Our choice for momentous event: IAM-Boeing contract

Note: Highs and Lows for 2011: see AirInsight.

In our previous post, we gave readers a choice of the most momentous event for 2011 for Airbus and Boeing; and who was the most influential person for the year and what would be the predictive momentous event for 2012.

We agree with three of the four readers’ choice but disagree for the momentous vote for Boeing. We think it was the IAM-Boeing contract agreed to nearly a year ahead of the amendable date of September 2012. This agreement extended a new contract for four years and is heralding a new era of cooperation between the union and the company.

Here’s why we think this agreement beats out the 787, the readers’ choice, as Boeing’s most momentous event in 2011.

First, why we don’t select the first delivery of the 787 as the momentous event.

First delivery was a given, at long last. But in our view, Boeing’s ever-shrinking delivery forecast for the 787 is indicative that the program still has major challenges to overcome. Recall that at one time Boeing forecast 20-40 787s and 747-8s would be delivered this year, evenly split between the two aircraft. Two reductions later, the 787 delivery forecast shrunk to 5-7. At this writing on December 30, two have been delivered and Boeing will struggle to deliver one more by the end of the year tomorrow.

The rework necessary on the airplanes produced so far made meeting any publicly or internally set goals problematic, and this will be true next year.

Furthermore, Boeing’s production ramp up plans have been sharply reduced. The Z23 plan called for a rate of 61 in 2012 and 95 in 2013 for the full years. Z24 reduces these rates to 45 and 66. These plans are indicative of the continuing production challenges for the airplane.

Until Boeing get a smooth, reliable production rate, we consider the first delivery important and a milestone but not a “momentous” event.

This doesn’t mean, however, we defaulted into selecting the IAM-Boeing contract as the momentous event. This choice stands on its own merits.

The IAM struck Boeing in 2005 and 2008 and would have struck in 2002 had the threshold required in bylaws been reached as members rejected the contract but failed to approve a strike in a super-majority vote required. Boeing imposed the contract, which included major provisions for outsourcing. Thus, the fuse was lit for the 2005 and 2008 strikes.

Negotiations for those contracts were marred by unrealistic positions taken by both sides and testosterone contests. The decision by management to locate 787 line 2 in Charleston was the low point that prompted the IAM complaint to the NLRB.

Boeing made Line 2 and Charleston entirely about the labor situation in its statements to Washington politicians, the union and the media. Boeing said flatly there was nothing Washington could do in the way of incentives that would influence the decision.

Thus, it was incredible when Boeing’s legal response to the NLRB complaint claimed that the decision was all about incentives South Carolina offered (nearly $1bn by some accounts) and the labor strike had no role in the decision. In essence, the legal response took the position that Boeing never even heard of IAM 751.

We think the IAM had Boeing dead to rights on the complaint, and Boeing itself acknowledged it expected to lose at the NLRB level. The immediate reliance on Boeing’s political allies (as with the tanker competition) demonstrated to us that Boeing feared losing on the merits.

(Sidebar: At the time we suggested to a Boeing official that framing the line 2 decision as a labor fight was counter-productive. Why not frame it as diversifying the earthquake risk that exists in Seattle–nobody could argue with that. The response: that would be a “lie;” it was all about the union.  We were also doing pro bono work for the State on the matter, thus we had some inside knowledge of what Boeing was telling politicians. We’ve refrained from telling this story before now because we didn’t want to get hauled into the complaint as a potential witness. These conversations also firmed our belief that the IAM had Boeing dead to rights on the complaint.)

The announcement by CEO Jim McNerney early this year that Renton didn’t have an automatic lock on the prospective 737 re-engine project further added fuel to the discord between labor and management.

While nobody we talked to inside or outside of Boeing believed it made business sense to put the 737RE anywhere else, it became a bargaining chip for the 2012 contract negotiations that were presumed to begin in 2012.

The story of how the negotiations commenced this year have been well chronicled. Ray Conner, now Boeing’s chief salesman but for most of the year in charge of supply chain matters, and Tom Wroblewski, president of IAM 751, were enlightened enough to agree to commence negotiations this year. The respective leadership of IAM International and Boeing also finally recognized that something had to change and to their credit clearly came out of their corners to support early talks.

Labor has been saving Boeing’s bacon throughout the turmoil of the 787 and 747 programs. The increased production rates of the 737 and 777 come with the expertise and skill set of the IAM (and the supply chain, of course, but this is a separate story). Boeing needs the profits and cash flow from these two programs to see the company through the continuing challenges of the 787 deliveries and production. As important as the 787 is to the company’s future, it is labor peace that allows the company to survive the present.

That’s why we believe the most momentous event in 2011 for Boeing is the labor contract. Kudos to Conner, Wroblewski, IAM’s Mark Blondin, Jim Albaugh and, yes, Jim McNerney for coming to the deal.

11 Comments on “Our choice for momentous event: IAM-Boeing contract

  1. Scott,

    You are exactly correct. This war that Boeing has been carrying on against its own workforce has been just stupid. Don’t read into that statement that I think the union is faultless. I don’t. But the intensity of animosity from the executive suite has been unbelievable and counter-productive.

    When you and I did the KCTS program at the time of the South Carolina decision 2 years ago, I was certain you knew more than you were admittling. I am glad that you have finally opened up on the subject.

  2. I agree with the assessment you have posted here. Boeing needs labor peace throughout its programs to enable a profitable future. Any further turmoil between corporate management and front-line workers will not bode well for BA. I hope they can work
    collectively together to get their programs back on a continually improving schedule soon.

  3. I found it interesting that virtually NONE of the national media on both sides of the political isle bothered to quote either the NLRB statements re mea culpa, not closing charleston, or even quoted the TV interview by the Seattle times wherein the ‘ strike avoidence’ statement was specifically made while dismissing the labor costs, etc.

    The same with all the TV pundits.

    Basic problem was a severe case of both feet in mouth by Boeing

  4. Absolutely agree with you.
    This contract was a great surprise to everybody. It shows that when Boeing want it can go forward and put aside the bad aspects. This was a great move.

    I wish Boeing and all its staff all the best for 2012. 😉

  5. Yes, I stand corrected, ofcourse the most momentous event for Boeing in 2011
    is or was the new labor contract.
    But, because part of that agreement was the agreement to leave the 737 pro-
    duction line in Renton, I am convinced that that decision, together with the last-
    minute offer by GE/SNECMA to reduce the fan-diameter of the GTX engine to
    be able to offer the 737MAX, instead of an all new aircraft as Boeing had plan-
    ned, was the second most important event for Boeing in 2011!

  6. I think the non-Seattle people have a slightly different perspective on the matter. But I only voted for the B787 after long thinking, because I thought pretty much the same. In that respect the new contract probably is the “best” achievement for Boeing in 2011, as B787 was merely an open item from previous year. Same with B747-8. And the B737-MAX was launched by Airbus. Not a good year for Boeing.

  7. Excuse me Schorch, 2011 NOT a good year for Boeing?

    I would agree with you, if:
    1. Boeing had lost the T/T competition against A330f from Airbus, as they almost
    did.
    2. Boeing had not been pushed by GE/SNECMA, to forget about taking their time
    offering an all new 737 replacement aircraft around the end of this year and
    instead offer the reduced-fan-diameter version of their GTX engine at the last
    minute, which enabled (sleepy) Boeing to offer the 737MAX, the only airplane
    that could have and will, effectively compete with the A320NEO!
    3. The 787 and 747-8 airplanes still had NOT obtained their Airworthiness Certifi-
    cates, while they are now at least beginning to earn back some of their develop-
    ment costs!
    4. The 777 was not selling in record numbers, far in excess of what Boeing could
    have expected after Airbus launched the A350 four years ago, because of A350
    delays and because of a much greater demand than Boeing had assumed for an
    aircraft with the payload and range of the 777-200/300ER!
    5. Last but NOT least, Boeing Management and the Machinist Unions had NOT
    come to the momentous and far-reaching agreements, which will ensure smooth
    and profitable Boeing production-runs for many years to come!

    • 1- If the first round was a honourable lost for Boeing, the second round was a shameful win.

      2- The 737 MAX announcement made Boeing management look like a bunch of amateurs.

      3- The 787 and 747-8 certifications were late and will therefore cost billions of dollars more.

      4- The 777 is the only program that can keep BCA afloat.

      5- The contract agreement was a triumph for Boeing. But it might cost JM his job.

      I wouldn’t call that a good year.

  8. Scott Hamilton’s review brings together 3 critical factors about the business: deliveries are disappointing; Boeing’s executives indulged themselves for years in a counter-productive battle with workers; the production ramp-up is falling behind.

    Put aside for a moment the drama about the contract extension, which is almost irresistible, to be sure.

    The purpose of the corporation is to make products customers want to buy, at a profit. From the simple business perspective, the late deliveries and overruns have already cost billions; the reduced production ramp-up will cost more billions; the rework, damaged customer trust, and slowed learning curve will cost more billions – for years to come. One bright spot in this picture is the experienced workforce, or what’s left of it.

    To dig out of this hole, Boeing needs to focus on products, processes, and customers.

  9. Year of the 767, the tanker contract and the FedEx order. Roll on 767 roll on.

  10. The labor deal, whilst undoubtedly the most important event in the long term is very much tied up with the MAX.
    For Boeing to get into contract for such large numbers of airframes, they simply had to eliminate one of the great unknowns, namely labor relations and associated costs, which could make or break the program, particularly if they moved house.
    Cheers from Manila and a good 2012

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