787 Line 2 Post Mortem

The Background

It had been a long time coming. Boeing’s 787 repeated delays and great backlog meant that the company had to have a second production line to catch up and to offer delivery positions within reasonable time periods for new customers.

Observers and analysts long predicted that Boeing would put Line 2 in the growing 787 facility in Charleston (SC) rather than Everett (WA). By now, all the signs are well known to Boeing followers and need not be recounted here.

Boeing CEO Jim McNerney had been clear that the IAM labor strike for 57 days last year was a seminal moment. If 787 Line 2 were to be put in Everett, labor peace and long-term production stability was required–some kind of no-strike agreement. The only way to achieve this was a long-term contract. The current IAM contract is amendable in 2012, so this had to serve as the basis for a new deal.

Clearly the IAM wasn’t going to extend the contract for a long-term period, during which no strike is permitted, without something in return.

IAM 751 president Tom Wroblewski had a dilemma. Winning Line 2 for Everett would mean another 700-900 direct jobs–for the 787 Line. But in return for granting some kind of a long-term contract during which no strike was allowed, he faced the ultimate question from the workers on the 737, 747, 767, 777 and P-8A lines: “What’s in it for me?”

Fifty-five year old workers within sight of retirement were concerned about pension payments, something that Boeing attacked in the 2008 contract proposal. All workers were worried about rising health case costs. Boeing wanted worker contributions in the 2008 proposal. New hires and young workers may not be worried about pension payments at their age but they are worried about a living wage.

And in this economy, everyone is worried about job security, paying the rent and feeding their families.

So Wroblewski could hardly propose a deal that would include concessions without getting something for everybody.

Boeing, faced with billions of dollars of cost overruns and penalties to customers, and a 787 program that’s already had a $2.6bn write-off and the prospect of more, needed a solution that not only provided production stability but one that also had economics that it could live with.

So talks (but, as Boeing would later say, not “negotiations” in the classic sense) began.

What transpired over the course of the talks will forever be a matter of debate. The IAM said it provided an offer to Boeing but never got one back. Boeing says it told the union clearly what it wanted and when. The union said, no Boeing didn’t–that it was prepared to revise terms of the offer in response to a Boeing counter offer and in any case, the IAM said it didn’t know the deadline had come-and-gone.

After the decision was announced to put Line 2 in Charleston, Boeing and the IAM issued dueling messages outlining their positions in the inevitable spin war that followed. We posted these previously.

The Seattle Times, Everett Herald and several newspapers in South Carolina have various, and sometimes varying, accounts of what transpired. We provided links to these in previous posts, so we won’t go into these details here.

But we will do some recapping that we haven’t seen elsewhere.

It was all about labor–or was it?

Throughout the run-up to the decision, Boeing told everybody who would listen and everybody who asked that the key point in deciding where to put Line 2 was labor and strike disruptions.

But in explaining its decision, Boeing’s corporate communications professionals and a vice president of marketing revealed that there was more than labor that influenced the decision.

Washington Gov. Christine Gregoire was told over and over that the state’s business climate and incentives were not the issue–only labor was. Said the Governor upon hearing the news:

On the question of additional incentives to the company: “I have to tell you, they’ve never raised that issue. Never, they’ve got over $3 billion sitting on the table and what’s the incentive for every 787 – they get more money in incentives. So the state, and the Legislature, I think, with (former Gov.) Gary (Locke), stood up to the question and the challenge. And it’s unmatched by anybody in the country. And the amount of money (from South Caroline) $170 million versus $3 billion. It has never been raised to me by (Boeing Vice President) Jim Albaugh, or by (Boeing Vice Presidnet) Scott Carson. Scott Carson after the last legislative session when I said is there anything else the state can do with respect to the 787 line. He said, ‘don’t take away what you have on the table for us right now. Don’t take it away.’ And I said I will fight takeaways. Then when Jim Albaugh came I asked the same question of him, and I’ve asked it on numerous occasions, and today he made it very clear to me. ‘This is not about workers compensation, this is not about taxes from the state of Washington, this is not about you and your efforts or the Legislature and their efforts, because in fact they’ve been good efforts and we appreciate them…this is about negotiations with labor.” (From The Seattle P-I.)

US Rep. Jay Inslee (D-WA), whose district includes the Everett Boeing plant, said this (from The Seattle P-I):

Rep. Jay Inslee, a Democrat whose district is also home to many Boeing workers, said he “point blank” asked a “high-level official” with the company last week [before the decision was announced] whether there were any tax breaks or changes in worker’s compensation benefits that would convince Boeing to build the line here.

“The answer was no,” Inslee said.

Yet in the media interviews following the announcement, the Boeing spin changed in very noticeable ways.

Boeing spokesman Russ Young told KOMO TV (ABC-Seattle) that siting Line 2 in Charleston is not the beginning of the end for Boeing in Puget Sound, despite predictions (by aerospace analyst Richard Aboulafia of the Teal Group and by us). Yet Boeing would not guarantee future airplane programs will be here in Puget Sound (properly, in our view, but also an element in our prediction).

Young also told KOMO that other factors, including incentives and natural disasters were factors. Bernard Choi, another Boeing spokesman, also cited the business climate as a factor in interviews with a Seattle area radio station and a newspaper.

Randy Tinseth, VP-Marketing, runs BCA’s blog. He wrote, in part:

Finally, I want to point out that before we made this decision, we looked at a number of factors, including the business environment, logistics and infrastructure that exist at both company locations. We applied the same basic assumptions and ground rules to both sites, with a heavy emphasis on long-term competitiveness and ensuring a sustainable stream of deliveries for our customers.

We first heard the change in the Choi radio interview. We immediately called Boeing to ask that if business climate was indeed a factor, why wasn’t Washington State so advised and given the opportunity to consider more incentives rather than proceeding under the understanding that labor, not business climate, not incentives, was the issue. The push-back we received to our question was that it was simply off-base.

Afterward, we saw the TV interviews with Young and Tinseth’s blog. Clearly, what Boeing was saying after the decision did not track with what Gov. Gregoire and Jay Inslee were told before the announcement.

Demanding more than  Boeing could accept

Boeing says an agreement could not be reached because the IAM demanded guarantees that future airplane programs (the 737 and 777 replacements) would be in Puget Sound, something that Boeing would not guarantee for a decision five or six years or so in the future; and that that IAM demanded Boeing remain neutral in IAM organizing efforts elsewhere in the country–something Boeing said was unrelated to Puget Sound and which it could not accept in any event.

Frankly, we agree with Boeing’s position on these two items. But the union told us it was willing to forgo the neutrality demand, if only it had had a chance to do so but Boeing never came back with a counter-offer. And, the union told us, it was only reasonable to seek a guarantee of the new programs as long as Boeing sought a long-term contract.

On the former point, we think it was a dumb idea to propose the neutrality clause and on the latter, we simply think Boeing is correct.

But wait: the union also says Boeing negotiators weren’t willing to even guarantee that Line 2 would be placed in Everett if the IAM offered up a long-term deal. Boeing says negotiators could only recommend Everett to the Board of Directors if the IAM came up with an acceptable deal.

While the IAM makes a big deal of this, we think this complaint is a red herring. The Boeing side was in the same position as the IAM: the IAM team could not guarantee their proposals any more than the Boeing team could guarantee Line 2 to Everett. The Boeing team needed Board approval and the IAM team needed a membership vote.

The two sides were apart on economic issues. IAM says Boeing never said what it wanted or came back with a counter-offer, asking only, “is this the best you can do?” leaving the IAM “negotiating with ourselves.” Boeing said it was very clear about what it wanted and the union didn’t meet the company’s needs.

What is clear from all this ambiguity is that the entire relationship, on both sides, is totally dysfunctional. They each need a keeper in a situation like this.

Take-aways and strikes

IAM’s Connie Kelleher says Boeing can avoid strikes by avoiding proposing “take-aways.” “I’ve been here 28 years and we’ve had four strikes. Each was because Boeing proposed take-aways. If you don’t have take-aways, you won’t have strikes,” she told us.

Strike-Immune?

Boeing says Charleston will diversify the workforce and reduce the impact of strikes. We don’t think so. Charleston and Everett are so inter-connected that we think a strike in Everett will have spillover to Charleston; you can’t totally divorce the two. We’ve also talked with Boeing officials who say the same thing.

Unionizing Charleston

Charleston workers voted to decertify the IAM local there, another factor in the site selection. South Carolina is a right-to-work state where unions are weak. But this doesn’t mean the plant may not re-organize at a later date. The IAM can come back one year after the decertification (or any other union can try). The engineers’ union, SPEEA, already said it will try to organize any engineers that locate there.

And a former long-time Boeing management executive believes Boeing management will mistreat the Charleston workers such that he thinks the plant will be unionized within 30 months.

Risk Factors

CEO McNerney acknowledged some inefficiencies of having Line 2 in Charleston and Line 1 in Everett. The company undoubtedly considered all the risks we’ve been bleating about for months and concluded these were acceptable.

But we’re not impressed with Boeing’s track record in evaluating risks. Management has been consistently wrong on the 787’s program risks; they were wrong on the 747-8 program challenges; and last year, they were wrong on the risks of a strike (unless one accepts the conspiracy theory that Boeing actually wanted a strike as part of a scenario to break the union and give more breathing room on the 787 program).

We think the risk to this high-risk program, with the continuing risks and the unknown-unknowns, is greater than putting Line 2 in Everett, union issues notwithstanding.

Wake Up Calls

Washington politicians and interested parties, The Seattle Times and even a South Carolina official, characterized Everett’s loss as a “wake-up call.” We find this laughable. Boeing’s move of headquarters in 2001 from Seattle to Chicago was a “wake-up call.” So was the near-miss in 2003 to land Line 1. So was our prediction last April that Line 2 would go to Charleston and subsequent airplane programs would not be in Washington. Boeing has been sourcing airplane production outside the state for decades.

How many wake-up calls do Washington stakeholders need before they wake up and find Boeing is gone?

11 Comments on “787 Line 2 Post Mortem

  1. The entire situation is laughable. Both sides (and the politicians) are making assumptions and then wondering why things don’t or didn’t go their way. If Boeing were still an engineering company run by engineers, this would have been resolved in about a week.

    “You can’t fix stupid” 🙂

  2. As it is likely that all future models will have composite hulls, the production process for that is more modular (X units a month per autoclave, spinning machine, etc) so it is easier to do multiple sites as the tooling investments are more equal.

    After it is up and going it greatly reduces risk to have multiple sites (possibly split between unions or union / non-union). Then as a model ends its run, one line changes and there is still production at lower rates on the other line.

    I believe that the 737 replacement will be built initially in Texas, with the 2nd line here. The 777 replacement will be initially in SC and the 2nd line here. I think the IAM squabbling, work rules, and attitude have killed the chance for WA to keep the production of any future models.

    Jay in Kitsap

  3. South Carolina has among the lowest per capita income in the U.S. and a state government willing to heavily subsidize industry. It’s hard to compete with that.

    The non-unionized workers will benefit from union contracts back in Washington, because no matter what Boeing thinks, at some point workers in the same company doing the same job expect to have nearly similar levels of pay. Boeing will get labor at a discount, but it won’t be dirt cheap.

  4. As to state incentives, as I have said all along, Boeing doesn’t ask. It’s almost as if Boeing considers asking to be beneath it. It prefers to have the taxpayers money dumped in it’s lap, without quid pro quo. This way, it can take the money and run anytime, never having committed to anything.

    On negotiations (of which there were none):
    Boeing came in with an ultimatum. The Union thought this was not an ultimatum, but a bargaining position. Mistake. What the union threw out as a bargaining position in regard to ‘demands’ is irrelevant.

    As to the union needing approval of he rank and file, and Boeing execs needing approval of the board, if Boeing were serious about Everett (never were) contingent agreements pending the votes could have been made. 787 for a no strike agreement contingent on approval of the board and the IAM rank and file.

    The great difference? The board was already meeting. They could have voted in 24 hours. I doubt the IAM rank and file could have been organized for a legally binding vote in less that two or three weeks.

    So with Boeing’s phony hard deadline looming, there was never any chance no matter what the union poobahs offered up.

    The timeline and conditions as set by Boeing are the best possible indicator that this was all a ploy by Boeing, carefully designed and executed to make it appear as though they were somehow forced, and to heap maximum PR pain on the union, and breed distrust between it’s leaders and the rank and file.

    It’s going to backfire in the worst possible way, three years hence.

    Meanwhile, I can easily predict that not a single 787 will be delivered from Charlston inside of the next four years. Just look at the mess that’s going to be as a sample of what a ‘work to rule’ campaign by the IAM in puget sound would look like. ( I believe the IAM won’t do it, it’s not in their charachter, they will just observe and note Charlston’s failures with no small degree of satisfaction).

    The Charleston induced costs will be bad. There will be huge over runs as there is no evidence it can be managed competantly. McNerney soft peddaling the risks ticks me off mightily. The man is not speaking truth, and can’t control his temper.
    I can take the lies. To be a Boeing sharholder you have to get used to it. But A CEO with poor self control? Seems like we just went through a couple of those.

  5. McNerney should be fired! Listening to our elected officials and respected analysts, Boeing had no intention of putting a second line for the 787 here.
    Fast forward to the next contract. Would any of the parties negotiating with Boeing trust them? I don’t think so. So now the STRIKE option becomes the only weapon to ensure that workers are treated fairly and states will have to watch out for Boeings extortion methods. A smart businessman would have settled with the union either before the last strike or relatively soon after it began saving what some have mentioned as much as 100 million a day and then put a second line wherever they wanted. The course that McNerney (documented union hater) chose lost the company billions in his words, infuriated customers, destroyed any hope for building trust with what the company has been calling its most valued asset,pissed off political its support, and didn’t do the shareholders any favors. This company has been so poorly run by this so called “management” team that they’ve given the union no choice but to be as adversarial as it takes to secure future production here even if it means a very destructive strike (both to the union and the company)! I for one think the people of S.C. will do fine and I wish them good fortune, as for Boeing “leaders” heads should roll, starting with McNerney!

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  7. Boeing used to be a great place to work… now its a good place to work… and if the current crop of executives had their way it would be just a job where no one gave a care about quality. But we do have pride in our work and our heritage.
    We don’t have pride in seeing our company being torn apart by the men at the top. Without its history, this company has no future.

  8. The consensus seems to be that Boeing was all set to make the move and the discussions were a backdrop to show the inability to come to terms.

    There is probably no doubt that Boeing decided that it was their best interest to open a second facility based on past experience, Maybe more cooperation or initial understanding could have prevented this but it appears that there was bad blood and the outcome was the result of that.

    Boeing certainly could not promise where their future lines would be located so that stopped the deal from the beginning.

    Like a argumentative couple, perhaps this separation will clarify some of the issues and a new equilibrium can be put in place that works for everyone. It is certainly in everyone’s interest to have that as a result

  9. South Africa cancelling Airbus A400M order
    ————————————————-

    The South African government decided to cancel the order of 8 pcs. A400M military transport aircraft. This shortens the order list of A400M
    from 184 down to 176.

    South Africa said Nov. 5 that it had cancelled a big contract for Airbus military planes in a new setback for the troubled A400M program that prompted Airbus to insist the plane was almost ready for test flights.

    The decision also left South Africa with a headache with its aging Herculus military transport fleet.

    Both sides face contractual issues over cancellation payments and conditions.

    Airbus described the decision as a “complete surprise.”

    South Africa said it had cancelled a contract to buy eight of the aircraft because of delays and a seven-fold cost rise in rand terms.

    The A400M version of the Airbus plane has been bedeviled by cost overruns and delivery delays. The entire 20 billion euro ($28 billion) project was put in doubt at one point.

    South African government spokesman Themba Maseko said “the cost escalation would have placed an unaffordable burden on the taxpayer” in an economic downturn.

    The director for programs at Airbus, Tom Williams, said at the group’s headquarters in Toulouse that the cancellation was a “complete surprise.”

    “We are so close to the first flight. I have a lot of confidence it will fly before the end of the year.”

    Airbus would now have to review the contractual situation with South Africa. “It’s up to us to go back and have discussions,” he said.

    A spokeswoman for Airbus Military said it was looking into “the potential financial impact of this announcement.”

    The contract for the A400M was agreed five years ago, when the South African government said the planes would cost about 830 million euros ($1.2 billion), or 6.4 billion rand.

    Source:
    http://www.aviationnews.eu/2009/11/06/south-africa-cancelled-airbus-a400m-order/

  10. Pingback: Boeing to explore options on 777X | Leeham News and Comment

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