Boeing’s union has the aerospace company over a barrel. Boeing can afford to raise wages but only at the cost of a big cut in profits.
On Sept. 13, 2024, history repeated itself.
For the first time in 16 years, contract negotiations between Boeing (BA 1.13%) and its International Association of Machinists (IAM) labor union broke down and ended in a strike after the union demanded a 40% wage hike (spread over three years). Boeing countered with an offer of 25% spread over four years…The union called a strike instead.
Where negotiations stand today
For two straight weeks now, Boeing’s union has been on strike, and Boeing production of 737, 767, and 777 airliners in Washington State has been halted. Aviation experts estimate the company could be losing between $100 million and $150 million per day as this strike continues, according to Yahoo! Finance.
So what does Boeing plan to do about that?
Boeing was understandably surprised by the union’s decision to strike. After all, IAM’s own leadership had recommended that union members vote to approve Boeing’s original offer of a 25% raise; instead, the union membership voted overwhelmingly (94.6% against) to reject the deal. It’s understandable that Boeing needed a bit of time to recover and come up with a new offer.
On Monday this week, though, Boeing came back to the negotiating table. The company presented its “best and final offer” of 30% worth of pay raises, again spread over four years (a 12% raise would go into effect immediately, followed by 6% increases after the first, second, and third years). Boeing also offered $6,000 ratification bonuses if the contract is approved and performance bonuses as well.
But here’s the thing:
In an abrupt about-face, IAM negotiators who had previously recommended accepting a 25% offer told union members Tuesday that Boeing’s new 30% offer “does not go far enough to address your concerns.” Worse, the union’s negotiating team criticized Boeing’s making a new offer without first getting union input as a “blatant show of disrespect.” Now it feels like emotions are running high, and it’s unlikely the union will accept Boeing’s new offer.
Boeing still hopes the union will reconsider. After initially demanding that the union take it (the offer, that is) or leave it by Friday, Boeing quickly backtracked and said it would give the union more time (without saying how much more time) to think it over. Boeing’s now planning to meet with union negotiators to discuss its offer on Friday instead.
That may have been a mistake.
Boeing’s willingness to quickly raise its initial offer, then bluff with a demand the union accept it because it’s “best and final” — and then quickly abandon that demand — may have tipped its hand. Boeing now looks desperate to make a deal, and the union’s negotiating position has been strengthened.
What it means for Boeing
So what does this mean for Boeing?
Boeing finds its position even weaker than when this ordeal began. If this strike is costing Boeing even $100 million a day, it confirms my initial estimate that Boeing’s losses will triple for as long as the strike lasts, to perhaps $3 billion per month. If losses are $150 million per day, then Boeing could be losing $4.5 billion per month.
Now, the good news for investors is that this won’t last forever. In 2008, the last time IAM called a strike, Boeing came to an agreement with its union after two months of negotiations. I don’t think this strike will last that long.
The bad news is the reason I don’t think this strike will be as long-lived as 2008. And that reason is that Boeing can’t afford to let it run that long.
Two months of losing $4.5 billion per month would cost Boeing more money than it lost in 2022 and 2023 combined (according to data from S&P Global Market Intelligence). After five long years of doing nothing but losing money, Boeing has been looking forward hopefully to earning, in 2025, its first profit since before the pandemic — $3.5 billion according to the analysts who track this stock.
Now, Boeing might still end up earning a profit next year if it can put this strike to bed. But investors should be prepared to see a smaller profit if labor costs rise significantly.
How significantly? Assume labor accounts for about 25% of total costs of goods sold at Boeing (so about $17 billion last year). Further, assume that Boeing’s other workers demand wage increases that are on par with what IAM is getting. A 12% increase in labor costs could add as much as $2 billion to Boeing’s costs in the first year of a new labor contract, cutting next year’s projected profits by more than half. And if IAM gets the full 40% increase in wages it’s demanding, then four years from now, those pay hikes could grow Boeing’s annual labor cost by as much as $6.8 billion annually — twice next year’s projected profit.
With analysts forecasting Boeing will earn about $8 billion in profit by 2028 (pre-wage hike), that would still leave Boeing a profitable company. It’s just going to be a whole lot less profitable than Boeing investors may expect.