By Stanley Holmes Boeing may be enjoying the strongest boom in commercial-airplane orders in five years, but a major bummer may be brewing for the giant plane maker.
Its commercial-airplane unit could face a strike by its largest union if Boeing (BA) fails to significantly boost its monthly pension payment, say International Association of Machinists (IAM) officials. A walkout could occur after the union members vote Sept. 1 on a new three-year contract.
While a strike isn't certain, the mood of the 18,300 members of the IAM's District 751 has soured dramatically in the last week. Though Boeing's commercial-airplane unit has been on the upswing, union negotiators claimed late on Saturday, Aug. 27, that Boeing continues to push for concessions on pensions, health care, and job security. Union leaders issued a statement late on Aug. 27 saying "the latest offer still falls short. It demonstrates the company is just not listening."
Both sides on Sunday afternoon continued to haggle over Boeing's latest contract offer (the third) that union leaders said was unacceptable. Submitted to the union at 2 p.m., the newest offer remained virtually unchanged on the substantive issues, say union leaders. Boeing continues to offer modest pension improvements. Its proposal to boost pension payments to $64 from $60 per month for each year of service remains unchanged from its initial offer.
DEALMAKER OR BREAKER. The union's counteroffer seeks about $80 a month for its members, but union negotiators say they could agree to monthly pension payments of in the low-$70 range. Boeing also offered up to $4,000 in two separate cash payments. It includes putting $2,000 into a voluntary retirement investment plan and offering $2,000 as a cash bonus. Boeing continues to seek concessions on medical benefits, union negotiators say. Both sides said they planned to negotiate through the night of Aug. 28.
At the heart of Boeing's negotiations with its largest union is the clash over retirement and pensions. About a third of the Machinists are over the age of 55 and can retire from Boeing with a full pension at 60. Union negotiators say Boeing needs to increase the monthly pension benefit by at least $10 a month, to $70 a month for each year of service, to get a deal on a new three-year contract.
"For more than a third of our people, this is the only issue," says one key IAM negotiator. "The company is playing hardball, and it's not to their advantage to be doing this."
BROADER SHIFT OF BURDEN. Boeing negotiators say such a pension increase would be too costly. Boeing and other large companies are trying to reduce their exposure to additional liabilities as they struggle to fully fund their existing legacy pensions. Though Boeing's underfunded pension is in no danger of defaulting, the company has had to shell out more than $4 billion over the last three years to close the gap and make up for the fund's recent poor returns.
The pension issue has taken on national significance since United Airlines (UALAQ) saddled the Pension Benefit Guaranty Corp., the federal agency that insures traditional pensions, with an additional $8.4 billion in unfunded obligations. But the United default also underscores a broader shift in the burden of retirement from large companies to individuals.
Twenty years ago, about 40% of U.S. workers were covered by traditional pensions, known as defined-benefit plans. Today, that number has declined to about 20%. What's more, about 75% of those corporate plans are underfunded, according to the federal pension agency.
TOO COSTLY? For the people who assemble commercial jets for Boeing, the pension is still viewed as a key component of their retirement -- and an improved pension is seen as the reward for helping the commercial-airplane division turn its fortunes around after the September 11 terrorist attacks, when Boeing cut more than 50% of the division's employees.
Bolstering the union's bargaining power is the fact that a strike would hurt Boeing harder than it would the union. With airplane orders, production rates, profits, and deliveries on the rise following the worst slump in aviation history, a strike would wipe out potential division profits and severely hurt Boeing's credibility as it tries to regain its momentum and take on European rival Airbus.
Boeing can afford to pay its employees a higher pension, according to its own financial and pension documents. Its minimum cost for funding the current $60 per month for each year of service is a $1.60 per hour worked. That comes to about $60 million a year. Increasing the pension benefit by $10 would cost an additional 56 cents per hour worked, or roughly $24 million annually.
WELL-PENSIONED CEO. The pension fund that covers hourly Machinists and engineers -- the Boeing Company Employee Retirement Plan (BCERT) -- has total assets of about $12 billion and is now fully funded. Moreover, Boeing has bumped up the pension benefit by roughly $10 a month in the past three contract negotiations. "This is not about breaking the bank," says an IAM insider.
The insider has a point. When Boeing hired new Chairman and CEO James McNerney in July, the board showered him with a $22 million supplemental pension. While that's a one-time expense, it's hard to argue that Boeing can't find an additional $24 million for 18,300 workers who will have put in 20 to 30 years apiece at Boeing when they retire. The difference is that the additional $31 million would be an annual expense essentially forever, and Boeing's obligation would increase if employment goes up.
Considering that Boeing had to kick in $1.2 billion over the past two years just to get the BCERT plan fully funded, it's easy to see why Boeing execs are loath to add any additional long-term liabilities. Such an expense can be a real drag on earnings if the pension returns underperform the stock market, as they have in the past two years.
WHAT ABOUT "BALANCE"? That's why Boeing's second offer on Aug. 26 included an intriguing new nonpension option that would give workers a one-time, $2,000 cash payment. That money could be put into Boeing's Voluntary Investment Plan, which functions like a 401(k). Boeing would match up to 50% of the portion of each worker's $2,000 diverted to the VIP plan.
Boeing negotiators also have been stressing that retirement resources should includes pensions, company-matched 401(k) savings, Social Security, and personal savings. "During these negotiations, there has been a lot of discussion about pensions" wrote Jerry Calhoun, Boeing's chief labor negotiator, on the company Web site. "What hasn't received much discussion is the concept of balance."
Calhoun adds that Boeing has always provided a competitive package that addresses the needs of all employees. He cites Boeing's "excellent" wages, health-care benefits, pension, 401(k), and free college tuition. "So far, the discussions surrounding these negotiations appear focused on just a few narrow issues," Calhoun wrote. "No contract should be based on just one or two issues." That will be for the negotiators on both sides to decide.
Holmes is a correspondent in BusinessWeek's Seattle bureau