Sept. 11, 2017, © Leeham Co.: I can’t help but get the feeling that Boeing feels it’s invincible these days.
And why not?
Boeing racked up some impressive victories and took some hardline positions in recent months that move it forward for its corporate goals.
Last week, Boeing (or more accurately, the US Trade Representative) won an appeal before the World Trade Organization that $8.7bn in tax breaks given by Washington State to entice Boeing to produce 777X wings and assemble the airplane at its Everett plant were not “prohibited” subsidies.
Airbus tried to make a silk purse out of a sow’s ear (a US colloquialism) by pointing out a parallel case (also under appeal by the US) hasn’t yet decided on whether the same subsidies are “illegal” under WTO rules.
“Prohibited” and “illegal” aren’t the same thing, in the arcane world of the WTO. Prohibited means the subsidies can’t be provided, period. Illegal means they can, provided the structure conforms to WTO rules—and they are “illegal” if they don’t. Remedies may be applied and if so, the subsidies are then legal (ie, not “prohibited”).
In a matter related to the same $8.7bn in tax breaks, Boeing earlier fended off yet another attempt by labor unions and Democrats in the Washington Legislature to adopt a “claw back” of the tax breaks, reducing them because Boeing has moved jobs out of state and shed jobs in cost-cutting measures.
When the tax breaks were granted in 2013, Boeing refused to provide job guarantees. The reason quickly became clear. Boeing planned to cut jobs in Washington. The unions warned the legislators this would happen, but no nexus was adopted.
It also became clear that the 777X assembly line was going to be more automated than the 777 Classic line, requiring fewer jobs. No wonder Boeing didn’t want to provide guarantees.
The trouble with the Democrats and the unions wanting a nexus between the tax breaks and the total Boeing employment in Washington when they were given is that the nexus was demanded to the entire Boeing enterprise—not just the 777X jobs for which the program tax breaks were granted.
To be sure, it seems that every other state demands, and gets, a nexus. The Washington politicians seem to get flimflammed every time.
In principal, I agree with the Ds and the unions. Boeing shouldn’t get a free ride. But the jobs guarantee should only have been to the 777X program, not the Enterprise.
Boeing must have the ability to shed jobs to cut costs. LNC has written several times that the head count comparison between Boeing Commercial Airplanes and Airbus’s commercial unit give Airbus a significant advantage.
Growing automation is also a fact of life and jobs. It’s simply unrealistic of the Ds and the unions to not recognize automation means fewer jobs. Boeing must be able to cut jobs.
End of story.
In what is perhaps the crowning chutzpah last week, Boeing told the Canadian government, in effect, to go perform an anatomically impossible task on itself—Boeing will not drop the complaint filed with the US government over allegations Bombardier “dumped” the CS100 order with Delta Air Lines at illegally low prices.
The Canadian government threatened to not buy a batch of F-18 fighters from Boeing and perhaps take other actions in retaliation for Boeing’s complaint.
Boeing officials countered that Boeing has brick-and-mortar facilities in Canada, employs thousands and spends billions of dollars in Canada. The threat of its own retaliation wasn’t too hard to discern.
A preliminary decision by the US Department of Commerce is due Sept. 25. A decision in Boeing’s favor is likely.
The amount of penalties could be huge, tens of millions of dollars per airplane. The importer of record (either Delta or a Bombardier US subsidiary) would have to escrow the penalties while the certain appeal is pending.
An appeal can be filed with either a US federal court or with a NAFTA board. Of course, President Trump threatens to pull out of NAFTA.
This complaint isn’t going to go away quickly or quietly.
And then there is the merger announced last Monday between United Technologies and Rockwell Collins. The next day, Boeing said it doesn’t like what it sees so far.
Officials question whether the merger is good for customer (of which Boeing is one, from both companies) and in another not-so-veiled threat suggested it might cancel contracts with the companies if it truly doesn’t like what it sees after a deep-dive.
Why would Boeing care?
There’s consolidation of suppliers, of course. But in this case, it gives UTC and Collins greater heft to resist future endeavors of Partnering for Success cost cutting.
More to the point, it threatens Boeing’s Global Services business plan, which relies on Boeing increasing its share of after-market services. Producing airplanes is an increasingly challenged profit-and-loss effort. CEO Dennis Muilenburg is pretty clear he sees margins coming from services decades in the future.
It’s one thing to divide-and-conquer Rockwell Collins’ service and parts. Or to punish UTC, as it did over 777 landing gear. It’s another to take on both as a single company.
But it looks like Boeing is ready to take on the task.
Muilenburg has good reason to be feeling good these days. He took over a mess from the disappointing reign of Jim McNerney, whose chief accomplishment was a war with the unions. Muilenburg achieved labor peace, of sorts, cut costs, improved margins and sent Boeing stock far higher than McNerney ever dreamed.
Muilenburg even tamed Donald Trump’s hostility toward Boeing, no small feat for the infamously vindictive personality.
Small wonder Boeing is seemingly invincible these days.