labor contract. So far, Boeing has not disclosed any information regarding the design of the new jet. This agreement, however, places the company in a better position to strengthen its manufacturing base in the U.S., as competition heat from Airbus intensifies. The companies are strategizing on new models of single-aisle aircraft to be brought into service in the late 2030s.
Salary Increases and Economic Stipulations –
IAM, in the tentative agreement, allowed for a 25% increase in annual wage, which was a 15% leeway from its initial demand of a 40% increase. The concessions were a significative show of recognition to Boeing being unable to meet IAM’s demands. There are also two tier-structured categories of wage increments. The vast wage increment is for newly and long-serving employees to boost the retention appeal. According to TD Cowen analyst Cai von Rumohr, these pay amendments are vital to attract new talents and retain experienced workers.
Jefferies analyst Sheila Kahyaoglu projects that wage hikes that Boeing is offering may have an estimated $900 million impact on Boeing’s cash-an added albatross on the already cash-strained company.
Challenges Ahead
But despite the warm welcome for the preliminary deal, analysts warn that it is not a done deal. ‘The workers have the considerable whip hand… and could potentially vote it down,’ said J.P. Morgan analyst Seth Seifman. Two votes are due to take place on Thursday: one to ratify the contract – which requires 50% in favour – and another to authorise a strike, which needs two-thirds in favour. According to Seifman, social media sentiments suggest disgruntlement among some of the union members over the proposed contract terms.
Historical evidence indicates that if a strike does occur, a work stoppage could last roughly 51 days. TD Cowen’s von Rumohr projects a cash flow loss of around $3 billion to $3.5 billion for a strike lasting 50 days, which adds to Boeing’s cash flow challenges caused by current defense business cost overruns and curtailed 737 MAX production.
While the tentative agreement with the IAM union was monumental for Boeing’s full recovery, the pending vote and threatened strike are a reminder that uncertainties persist. These are high-stakes negotiations-not only for Boeing’s bottom line but also for the possible impact on its operations-and Ortberg will have to lead the company through them as best as he can. The results will go a long way toward determining how much Boeing is capable of restoring its position as a major player in the aerospace sector.