Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Boeing CEO promises company is turning around…again April 24, 2024
- Solid start for stand-alone GE Aerospace despite cuts to LEAP output April 23, 2024
- SPEEA, Boeing at impasse over safety program, union says April 23, 2024
- Better transparency needed on Boeing’s 1Q earnings call April 22, 2024
- Bjorn’s Corner: New engine development. Part 4. Propulsive efficiency April 19, 2024
Week 8: IAM-Boeing strike
October 27:
SPEEA, the engineers union at Boeing, starts its table negotiations tomorrow. Michele Dunlop of The Everett Herald has a good summary of the issues. At the moment, things look rather bleak and a strike by SPEEA is quite possible. SPEEA’s contract expires December 1, but don’t look for a strike until either after the IAM is back to work or after the first of the year in any case. SPEEA’s statement in advance of negotiations is here.
The LA Times has a story of interest here.
October 26:
As the IAM strike against Boeing begins its eighth week, mediated talks continue in Washington (DC) against a media blackout.
Here are the latest developments:
Bloomberg News cites officials at Goodrich, a major supplier to Boeing on the entire product line, predicting that no 787s will be delivered in 2009. Boeing has yet to acknowledge this, nor has Boeing even said the first flight will be delayed until 2009–something every analyst now believes.
Boeing stock reached a low of $41.75 last week; the 52-week low is $39.99.
The IAM strike cost Boeing 35 cents a share in the third quarter financial results, the company’s CFO said in the earnings call last week; that’s $256.49 million. This is $10.3 million a day for the 25 days the IAM was on strike in September, compared to the $100 million to $110 million a day analysts projects and the $75 million to $83 million a day we estimated. Delay deliveries due to supplier issues for galleys, principally on the 777, cost the company 25 cents a share. Third quarter revenue declined $1.224 billion year-over-year (7%), or $48.96 million a day. The cash and securities position declined by $3 billion for the quarter, attributable to strike, research and development and other cash outlays.
Vought, a major 787 supplier (also on the 747, C-17 and certain Airbus programs), said it is 30 days away from closing down the 787 plant at Charleston (SC) as a strike-related impact. On other hand, Triumph Group, another major supplier, had a boffo quarter.
Boeing 3Q results, earnings call
Boeing announced its third quarter/nine month results today.
The full press release with the results may be found here.
Boeing’s 11-page PDF slide show that goes with the conference call may be found here.
The full earnings call transcript may be found here.
The call begins; key points:
- James McNerney, CEO: I want to be very clear; we worked very hard to avoid it, we want to solve it. We want an agreement that rewards a group of valuable employees and which protects out ability to compete. The linchpin remains management rights to respond to our business and market conditions, especially in today’s economic environment.
- McNerney: 5-10 deliveries for Boeing wide-body aircraft affected by supplier delays for galleys.
- McNeney: so far only two airplanes canceled, 80 deferred.
- McNerney: Despite strike, have achieved key milestones in 787 program, including assembly of fourth 787. We have used the strike period to better organize the work plan in the factory. Delivery schedule will be reassessed after strike is over; there will be a ramp-up period after strike concludes.
- McNerney: Boeing Capital is working with customers in tight credit market, but aircraft financing still available and we have no evidence that airplanes won’t be financed. We stand ready to help our customers if needed. We will do so when appropriate. 80% of our planes are ExIm Bank-eligible.
- James Bell, CFO: Revenues down in third quarter affected by strike and the galley-delayed deliveries. These accounted for 60 cents a share in the revenue loss. Boeing Commercial revenues were reduced by $600 million. (Editor: This equals $24 million a day in reduced revenue.)
- Bell: Costs for development of the 748-8F have increased. Engineering 95% complete.
- Bell: It is very likely BCC will do some financing in 2009. We will be very disciplined. We have backstop financing commitments of $9.5 billion, or 3% of BCA’s backlog for next decade. We’ve recently included additional terms and conditions to reduce BCC’s risk.
- Bell: All commercial and some defense programs affected by strike. It is important to note there will be a ramp-up period. All financial guidance suspended for duration of strike.
- McNerney: We will not sacrifice our ability to compete for short-term agreement with the strike.
Questions begin:
- McNerney: cancellations and deferrals are pretty much in line with what we’ve seen in previous years and others are interested in icking up positions. Discussions are slightly more, but backlog is still in relatively strong parts of the world. We have steadily increased production rates in a measured way in last few years to meet demand without getting beyond our headlights. We’re feeling good about our production rates over next few years but we want to understand impact of strike before adjusting rates in the future. We don’t anticipate any white tails at all next year.
- McNerney: Impact on 787 remains day-for-day. The gating item is the assembly of the early airplanes in the factory, not supply chain. (McNerney would not answer whether first flight would occur in 2008 if strike ended tomorrow.)
- Bell: We’re not overly dependent on any one financing source (for BCC to help customers). We went through and reaffirmed commitments. Pricing may be different, but not out of line. We think ExIm will do 20% of financing over next six months. We have provisioned for BCC to participate for about $1 billion.
- Bell: BCC is heavily concentrated in 717s (Editor: financially ailing Midwest Airlines is a major customer; AirTran is the other major customer). BCC has been working to reduce exposure in this type.
- Bell: Making up strike-delayed deliveries in any short period of time is impossible.
- McNerney: We’re trying to learn from 787; in retrospect we bit off more than we can chew. There is a lot to learn from how we did that, good and bad. Hopefully you’ll see that in new programs. On 747-8 we’re not particularly proud on how that’s sorted out (on processes). Learning how to manage the 787 global supply chain with IT, design responsibility, visibility through IT and design, we did not have the kind of controls in management and IT are areas we have had to fix.
- Bell: Negotiations with 787 customers over delays, we’ve settled with some and have a better than expected settlement to serve the customers and to protect the corporation. By the time we deliver the first airplane, we’ll have a better view of zero margin (financial) on program.
- McNerney: We had [previously] informally slotted American positions, so this order doesn’t affect demand [and therefore won’t affect production rate].
- Bell: A lot of financial liquidity crisis should clear up by 2010.
- Bell: Would not definitively speculate how long the ramp up will take following the strike, but depending on the length of the strike, Bell hoped two months would see the production back to normal.
- McNerney: I think there is a way forward, a compromise, on management rights issue. I think there is a way to work with the union to meet some of their goals. I think both sides are approaching negotiations tomorrow with a constructive headset.
- Bell: The strike impact is 35 cents a share and the galley issue is 25 cents. (Editor: there are 740,250,000 shares outstanding.)
- McNerney: There have been some informal discussions with the IAM which indicated some constructive headset. [And] we look forward to successful discussions with SPEEA.
We’ll make a personal note: Boeing today confirmed what we reported previously: American’s 787 delivery positions were already figured into the production chain. We also note with satisfaction that Air Transport World reported October 21 what we’ve been reporting for months: that there are no new delivery positions available for the 787 until the end of the next decade. Here’s what ATW reported:
Last month ATWOnline revealed that two airlines were quoted 2020 as the earliest delivery date for a new 787 order (ATWOnline, Sept. 8). Boeing confirmed the timeline, stating that it “has said publicly that first availability for new orders of the 787 is around the end of the next decade.”
Note that ATW quotes Boeing as confirming this.
Corporate Website updated 10/21
This week we take a look at the complaints filed against Airbus and Boeing at the WTO. Decisions were expected months ago–where are these? Check this comment out at our Corporate website.
We also talk about the shrinking availability of capital for airlines to finance airplanes next year.
Update, October 24:
The WTO announced it won’t have any decision until next year.
AA: getting early delivery positions
With Boeing’s 787 line sold out to 2017 or 2020 (depending on which aerospace analyst you believe), how did America get early positions? Here’s what we wrote for Commercial Aviation Online (paid subscription only) yesterday. We had to wait 24 hours before we could post this on a free site.
Commercial Aviation Online, October 16:
American Airlines’ previously held purchase rights for the Boeing 787 provide the airline with favourable delivery slots beginning in 2012.
American declined to comment directly on the 787 contract, but reminded CAO of its previously announced 787 purchase rights.
A CAO source says the delivery positions had been reserved for American, and with American’s reminder of its previously stated purchase rights, this is the probable explanation for the early delivery positions.
The positions do not come from another customer, either by deferral or cancellation, nor do they further delay the program deliveries.
Also, American’s early delivery positions shouldn’t come as a surprise to those familiar with the airline’s over-arching contract with Boeing, signed shortly before the 1997 merger between McDonnell Douglas and Boeing.
The contract called for Boeing to be the exclusive aircraft provider to American for 20 years. As a condition to the merger in order to gain approval from the EU, Boeing agreed not to enforce its side of this contract provision, enabling American to order from Airbus should it choose.
However, from American’s perspective, the contract provides most favored nation pricing as well as what is described as the “mechanism” to ensure American gets aircraft in the future when it wants them. This mechanism is how American gets early deliveries even though the 787 is otherwise sold out to the end of the next decade.
IAG/AirInsight has this podcast about the American order.
Since writing this piece, we confirmed that the purchase rights dating to the 1996 contract are indeed the key and that American’s delivery slots had been reserved all along. Delta and Continental have similar exclusive supplier contracts with Boeing and have similar purchase rights.
We also reconfirmed that for any other customer, 787 delivery positions are unavailable.
Airbus unshaken: WSJ
Update, October 15:
Bloomberg reports that Airbus is scaling back plans to increase production of the A320 and A330 lines. Here is the story. This prompts us to highlight an item in The Wall Street Journal piece below: Boeing won’t up production to catch up delivery delays due to the strike (though this is really no surprise).
Original Post:
With Boeing dominating the news in recent months due to delays with the 787, the 747-8, the controversy over the KC-X program and the labor difficulties, a little news about Airbus is refreshing.
As previously reported, Airbus has its own delay issues with the A400M military program. A380 delays continue to make news from time-to-time. The Wall Street Journal just published a long piece about Airbus, saying the European company is “unshaken” by economic turbulence. Unlike most WSJ articles, this one is free. It’s worth a read.
Meantime, from what we are hearing in the market, Airbus continues to make efforts to benefit at the 787’s expense by selling the A330 to disappointed 787 customers. Sales of the A330 have been more than healthy and with the anouncement that the company is designing an A330 Heavy with longer range, Airbus is making a concerted push to further expand the A330 market.
With the 787 troubles, Boeing doesn’t have delivery slots (beyond the occasional hold-back) until 2017 or 2020, depending on who you believe. Airbus has A330 delivery slots as early as 2012. The A350 is scheduled to go into service in 2013 (which, given the A380 performance and the 787 issues, draws a lot of skepticism even at this early date) but Airbus believes the A330 could be produced alongside the A350 for another decade–as a passenger airplane. While an A350 Light is being discussed that would clearly be a replacement for the A330, this plane probably would not be available until 2015 or later, if at all.
Boeing contemplates a second line for the 787, something that is required if there is any hope to catch up on program delays in a reasonable amount of time. But the question not only is when can Boeing do this but also where will a second line be established. Common sense says do it at the Everett, WA, plant where the 787 line is now. But the IAM strike and the likelihood of one by SPEEA suggests Boeing management has had enough and we think it entirely possible a second 787 line could be opened in a right-to-work state.
(For non-Americans, a right-to-work state means no unions required.)
If this happens, might an interim period be undertaken for Line 2 to cover production while Line 1 is shut down and moved alongside Line 2 in the right-to-work state? Call us conspiratorial, but we certainly see a scenario where this could happen. We believe the odds are much better than 50-50 that the replacement airplanes for the 737 and 777 won’t be built in Washington State. Why, then, keep the 787 here? The 747 and the 767 will die here, but these are both at the end of their life cycles anyway (final outcome of the KC-X program being the only variable).
Airbus, meanwhile, chugs along with the A380 (and A400M) the only hiccups (or up-chucks, as the case may be). The company is working on improvements to the A320 that will reduce fuel burn by several percentage points; Boeing is only doing minor improvements that customers hope will gain as much as 3% fuel improvements but say could be as little as 1%.
Pratt & Whitney began testing its Geared Turbo Fan on the A340-600 test bed owned by Airbus. Although Airbus cautions against reading anything into the use of the A340 as the platform, observers speculate that this could lay the groundwork for Airbus to put the GTF on the A320 as an interim step toward a full replacement airplane, not expected before 2018 or 2020. An A320 GTF theoretically could be certified by 2012 or 2013.
Boeing responds by saying the GTF could be fitted on the 737, but the problems are greater than on the taller A320. CFM International is working toward certification of its new LEAP-X powerplant, an entirely new engine, which is promised to reduce fuel burn around 12%-15%, similar to the GTF. But certification isn’t promised until 2016.
Airbus’ A330 Heavy, it says, will have more range than early models of the 787 (something Boeing disputes) because its analysis concludes that the 787 will be heavy and fuel burn promises of the GEnx and Trent 1000 engines won’t live up to promises. Meantime, Boeing works on a Product Improvement Package for the 777 which Emirates says provides a 10% operating cost improvement.
Airbus will likely finish this year with a substantial sales lead over Boeing.
Change in Boeing production?
The economic times may cause Boeing to alter production, a top executive said. Bloomberg News reports that Randy Tinseth, VP-marketing, hinted at this. The aerospace analyst at Goldman Sachs last week issued a report predicting fewer deliveries in coming years as airlines face financing difficulties. Bloomberg now reports pretty much the same thing.
Flight Global’s Laura Mueller reports that two lessors have urged production cuts.
This is the sort of “flexibility” Boeing seeks in its contract with the IAM and, upcoming, SPEEA: to alter production and jobs in bad times. Boeing says that the job guarantees sought by the IAM inhibits this flexibility. Airbus has long had handcuffs on its ability to reduce its workforce in bad times, due to European labor laws (as opposed to union contracts) that mean a huge severence pay that makes laying off people academic.
What’s interesting in Tinseth’s reported comments is the contrast with Boeing executive statements all year. Boeing’s top execs repeated told everyone who would listen (including, it seems, its own unions) that Boeing was insulated from any downturn because the backlog was so well spread out among customers around the globe in different economies and with varied business models. Some observers didn’t drink the cool aid, but certainly the labor unions took note and these chickens came home to roost in the current labor demands for reduced outsourcing and job guarantees.
So while Boeing execs were reassuring Wall Street, they in some respects set the stage for the current labor impasse.
Week 6: IAM-Boeing strike
October 17:
MarketWatch: Boeing is expected to finally reveal the damage caused by the IAM strike during its earnings call October 22. This is a matter of much speculation: some analysts figured Boeing was losing between $100m-$110m a day, or $3bn+ a month–which is higher than the monthly revenue reported in the second quarter. We tried to back out the non-affected units of Boeing Commercial Aircraft and estimated the revenue loss at $75m-$83m a day. Dominic Gates at The Seattle Times, in a well researched article, estimated that Boeing is losing $1.3bn a month in cash, or $43.3m a day. Perhaps we’ll find out on the 22nd.
October 16:
Seattle Post-Intelligencer: Columnist Bill Virgin asks the question: Can Boeing reverse outsourcing even if it wanted to?
Kansas.com: Spirit AeroSystems, a major supplier to Boeing for the 737, 747 and 787 programs, may have to begin layoffs as the strike as Boeing continues. Spirit originally went to a three day work week when Boeing’s IAM walked off the job.
October 15:
Seattle Post Intelligencer: James Wallace gives this report about what went wrong in the IAM-Boeing negotiations.
Seattle Times: Dominic Gates has this report about the failed negotiations.
Everett Herald: Here’s its report on the collapse.
The Street.com: Ted Reed takes a look at the analogy used by Boeing to the auto industry in arguing its hard-line position.
October 14:
It’s election season and a candidate for the Democratic State House of Representatives in the district where we live is supporting the IAM strike against Boeing. He’s asking for wood for the burn barrels used by striking members to stay warm. OK, this makes sense, now that it’s getting cold in the Seattle area. But he goes on to ask for volunteers to help man the picket lines.
Say what? The IAM has 27,000 members, most in the Seattle area (other striking locations are in Wichita, KS, and someplace in California). With 27,000 members on strike, the IAM needs outside volunteers to man the picket lines? We previously heard a story from Boeing management that at Boeing’s Renton plant that Boeing’s security guard talked with some picketers and found they had been hired to walk the picket line. We don’t know if this story is true or apocryphal but the story from the Democratic candidate is true; we got the email to prove it.
What gives? Where is the solidarity? Why aren’t the union members manning their own lines in sufficient numbers?
Tacoma News Tribune: Aviation writer John Gillie has a Q&A with SPEEA’s president from March, but it’s worth revisting as negotiations with SPEEA begin around the clock in two weeks.
October 13:
Talks broke off after only three days, reports The Seattle Times, over the issue of outsourcing. Here is the story from The Seattle P-I.
787 First Flight: 1Q09 (or 4Q08)
Update, October 9:
In a third story posted by Mary late last night, Boeing sticks to its plan for a first flight in the fourth quarter this year. Originally the first flight was supposed to be late October. At the Farnborough Air Show, program chief Pat Shanahan said November; and more recently, December became the target date. Boeing CFO James Bell told an investors conference in mid September the 787 delay is a one day-for-one day on the strike. It won’t take too much longer for the first flight to slip. Aerospace analysts already predict it.
Original Post:
Our colleague, Mary Kirby, at Air Transport Intelligence (we both write for the same Flight Global family of publications) reports that Boeing is planning on the first flight of the 787 in the first quarter of next year. Her ATI report, on the paid-subscription site, includes this passage:
Boeing now eyeing 1Q for 787 flight testing
Mary Kirby, Philadelphia (09Oct08, 00:52 GMT, 187 words)
Over a month after Boeing machinists began strike action, bringing jetliner production to a standstill, the airframer is now eyeing a further delay to the 787’s maiden flight.
Responding to comments by a Northwest Airlines executive concerning the carrier’s requirement that its 787s be delivered with the range and specifications promised, a Boeing spokesman in a telephone interview today said the airframer will have “more specific airplane performance data following flight testing. That’s scheduled to happen first quarter 2009.”
This expands on her earlier report with a free posting on Flight Global that Northwest
Airlines is unhappy with the status of its airplanes at the moment. This full story may be found here. The relevant passage in this story is:
Boeing will have more specific airplane performance data following flight testing, which is scheduled to occur during first quarter 2009.
This is the first confirmation by Boeing that the first flight is now the 1Q09; only yesterday, The Seattle Post-Intelligencer speculated the first flight slipped, reporting:
The first flight of the Dreamliner was to have taken place by the end of this year after a series of production and supply-chain issues. But the strike has probably pushed that out to at least early 2009, although Boeing has not confirmed this.
The P-I’s full story may be found here.
Several aerospace analysts had already forecast the first flight was slipping, even before the IAM struck Boeing on September 6.
Update, 7:20 PM: Mary’s full story from the ATI site has now been posted on the free site and it is here.
Week 5, Boeing-IAM strike
Update, October 8:
Breaking News, 6:30 PM PDT, Seattle Times: Dominic Gates reports that Boeing and the IAM secretly met and are resuming talks. The story can be found here.
The Seattle Post-Intelligencer has a catch-up piece here. The P-I’s James Wallace has this story about the impact on suppliers from the strike, posted this evening.
Bloomberg News: The IAM responds to Boeing’s management pressure tactics. You don’t scare us.
Update, October 7:
Update, 1:30 PM: Boeing further ratcheted up the pressure with an appearance before the Governor’s Aerospace conference today with a direct warning that strikes can drive assembly out of Washington State. The Seattle Times has this report.
We have some in-depth comment about the McNerney memo listed below on our bi-weekly update on our Corporate Website.
Seattle Post-Intelligencer: James Wallace has a lengthy story here. In it, Teal Group analyst Richard Aboulafia speculates that in 10 years there may be no airplanes built in the Seattle area. We think that’s a little too soon, but fundamentally agree that Boeing is moving in this direction, fed up with the labor strikes and threats of strikes.
McNerney’s memo isn’t just about the IAM strike, of course; it’s a not-too-subtle shot across the bow of SPEEA. Boeing’s contract information exchanged with SPEEA is very similar to that rejected by the IAM. Boeing’s can’t give in to the IAM without giving in to SPEEA, which shares many of the same issues with the IAM.
Is this year about union-busting? SPEEA thinks so. We met with SPEEA two weeks ago (we were to meet with Boeing yesterday, but this was rescheduled at Boeing’s request) and SPEEA thinks Boeing is engaged in busting SPEEA.
Clearly Boeing would rather not have to deal with unions, but the only way to achieve this will be to move to a right-to-work state. As long as Boeing is in Washington State, unions remain a fact of life. At an IAM rally held while negotiations were still underway, a labor official boasted that Washington is the fourth-most organized state in the union (or something like that). This might have been cool stuff to express at the rally, but it’s not something that would be looked upon favorably by management.
But moving to a right-to-work state won’t guarantee a non-union force. The IAM successfully organized the employees in Charleston, SC, where major portions of the 787 are built. Employees for Southwest Airlines and American Airlines are highly unionized in Texas (Continental Airlines employees are less well organized), though one might argue that as national airlines votes could overwhelm local sentiment. We don’t think this is a valid argument. (We lived in Dallas for nearly 12 years and have a pretty good feel for local union sentiment.) Boeing has an operation in San Antonio and speculation has been rife a second 787 line might emerge there. Could be and it wouldn’t be long before unionization efforts would happen–especially if Boeing succeeds in putting down the IAM here in Seattle. Payback is, as they say, a bitch, and the IAM would seek payback bigtime.
We remain concerned that outsourcing off-shore is a major threat to the viability of the US aerospace industry, as we commented last week and today on our Corporate Website. McNerney uses the threat of the rise of new competitors in his memo below, but the irony is that Boeing’s own outsourcing (along with Airbus, Bombardier and Embraer) are creating these competitors.
Update, 0935 PDT October 6:
Boeing CEO Jim McNerney issued an internal memo this morning about the IAM strike. The bottom line: Boeing doesn’t look to be budging on its positions. Here is the memo in full:
Boeing stalled by strike as competitors strengthen their positions Any settlement must balance rewarding valued employees with protecting our ability to compete and win
Jim McNerney
Chairman, President and Chief Executive Officer
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Many of you responded to my column last week on the crisis in the financial markets with questions and comments about the ongoing strike in the Pacific Northwest and Kansas, which has now entered its fifth week.
I understand and share the frustration so many of you feel when we don’t have the whole team together working to meet the commitments we’ve made to our customers and competing to win the new business that will sustain and grow Boeing jobs for years to come. Read more
USAF loses yet another tanker award
Update, October 6:
Mobile Press-Register: The Mobile paper has a long interview with Northrop Grumman’s CEO on the KC-X tanker debacle.
Original Post:
The USAF has been overturned on yet another contract award concerning aerial tankers. A federal court overturned a maintenance contract for KC-135s awarded to Boeing after Alabama Aircraft (formerlly Pemco) protested to the GAO, lost, and sued. Alabama Aircraft’s press release may be found here.
The contract is worth $1.1 billion.
The inability of the Air Force to conduct proper contract evaluations and awards is mind-boggling. Not only are there the high-profile issues with the KC-X program, dating to the 2001-2004 illegal conduct in that award, and the clear disregard for its own rules on eight critical points in the more recent award, the USAF couldn’t even properly award a public relations contract for the Thunderbirds air show team.