Why Boeing May Welcome a Walkout

With plane orders down, a shutdown could spell relief

It's payback time at Boeing Co. (BA ) Four years ago, the Chicago-based aerospace giant was cranking out a record 620 airplanes a year to fill orders in a booming economy. So when the International Association of Machinists union demanded a new labor pact, management felt it had little choice but to hand over a rich package with 10% bonuses, 25% pension hikes, and strong job security language.

Now Boeing officials are ready for their turn. The contract covering 25,000 IAM workers expires on Sept. 1, but with the demand for planes now weak, management is acting like it wouldn't mind shutting down its factories for a while to let orders catch up with production. So the company has been playing hardball with the union. On Aug. 27, it slapped down a final offer with pay hikes of just 2% and none of the job guarantees against overseas outsourcing that union members want. IAM leaders promptly denounced the offer as "inadequate" and "insulting," setting the stage for a possible Sept. 1 walkout.

Strike or no, Boeing thinks it's poised to emerge the victor. Even before the scheduled Aug. 29 vote by the IAM membership, chastened union leaders had asked management to extend the contract so talks could continue. Boeing flat-out refused, leaving the union with few palatable choices: Either it swallows a cheap contract, or members stomp off the job on a strike they most likely will lose. Publicly, Boeing officials insist that they don't want a walkout. "A strike is never good for anybody," said Alan R. Mulally, CEO for Boeing's commercial airplane division in Seattle, shortly after the company made its final offer. But IAM officials aren't buying it. "Boeing is spoiling for a fight," charged IAM chief negotiator Dick Schneider that same day.

Although Boeing seems to have the upper hand this time, its hard-line tactic may prove to have painful consequences down the road. In 1997, a sharp ramp up and new production techniques marred labor relations. The resulting difficulties produced gallons of red ink and took years to straighten out. A similar scenario could play out if Boeing's tough stance wreaks long-term damage to worker morale. A nasty dispute with the IAM could also poison the atmosphere for talks with the 22,000 engineers who are members of a different union. Their contract expires in December.

For now, though, Boeing officials are more intent on controlling their costs as the company struggles to cope with tepid demand and sinking prices. The industry is still reeling from the one-two punch of last year's terrorist attacks and the subsequent economic downturn. As a result, Boeing's production is likely to come in at 380 planes this year and just 275 in 2003. Even that may be too high, since many carriers are looking to get out of orders they placed during flush times.

As a result, Boeing could save a bundle of money if it shuts down production for a while. A walkout would allow it to delay aircraft deliveries, helping to dry up the excess supply of commercial jetliners that's forcing Boeing and rival Airbus to offer deep discounts. A delay would also prevent the value of used aircraft from plunging. With few new orders trickling in this year, Boeing could conserve its shrinking contractual backlog, a key measure of future business. The backlog is down by nearly a third since 2000, to $66 billion. "Never before has a strike been less threatening to Boeing," says Joseph Campbell, a veteran aerospace analyst for Lehman Brothers.

If the machinists do walk, a strike could last three to four months, say industry experts. Two of the last four contract negotiations led to IAM strikes, and many members still carry grudges. Boeing could lose some market share to Airbus, but with few new orders being placed, the damage might not be too great. Campbell says a prolonged strike would probably slice deliveries by about 25 aircraft this year, which would only trim about 20 cents off the $3.15 in earnings he anticipates. The longer-term outlook on morale is murkier. But Boeing appears willing to risk strained employee relations to claw back some of the high costs it gave away four years ago.

By Stanley Holmes in Seattle

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