Boeing's Strike: Go Figure

The shutdown is costing much more than it would to meet the machinists' demands

In the days before Boeing Co.'s (BA ) 18,300 machinists walked off the job on Sept. 2, management thought it had a smart strategy for avoiding a strike. True, the aerospace giant wasn't ready to jack up its traditional defined-benefit pension plan nearly as much as the International Association of Machinists (IAM) was demanding. But Boeing had an alternative: Offer as much as $9,000 in cash bonuses, including a generous new match to the 401(k) that IAM members get along with their pension. Managers hoped the juicy stack of cash would tempt the roughly 4,000 mostly younger workers who had been recalled recently as orders picked up. If so, that would have sufficed to bring about a repeat of 2002, when the IAM failed to muster the two-thirds majority needed to sanction a strike.

Instead, Boeing's effort misfired badly. The machinists rejected the company's offer by 86%. Boeing Commercial Airplanes CEO Alan R. Mulally, who's running the show while new Boeing CEO W. James McNerney Jr. learns the ropes, denies that the company attempted to divide the union membership. Still, what's puzzling is why he hasn't yet found a face-saving way to end the standoff. A close reading of management's offer suggests that it could meet the IAM's key pension demands for just $90 million more over the three-year life of a new labor contract. Since that comes to less than 1% of the nearly $4 billion the company will spend on the IAM's total wage-and-benefit expense over that period, it's difficult to see what Boeing hopes to gain by a lengthy showdown. That's particularly true in light of analysts' estimates that Boeing will rack up more than $90 million in costs each month that the walkout drags on.


What worries Wall Street is the long history of bad blood between Boeing and its unions. In 1995 the company endured a 69-day strike that poisoned morale for years. This contributed to a series of painful production snafus over the next few years that cost the company $2.5 billion -- a profitless stretch that lasted right through what then was the biggest boom in commercial aviation. Today demand is once more rising for jetliners, raising concerns that Boeing will again let labor animosities get in the way of boom times. "The money makes no material difference to either side -- there is no reason for this strike to be happening," says Richard Aboulafia, an analyst at aerospace consultant Teal Group.

While Boeing's initial strategy seemed promising enough, Mulally and Boeing Human Resources Vice-President Jerry Calhoun clearly underestimated the machinists' desire for traditional pensions. Indeed, two-thirds of IAM members are nearing retirement and weren't tempted by the short-term cash offer. Instead, older workers are looking for a big boost to the pension plan that currently pays them $60 a month per year of service -- about $1,800 a month for a 30-year veteran. Boeing offered to bump that up to $66 by 2008, but the IAM is looking for $80 -- or $70 at the least, union insiders say. Older workers, says IAM District 751 President Mark Blondin, feel they deserve a richer retirement as payment for helping Boeing rebound from the worst slump in commercial airplane history. They also know that the Chicago company is sitting on more than $5 billion in cash and has earned more than $1.1 billion in profit in the first half of this year.

The question now is, if the strike is costing more than a compromise would, why doesn't Boeing just settle? True, no industrial company wants to saddle itself with even higher fixed pension costs these days, given the pain that General Motors Corp. (GM ) and others are going through with their troubled union retirement plans. But in Boeing's case, the extra dollars it would take to satisfy its aging IAM workforce amount to a pittance.


Internally, Mulally has argued that meeting the IAM even halfway would be disastrous. In an early September e-mail to managers, he said union negotiators had barely moved off their original positions when the strike began and "were demanding $1 billion more than what was in our best and final offer." Mulally went on to say that meeting the "union's extreme positions" would have been a "disservice to every current and future employee, customer, and shareholder...and would have eroded our ability to compete."

But it's difficult to make his numbers add up, according to accounts of the talks from both sides. The $1 billion Mulally cited includes every demand the IAM made; in other words, its negotiating wish list. But unions almost never get everything they want, and their leaders know it. They're negotiating -- starting high in the hopes that a compromise will yield a better deal. Demanding $1 billion in wage and benefit hikes would nearly double Boeing's IAM payroll, something Blondin says he knows would never happen.

In fact, the differences between the parties boil down to something closer to $90 million, according to union and company data analyzed by BusinessWeek. The company's pension offer of $66 a month would add $16 million a year to its pension outlays, or $48 million over the contract's three-year term. The $80 the IAM wants would hike that to $29 million a year, or about $90 million through 2008. Union negotiators say they probably would have settled for something closer to $70 a month had Boeing been willing to keep talking. Boeing disputes the idea that the pension issue alone could solve the standoff.

The company's current offer, which includes a pay hike and a more modest pension increase, would cost it about $270 million over three years. That comes to an increase of less than 2.5% a year, a great outcome given all the new plane orders pouring in to Boeing. Even matching the union's full pension demand would bump that total up to only $360 million, just about equivalent to the 3% a year many economists expect inflation to be. "Obviously, we came to the table with significant increases, but they were unwilling to compromise and didn't bargain," claims Blondin. Boeing officials deny that IAM negotiators suggested any compromises.

Underlying the current standoff are the poor relations Boeing has long had with the IAM. That became clear in last-minute talks between Calhoun and Blondin just before the strike began. The two were deadlocked over yet another relatively minor issue, involving worker training. Blondin recalls asking: "I just don't understand why you always fight us." Blondin says Calhoun replied: "You just don't get it. We represent Corporate America. You represent labor. We are always going to be adversaries." Boeing says Blondin's account was taken out of context.

Whatever the exact figures, the sums causing the impasse are essentially rounding errors for a company that hauls in $54 billion in annual revenues. With any savings to Boeing soon to be eaten up in the strike's first month, what's really driving Boeing remains a mystery.

By Stanley Holmes in Seattle

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