Big Week for Boeing

Update, 10:30 AM PDT, Sept. 3: IAM members are voting today. There is a last-minute flurry of activity by Boeing, IAM and the media.

KIRO Radio news: Boeing machinists voting.

KIRO Radio News: To broadcast the vote results live at 8:30pm PDT. See the URL at the top of the page.

IAM’s last minute appeal: At the main website.

Boeing’s last minute appeal and their main messaging site with a radio ad from BCA President Scott Carson and other messages.

Voting continues to 6 PM PDT; the first vote tallies are expected between 6:30 and 7 PM, and a trend may be evident with these initial results.

Big Week for Boeing

This is a big week for Boeing. Wednesday executives will find out if members of the International Association of Machinists will strike. This week the Department of Defense is expected to issue its Final Request for Proposals in Round Three of the KC-X aerial tanker competition for the USAF, and Boeing will learn whether DOD is going to give the company six months to propose a bigger airplane than the KC-767AT.

First, the IAM

The IAM votes tomorrow (Sept. 3) on whether to accept the “best and final” contract offered last Thursday by Boeing. We have been posting the Boeing and IAM positions and statements on this site, so we won’t re-link any of that information here.

Boeing took a big gamble by releasing information throughout the process. On the one hand, these trial balloons enabled Boeing to gauge reaction. On the other, some of the so-called take-aways inflamed the IAM membership and may have had the opposite effect Boeing had hoped for.

The IAM leadership recommended that the membership reject the contract and strike. Union by-laws require a two-thirds of the membership to reject the contract. Thus, if 33.34% of the membership votes to accept the contract, Boeing wins. This is what happened in 2002 when Boeing received 34% of the vote and imposed the contract then that froze salaries and had other take-aways. Some Boeing officials believe this set the stage for the 2005 strike that lasted a month. Boeing wants a majority vote this time, however, and one of the sweeteners in the contract is a bonus if 50% of the membership votes to accept the deal.

An unscientific poll conducted by The Everett (WA) Herald, the newspaper covering Boeing’s wide-body production plant, Monday (Sept. 1) showed just 66% of the respondents supporting rejecting the contract. This was down from 70% on Saturday. Since there are no controls on the on-line poll—people can vote multiple times and anyone can vote, not just Machinists–it’s unclear how much veracity the poll has. But it certainly suggests rejection is no sure thing.

So what is the impact if the contract is rejected and the union strikes at 12:01 am Thursday, Sept. 4? It all depends on how long the strike is. If the strike is over in a matter of days or a week, the impact will be minimal. But if it lasts a month, like the 2005 strike, Boeing will be challenged in many areas.

  • During the second quarter, Boeing Commercial Aircraft had revenues of $8.567 billion and earnings of $777 million. A straight-line division suggests that for every month there is a strike, revenues will be reduced by $2.855 billion and earnings by $259 million. This does not take into account revenues from other business units within BCA that won’t be affected by a strike, however. The revenues will be recovered in the long term, but how long is anyone’s guess.
  • Boeing delivers every month on average 31 737s, seven 777s, one 767 and one 747. The 737 and 777 lines are at current capacity, based on the supply chain, and for every month a strike continues, it will be that much more difficult for Boeing to catch up on deferred deliveries.
  • The 787 program will move to the right. There is a theory that a strike will enable Boeing to mask continuing problems with the 787 and blame delays on the strike. There is plenty of anecdotal evidence that the program continues to be a challenge and talk among Boeing, the IAM and suppliers that the first flight is slipping to December or even well into the first quarter next year, exclusive of a potential strike (787 program chief Pat Shanahan said at the Farnborough Air Show that the first flight was planned for November, according to a report Bloomberg News at the time).
  • If a strike occurs, kiss goodbye Boeing’s pledge of 25 787 deliveries in 2009. But Wall Street analysts are already predicting as few as 10 787 deliveries, exclusive of a strike. Even these might be in jeopardy.
  • We understand that sales contracts exclude penalties for late deliveries of any aircraft due to a strike.
  • The 747-8 program, just beginning production and already a reported five-seven months behind schedule (investment banking firm Jeffries & Co. just issued a research note with a six month figure), will be delayed. So will the 777F program, now in flight testing.

The intangible impact will be the relationship between Boeing and the IAM, long-strained over out-sourcing, take-aways and loads of other issues. If the IAM leadership succeeds in getting a contract rejection, the sour relationship between them and management will get worse. If Boeing wins by less than a majority vote, or very close to it, union membership and leadership resentment will almost certainly be aggravated.

Boeing needs a clear, solid win, but our prediction is that a majority will vote to reject the contract. Whether the IAM reaches the two-thirds required to make it official remains to be seen.

The Tanker

The Department of Defense is already overdue in issuing the Final RFP (FRFP) in Round Three for the KC-X competition. Expectations are that the FRFP will be issued this week. The big question is not whether DOD will back off on any technical specifications or scoring methodology but whether it will accede to Boeing’s request for an additional 4 ½ months—for a total of six—to give it time to prepare a bid using a platform larger than the 767-200LRF design that lost to Northrop Grumman’s KC-30 offering and which Boeing now concedes is inferior to the KC-30 within the context of the DOD Draft RFP.

Northrop and its supporters are apoplectic over the request for more time, charging Boeing is only playing politics and hoping for a friendly Democratic White House and Congress. This is undoubtedly part of Boeing’s motive, but we think the request is reasonable, as we previously outlined on our companion website. Not only is there a fairness issue, both real and perceived (and with this competition already wallowing in politics, perception is more important than reality), we think this new competition will encourage Boeing and Northrop to sharpen their bidding prices and also provide better airplanes. Here are the options:

  • Boeing will offer a tanker based on the 767-400 or the 777. We think a “KC-764” is most likely. First, Boeing can deliver this airplane far sooner than anything based on the 777, which is sold out for 4 ½ years. The USAF wants a plane sooner than later, and on this basis alone the 777 doesn’t work. Secondly, a KC-777 as a sole-offering (as opposed to a mixed offering of a 767 and a 777) simply is too big; it’s 50% larger than Northrop’s KC-30. It’s so far beyond the current RFP requirements that this platform simply doesn’t work. Third, the 767 production line is limping along at one a month and Boeing has the ability to ramp this up to whatever level the USAF wants (subject, as always, to the supply chain). It’s expected that Boeing is going to double 767 production to two a month to backstop the 787 problems; boosting the rate for a KC-764 is possible and it’s not for the 777, which is at capacity today.
  • Boeing could offer the 767-400 with the GEnx engine, now certified for the 787, with 15% less fuel burn than engines currently in service on the 767 (or the A330).
  • Boeing could protest the FRFP.
  • Boeing threatened to no-bid if it doesn’t get more time.
  • Northrop floated the idea that it may alter its bid from a conversion of the A330-200 passenger plane to a platform based on the A330-200F, now entering production—something that wasn’t available when the competition began. The A330F is better suited than the A330P, so the USAF would gain from this.
  • Northrop might offer the A330 with the GEnx engine. Any offering by Northrop or Boeing with the GEnx will reduce life-cycle costs. Airbus did a great deal of research and development for a GEnx-powered A330 when it proposed Version 1 of the A350. We call the GEnx-powered Northrop tanker the KC-35. While we really like the idea of a KC-35, we don’t think this is in the cards.
  • Northrop could offer a “KC-33” based on the A330-300 passenger plane. We think this less likely; Airbus doesn’t have a freighter program for the A330-300, either in new-build or conversion.

3 Comments on “Big Week for Boeing

  1. Scott,

    A slight clarification…there are actually two votes by the IAM on the line.

    Vote 1 is to ratify or reject the contract itself. This requires a 50% majority to ratify. If more than 50% vote to ratify the contract, the second vote (see below) is irrelevant.

    Vote 2 is to reaffirm the strike. This requires a 2/3 majority to hit the picket lines. If less than 2/3 vote to reaffirm the strike, the contract is ratified by default. This is the most likely way Boeing avoids a strike and get everyone back to work.

    So your statement “Union by-laws require a two-thirds of the membership to reject the contract. Thus, if 33.34% of the membership votes to accept the contract, Boeing wins.” is a bit inaccurate.

    Don’t mean to nitpick too much. You do a great job! 🙂

    For a good sense of the divisiveness of not only the workers in IAM, but of the IAM vs the general public, see the Seattle PI soundoff:

    There’s plenty of emotional responses there so I won’t comment about the IAM on this board, and the freighter issues have also been debated to death.

  2. It will be interesting to see what time frame will be set by the USAF in the latest issue of the RFP. Under the original schedule, I believe, they wanted 3 aircraft in flight test in 2010. Inevitably both Boeing and NG/EADS, have to balance the risk v opportunities with their latest bids. I think hanging GEnxs, would probably be too risky at this stage but could be done later. My feeling is we will see B764 v A332F. They are a closer match, although A332 may have a better filed performance, thanks to the much bigger wing and more powerful engines.

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