Boeing's Big Win: It's Too Soon to Crow

A new machinists' pact will help rein in payrolls. But it could harm morale--and productivity

Boeing Co. (BE ) took a hard line in contract negotiations with its 25,000 unionized machinists. Management refused even to talk about altering its final offer, infuriating rank-and-file workers upset about the concessions they felt they were forced to accept. In the end, however, the company avoided a showdown. On Sept. 13, the strike option drew 62% of union votes--just five percentage points shy of the two-thirds required for a walkout.

The new contract could mark a turning point in Boeing's multiyear effort to stanch its market-share losses to rival Airbus Industrie. For the first time in decades, the aerospace giant's labor costs could actually decline after inflation, saving hundreds of millions of dollars over the next three years. What's more, management won greater freedom to subcontract work to nonunion and overseas companies, as well as the ability to slash costs further by using vendors to deliver parts right to the factory floor. Although bad blood over the contract may hurt morale, for now execs are happy to have a victory in hand. Says Alan R. Mulally, CEO of Boeing's commercial plane division: "The total package is the envelope we need to improve our competitiveness."

Boeing badly needs a leg up in its battle with Airbus. The European consortium has a newer production system, which has let it streamline factories and become more efficient than Boeing. Airbus also gets subsidies of various sorts from the European governments that still support it.

Now, Boeing can count on lower costs to keep it in the running. Indeed, the new pact with the International Association of Machinists could cut Boeing's total labor bill, adjusted for inflation, after years of steady increases. Under the four-year contract just expired, the IAM's average hourly wages and benefits jumped by an inflation-adjusted 4.3% a year, to $34.79 an hour in 2002, according to the union. Adjusting for inflation projected to average 3% annually over the life of the three-year contract, Boeing's labor costs will fall to just $34.33 by 2005, the IAM figures. "This is why Boeing's popping champagne and not returning our phone calls," says one union official.

The dollar savings could be even higher if Boeing can use its knockout win against its largest union to cut labor expenses elsewhere. Labor accounts for a third of its total costs. Next up is the 22,000-member Society of Professional Engineering Employees in Aerospace. It begins talks on Oct. 29 over a contract that expires on Dec. 1, and leaders are bracing for a tough battle. "There's got to be a better way to do this," says SPEEA Executive Director Charles Bofferding.

Still, Boeing execs must make sure that victory doesn't come at too high a price. Deteriorating morale could hurt productivity. The question is whether the savings will offset the possibility of lost efficiency gains. With the new contract, Boeing has a shot at emerging in much better shape than it has been in for years. But Mulally will have to massage a wounded workforce to make sure he gets there.

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By Stanley Holmes in Seattle

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