SEPTEMBER 25, 2005

Boeing: An End to Strike Turbulence

The planemaker has reached a tentative pact with the machinists' union for work to resume, clearing the way for the company's rebound

Alan Mulally, CEO of Boeing's commercial airplane unit, flew to Washington, D.C., on Friday to meet secretly with top leaders of the machinists' union. The result: A tentative agreement to resolve contract differences and end the potentially debilitating 25-day strike at the world's largest aerospace company.
Boeing (BA ) and the International Association of Machinists' officials are expected to officially announce the labor accord on Monday morning, according to people familiar with the matter. About 18,400 Boeing assembly workers in the Seattle area, Gresham, Ore., and Wichita, Kan., hit the picket lines Sept. 2 after talks broke down over a new three-year contract, shutting down all large commercial airplane production in the U.S.

PENSION SKIRMISH.  Among the crucial issues that sank Boeing's final contract offer -- differences over the amount of the company's monthly pension contribution, changes in health-care plans that require more employee contributions, and efforts to eliminate retiree health care (see BW, 9/26/05, "Boeing's Strike: Go Figure").

The tentative agreement represents a victory for both sides, as it appears that rational economic thinking overcame earlier tensions, strategic miscalculations, and heightened emotions. On the big issues that had splintered the two sides, it appears that Boeing and the IAM has finally compromised.

Boeing officials agreed to boost the monthly pension multiplier to $70 a month for every year served, up from the planemaker's final offer of $66, say people familiar with the negotiations. The union had wanted $80 a month. The company also agreed to continue retiree health-care coverage for new employees as well as drop its demand that IAM workers contribute more to their medical benefits.

WORK-RULES AGREEMENT.  What's more, IAM workers will receive a bonus of 8% of last year's wage, which works out to about a $5,000 cash bonus for the average employee in the first year. They also will receive a $3,000 cash bonus each in years two and three of the new contract. That comes to a total of $11,000 in cash bonuses, compared with $9,000 in Boeing's final offer, say people familiar with the negotiations.

Still, machinists will not receive a matching contribution to the Boeing's VIP 401(k) savings plan, which had been part of the company's final contract offer. Workers will receive no general wage increase, compared with a 2.5% wage boost management had included in the third year of its earlier offer.

It also appears both sides were able to iron out differences over crucial working rules and aircraft assembly integration. Boeing withdrew its proposal to require machinists to operate multiple machines. The union would be willing to work with the planemaker on that proposal if management would bring the advance machining capabilities back to Seattle and revive opportunities for skilled machinists, say people familiar with the matter.

DELIVERY DELAYS.  On job security, management dropped its effort to have vendors install their parts on airplanes. As for Boeing's controversial team-leader concept, management still retains this structure but now has to consider seniority in selecting team leaders from the shop floor -- a big internal work issue among the company's airplane assemblers. Finally, Boeing had wanted a four- or five-year labor pact, but machinists stuck to a three-year contract.

Differences over pension and health-care issues had the potential to derail what is shaping into a lucrative commercial airplane recovery for Boeing. The Chicago-based aerospace goliath has booked more than 620 commercial airplane orders in 2005 -- the most since 1998. What's more, the company has been raising the number of aircraft deliveries and has won widespread acceptance for its innovative and fuel-efficient new 787 Dreamliner -- a 200- to 250-seat, twin-engine, long-range jetliner.

But the strike had been clouding the good news, and a lengthy walkout could have made things worse. The strike is already costing the company in dollars, if not in reputation. At the very least, it will delay the delivery of up to 30 jetliners in September, which could cost Boeing roughly $90 million in the third quarter, or about 12 cents a share, say analysts.

FAILED STRATEGY.  If the agreement holds, it appears that saner heads have prevailed. The relatively short strike will have a minimum impact on Boeing's bottom line and its airline customers. Some carriers, such as All Nippon Airways, Southwest Airlines (LUV ), and Cargolux, had begun to state publicly last week that the strike would force them to curtail new routes, change schedules, and possibly lay off employees.

The negotiations on Friday took place at the D.C. law offices of Piper Rudnick and involved former House Minority leader Richard Gephardt. He was hired by the aerospace giant on Thursday to be a mediator between the two sides. The talks included Boeing's Mulally, who took the rare step of directly leading the negotiations for the company, chief labor negotiator Jerry Calhoun, and two other Boeing execs, say people familiar with the meeting. The machinists were represented by IAM's District 751 President Mark Blondin, chief aerospace negotiator Dick Schneider, and international Machinists President Thomas Buffenbarger.

In the days before Boeing's machinists walked off the job, management thought it had devised a smart strategy for avoiding a strike. The company offered up to $9,000 in cash bonuses, including a generous new match to the 401(k) that IAM members receive along with their defined pension plan.

LITTLE TO GAIN.  Management had hoped that the allure of cash would tempt the roughly 4,000 mostly younger workers who been recalled recently as airplane orders picked up. The strategy was modeled on the company's 2002 contract offer, when the IAM rejected the deal but failed to muster the two-thirds majority needed to sanction a strike.

This time, Boeing's effort misfired badly. The machinists rejected the company's offer, with 86% of the workers voting to approve a strike. Boeing officials deny the company attempted to divide the union membership.

The planemaker's management had accused the machinists of being "miles apart" and barely budged off their original position, saying union negotiators were demanding more than $1 billion over what was in the company's best and final offer. Management contended that IAM demands did not reflect the current market for pay and benefits and far exceeded any recent contract settlements in the industry.

But a close reading of management's offer by BusinessWeek found that Boeing could meet the IAM's request for a monthly pension multiplier of $80 for just $90 million more over the three-year life of the labor contract. Since that comes to about 2.3% of the nearly $4 billion the aerospace goliath would spend on the union's total wage-and-benefit expense over the period, it was difficult to see what the company had hoped to gain by a lengthy showdown.

With the agreement resolving differences and ending the strike, Boeing's management and machinists can get back to selling and building airplanes in what looks to be one of the most prosperous commercial airplane recoveries in decades.