Boeing’s (NYSE: BA) troubles are set to compound after workers rejected the tentative deal that the company negotiated with the labor unions. While Boeing had termed the deal as a “historic contract” and presidents of the unions described it as the “best contract we’ve negotiated in our history” workers don’t seem impressed. Here we will discuss why workers rejected the deal and what impact could the strike have on the aircraft maker.
For context, Boeing reached a tentative agreement with over 33,000 workers of its IAM Districts 751 & W24 which was the first fully negotiated contract in 16 years.
Apart from the 25% wage hike over four years, the new deal promised several other perks for Boeing employees. These include higher retirement contributions by Boeing, lower medical cost share, and better work-life balance.
Boeing Workers Reject Tentative Labor Deal
However, announcing the voting tally, Jon Holden, president of the IAM chapter, said. “While there were many important things that were in this offer, it did not bridge the gap for 16 years and going through two extensions, the threats of job loss, stagnant wages, the cost shift on healthcare and many other issues.”
Workers are set to strike from today and Holden alleged that “Boeing workers faced discriminatory conduct, coercive questioning, unlawful surveillance and we had unlawful promise of benefits.”
The strike would halt most of Boeing’s production including that of its best-selling 737 Max and would only compound the company’s woes whose reputation has only been going downhill with every passing day.
Unionized Boeing workers have approved a strike. IAM 751 says 33,000+ workers in Washington will stop work at midnight: KUOW
They can use the downtime to learn how to make airplanes that fly
— zerohedge (@zerohedge) September 13, 2024
Boeing is clearly fearful of the consequences of such a strike and claims that it’s open to negotiating with its workers, saying, “We remain committed to resetting our relationship with our employees and the union, and we are ready to get back to the table to reach a new agreement.”
Jefferies estimated that the now-rejected labor deal would have cost Boeing $900 million over the four-year contract. The costs would escalate further if workers could extract a better deal from Boeing. Also, the strike would impact Boeing’s finances and wouldn’t do any good to its rapidly deteriorating reputation. It is also a major setback for CEO Kelly Ortberg who took over the position in August only and reached out to employees as he tries to turn around the company.
Labor Strikes Can be Costly
Labor strikes can be costly and last year, the Detroit Big 3 – namely Ford, General Motors, and Stellantis collectively lost billions of dollars amid the United Auto Workers (UAW) strike.
Jefferies aerospace analyst Sheila Kahyaoglu estimates that a 30-day strike could have a cash impact of $1.5 billion for Boeing. A strike would amplify Boeing’s woes as the company has already burnt $8 billion in cash in the year, in part due to the high inventory of unfinished aircraft that it is carrying. These partially built planes are yet to be delivered as Boeing fine-tuned its production to resolve its infamous build issues. However, Boeing will only be able to realize that cash when these are delivered to end customers.
During the Q2 2024 earnings call, Boeing’s CFO Brian West said that the company expects to burn cash in Q3 also on working capital build-up. “Inventory will remain a near-term headwind as we prioritize supply chain stability to support future rate increases and advanced payments will take time to improve as we stabilize production and improve the profitability of deliveries to our customers,” said West.
Boeing raised $10 billion through a debt offering in May and its total debt was $57.9 billion at the end of June. If the strike turns out to be an extended one, it would further hurt the company’s balance sheet and make the company’s task of protecting its investment-grade credit rating more difficult.
The above video talks about the financial impact of the strike. Meanwhile, Rob Stallard, an analyst at Vertical Research Partners sees a silver lining in the strike and argues that it “could be a good opportunity for Boeing to reset, and either pause supplier deliveries or take them down to a more realistic level.”
BA Stock Is Dragging Down the Dow Jones Index
Last week, BA stock hit the lowest level since 2022 after Wells Fargo analyst Matthew Akers downgraded the stock to a sell equivalent and slashed his target price by $70 to $119.
In his note, Akers said that Boeing missed a “generational free cash flow opportunity” which he said would have been driven by “ramping production on mature aircraft and low investment need.”
However, production and quality issues have meant that Boeing’s operations are instead burning cash and Akers predicts that the company would need to raise $30 billion in equity by 2026 to make new investments, which would mean equity dilution thereby driving down the company’s per-share earnings.
Meanwhile, BA is the second worst-performing Dow Jones Industrial Average constituent this year and has been dragging down its returns. Bank of America’s aerospace analyst Ron Epstein doubts whether it should be part of the index at all.
“If you want bellwether, strong balance sheet companies, they don’t check those boxes any longer,” said Epstein in his note. Boeing hasn’t posted an annual operating profit since 2018 – which coincides with its safety woes. Boeing’s troubles began when two new 737 Max jets crashed in quick succession, just a few months apart, between 2018 and 2019, in Indonesia and Ethiopia.
The company has cumulatively posted operating losses of over $33 billion since 2018 and looking at the continued woes, that number looks set to go even higher. If the strike extends for a long time, it would further add to Boeing’s losses.
Flyers Are Wary of Flying in Boeing Aircraft
Earlier this year, the door panel of a 737 Max jet blew off during an Alaska Airlines flight. Later in April, the engine cover on a Southwest Airlines Boeing 737-800 fell off during takeoff. Recently, Boeing said that it is halting the trials of its 777X after finding a crack in its structure.
The recurring safety scares have made many flyers wary of flying in a Boeing aircraft. A June survey conducted by digital analytics company Quantum Metric showed that while a fifth of travelers are doing more research on the aircraft that they may be flying before booking the ticket, 22% said they were limiting their air travel for the rest of this year. More than half – 55% to be precise – said that they have changed the way they book tickets due to the recent developments in the industry.
While the survey did not specifically name Boeing, there are no marks for guessing that the frequent safety-related issues with the company in the duopoly aircraft manufacturing industry, have started to take a toll on the behavior of travelers.
Notably, amid Boeing’s safety woes rival Airbus has outpaced it in orders and deliveries for five consecutive years. Just when Boeing was looking to put things in order, it now faces a labor strike which would further hamper its manufacturing plans.
Markets have also taken note of the strike and BA stock is down sharply today – just as it was up handsomely when the tentative labor deal was announced.