Boeing defense programs to feel the pinch as Seattle-based union votes to strike

WASHINGTON — Boeing’s machinists union in Washington state voted to strike late Thursday evening, putting near-term deliveries of the KC-46 and P-8 military aircraft in limbo.

Members of the International Association of Machinists and Aerospace Workers (IAM), which represents about 33,000 Boeing workers in the region, rejected a proposed deal that was endorsed by union leadership. Union members across the Seattle area, as well as some in Oregon and California, began striking at midnight local time.

IAM said that 94 percent of its members voted to reject the contract, with 96 percent voting to strike. A two-thirds majority was required to strike.

A strike at two of Boeing’s major commercial plane factories near Seattle threatens to plunge the company into further financial disarray as it grapples with a safety crisis that has hampered airplane production this year.

The strike stops production of Boeing’s 737, 767 and 777 jetliners as well as military derivatives of those aircraft, which include the 737-based P-8 Poseidon maritime aircraft and the 767-based KC-46 tanker.

“The tanker program is going to be impacted by the BCA [Boeing commercial airplanes] factory disruption and now work stoppage,” Boeing Chief Financial Officer Brian West said during the Morgan Stanley Laguna conference today. “That is going to flow through the tanker [production] rates, which is going to be more cost pressure [on Boeing’s defense unit].”

Specifically, the strike could hamper Boeing’s ability to deliver 15 KC-46 tankers to the Air Force by the end of 2024, depending on the length of the work stoppage.

Over the first half of the year, Boeing delivered three P-8s and five KC-46s, the company said in July. Boeing delivery data shows an additional two 767s were delivered to its defense unit in July for conversion into KC-46s for the Air Force.

West said Boeing CEO Kelly Ortberg is “already at work” to get an agreement that addresses workers’ concerns, and that the company is focused on conserving cash during the strike.

“Kelly has been in Seattle all week getting first-hand information about the situation on the ground, and his priorities are to reset, reengage and rebuild,” West said. “So how that plays out, in terms of timetable that will be up to the union the bargaining table participants to decide upon, but our intent is to get back to table and try to get an agreement.”

IAM headquarters will make “every resource available” to the local union groups now on strike, the union said in a statement.

“We are incredibly proud of the hard work and dedication shown by the negotiating teams from District 751 and W24 and the unwavering solidarity of our membership,” the union stated. “Their tireless efforts have been on display throughout this entire process. Now, they will regroup and begin planning the next steps on securing an agreement that our membership can approve.”

The Pentagon, Air Force and Navy did not immediately respond to a request for comment.

Strike Comes Despite Earlier ‘Reset’ Pledge

Ortberg has sought to ameliorate the company’s relationship with its Puget Sound-area union, which deteriorated under the leadership of previous executives who publicly and sharply criticized the union in prior negotiations. Ortberg met with local IAM leaders shortly after taking the reins of the beleaguered company in August, pledging to “reset” relations with the machinists, Aviation Week reported then.

On Sunday, Boeing and IAM leadership endorsed a deal that promised a 25 percent general wage increase, reduced health care costs, improved terms on retirement benefits and a promise to build the next commercial airplane in the Puget Sound area, if announced during the life of the contract.

The agreement fell short of IAM’s original objectives, which included boosting wages by 40 percent and reinstating Boeing’s pension plan, which was cut in 2014 in order to assure 777X production in Puget Sound.

Analysts were optimistic that the backing of IAM’s leadership would get the deal over the finish line, but it quickly became clear that rank and file membership was not supportive.

On Monday, IAM 751 President Jon Holden told the Seattle Times that he expected members to reject the contract and vote to strike.

“We have achieved everything we could in bargaining, short of a strike,” Holden said in a message to union members posted to the organization’s website on Monday. “We recommended acceptance because we can’t guarantee we can achieve more in a strike. But that is your decision to make and is a decision that we will protect and support, no matter what.”

In a Wednesday letter to the workforce, Ortberg said a strike would put Boeing’s recovery in jeopardy, calling it a path “where no one wins.”

“I know the reaction to our tentative agreement with the IAM has been passionate,” he said. “I understand and respect that passion, but I ask you not to sacrifice the opportunity to secure our future together, because of the frustrations of the past.”

Depending on the length of the strike, the work stoppage in Seattle could further squeeze margins at Boeing’s defense unit, which West said are expected to be negative again in the third quarter, with financial performance on par with the previous quarter when the company booked $527 million in losses.

West said the results were a “disappointment” and driven by cost pressures in two areas. First, the costs of winding down F/A-18 Super Hornet production and ramping up F-15EX production is proving to be more expensive than previously estimated.

Cost overruns on fixed-price development programs — long a bane of Boeing’s defense earnings — also continue to be a problem, with West calling out “development hurdles” on the Air Force’s T-7 trainer and Navy’s MQ-25 tanker drone.

Based on the duration of previous strikes, it is “realistic” to assume that the current strike will last about 50 days, ending before the strike fund runs low ahead of the holiday season, Cai von Rumohr, an aerospace analyst with TD Cowen, wrote in a note to investors earlier this week. A strike of that length would cost Boeing about an estimated $3.5 billion in cash flow.

Ron Epstein, an aerospace analyst for Bank of America and a former Boeing engineer, said that while previous strikes have hovered around the 60-day mark, last year’s strike at Boeing supplier Spirit AeroSystems could offer a precedent for a much more rapid negotiation — one that could end in as little as a week.

“We see it likely Boeing would have to make further concessions and move closer to the IAM’s initial proposal of 40 [percent] wage gains,” Epstein said in the note to investors this morning.