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.
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
Chairman, President and Chief Executive Officer
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
Update, October 6:
Mobile Press-Register: The Mobile paper has a long interview with Northrop Grumman’s CEO on the KC-X tanker debacle.
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.
This week we discuss the dangers of technology transfers to China, Russia and Japan by Airbus, Boeing, Bombardier and Embraer in our bi-weekly update of our corporate website. By outsourcing work to these countries, aviation’s Big Four are creating new competitors.
Update, 11:45 AM PDT:
Reuters has this interview with Northrop Grumman’s CEO about the decision by DOD Secretary Robert Gates to cancel the contract. The NGC CEO calls the move “chilling.”
The collapse of the $700 billion bailout of the US financial system is bad news for aviation.
The capital markets were already driving up pricing on debt and driving out many lending institutions from the aviation market. Airbus and Boeing downplayed the declining credit markets (our conversations with them being about two weeks ago, before things really began to go south). Each believed that money to finance airplanes was available, albeit more expensive, and that neither would have to step up to provide backstop financing until the second half of next year. Part of this is the large segments of their respective order backlogs that are eligible for export credit financing backed by the European and US governments. In Boeing’s case, the company has said on several occasions that about 83% of its backlog may be financed by the US Export-Import Bank. We don’t have a figure for Airbus, but we believe that most of its backlog is similarly eligible for the European Credit Agency (ECA) financing.
Based on the information we had at the time, we generally agreed. But not now. ExIm or ECA or not, there still have to be viable banks and general market liquidity available for the credit agencies to provide guarantees for the funding.
The situation has changed so dramatically in just the last seven days that we are now concerned there will quickly be a financing crisis for the airlines. In this respect, the airlines may just decide that the longer a Boeing strike the better.
Our colleagues at Commercial Aviation Online, the finance-oriented publication of the Flight Global family, paints a dire picture emerging in aviation finance in our conversations with them. (We write for CAO as well.) But they are still constructing their stories, and we’re obligated to me ambiguous at this stage. Furthermore, it’s a paid-subscription service, so while we’ll be able to synopsize stories when the time comes, we won’t’ be able to fully reproduce them here. But the bottom line is that things are going south faster than anyone believed in aviation finance.
Update, September 30: Bloomberg News has this short item about customers for Embraer having difficulting financing the planes that were ordered. Brazil, like the US, Europe and Canada (for Bombardier), offers export financing support, too.
Update, 11:45 AM PDT: Commercial Aviation Online posted its story. (Paid subscription required.) Here are some excerpts:
With no US bailout package on the table, the aviation finance market remains frozen unable to make sound decisions in an uncertain climate.
“Right now, there is no interbank lending and banks are hoarding cash. Most bankers are putting off any decisions because there are no good decisions right now,” says a London-based banker.
He adds: “It is hard to say anything concrete right now except that if the current crisis continues, we are in big trouble. However, even with a US bailout don’t expect a panacea. What we are seeing now is what happened to the Japanese banks. It will take five to ten years to get out of this mess.”
Due to uncertain market conditions, a number of aviation deals that are currently in the works are likely to be renegotiated.
“No one wants a RFP right now. Everything is being delayed and many deals will have to be revisited,” says another banker.
Update, October 2:
Here’s a new twist. An Australian newspaper reports that Virgin Blue may seek damages from Boeing and the IAM over the strike-induced delays of the 777s the airline wants. We think Boeing’s customer contracts preclude strike-caused delays. The IAM liability, if any, is another matter.
Seattle Times: Dominic Gates has this detailed analysis of the strike and its cost to both sides.
One piece of math in the article that Dom didn’t do is to present the daily cash drain for Boeing. Based on his information that the monthly cash cost is about $1.3 billion, this means the daily cash cost is about $43 million. This compares with the widely reported figure of $100 million to $110 million a day, which was actually deferred or “lost” revenue, but which is also quite a bit higher than it should be because these figures don’t take into account the unaffected businesses within Boeing Commercial Airplanes that continue to produce revenue: Alteon (pilot training), Aviall (maintenance) and Jeppessen (maps and related stuff). We estimated that strike-related BCA revenue loss was more like $75 million to $83 million a day.
An IAM official predicted at the start of the strike that the IAM could bleed Boeing of its $10 billion in cash in a matter of a few months. Not hardly. Certainly $1.3 billion a month in cash loss is not chicken feed, but it’s also only one-third of the widely quoted figures.
Everett Herald: The IAM’s health benefits end Oct. 1. Some inside Boeing told us they believe that this event will help trigger a settlement.
(Special projects precluded us from updating last week, so some of the links below backtrack into then.)
Politics continue to plague the tanker program even though the Bush Administration has punted the decision to the next presidency. Today we play catch-up with selected stories of interest.
Update, September 26:
Inside Defense reports that US Rep. John Murtha (D-PA), chairman of the House Appropriations subcommittee, says a split buy between Northrop and Boeing is the only way to recapitalize the USAF tanker program any time soon.
Murtha generally has been supportive of Boeing’s KC-767 tanker proposal.
He’s added language to the 2009 defense appropriations bill directing the DOD to study the feasibility of a split buy, Inside Defense reports. Murtha, according to the publication, acknowledged that Boeing and DOD don’t like the idea and he didn’t know if Northrop does, “But let me tell you something, we’re not going to have tankers if we don’t do that, I’m convinced,” Inside Defense quotes Murtha as saying.
Murtha predicted that in a re-compete, Northrop is likely to receive the order because its plane is ready to go.
Inside Defense is a paid-subscription service only but readers may register for free and receive three free articles (and then pay a la carte thereafter). This article may be found here, with the registration process the first thing you will see.
Update, September 25:
Be careful what you ask for. US Rep. Norm Dicks (D-Boeing/Washington) announced that he’s inserted language in a new House bill to require the USAF or DOD to review any adverse ruling from the World Trade Organization on the “illegal” subsidies complaints filed by the US Trade Representative and the European Union against Airbus and Boeing. He has said for years that Airbus received “illegal” subsidies and presumes the WTO will back up the USTR complaint. Most objective observers, including us, agree with his biased viewpoint on this one.
But most objective observers, including us, also think the WTO will find Boeing received “illegal” subsidies as well–something Dicks and other Boeing supporters in Congress seem blind to.
The full House has to approve Dicks’ language (likely) and then the Senate has to agree (unlikely).
A decision by the WTO is overdue.
Update, September 24:
Mobile Press-Register: Gates against tanker split buy.
Aviation Week: DOD’s Gates eyed changes to RFP before canceling contract.
JD Crowe at The Mobile Press Register is at it again.
Update, September 23:
Washington Times: [Tanker] Rigged in Boeing’s favor. US Sen. Richard Shelby (R-Northrop/Alabama) writes in an Op-Ed piece that DOD’s decision punting the tanker to the next presidency was nothing more than a sop to Boeing.
JD Crowe at Mobile Press-Register
Business Week: Boeing’s CEO beat the Pentagon, but lost some, too. Boeing CEO Jim McNerney gambled in taking on the Pentagon over the tanker, and won.
Defense Industry Daily: A400M delays creating contract controversies. Airbus’ sole military program isn’t going too well. (We count the KC-330 as a broader EADS program; the A400M is Airbus.)
Washington Post: Defense buyer says Northrop’s bid was $3bn cheaper than Boeing. DOD’s John Young said the smaller KC-767 should have been cheaper to buy than Northrop’s KC-30–but it wasn’t. We say perhaps the US taxpayer was going to benefit after all from all those “illegal” subsidies alleged to be provided to Airbus.
Inside Defense: Flyoff will determine tanker win. The Air Force’s top buyer predicts a flyoff between Boeing and Northrop for the tanker contract. Inside Defense is a paid subscription service but with registration you can get three freebies, including this article.
Los Angeles Times. Northrop entitled to termination fee. The Pentagon says Northrop is due tens of millions of dollars for the canceled tanker contract.
Boeing and the IAM entered the third week of the strike last Saturday and there is no sign of any progress. As of last week, the two sides weren’t even talking about talking.
Update, September 24:
Seattle Post-Intelligencer: Columnist Bill Virgin has an interesting piece speculating what happens to Boeing in the Puget Sound (Seattle) region when the strike is over.
Bloomberg: Boeing CEO cites economic downturn, sees risk to backlog and need for Boeing to finance customers. There is also some reporting on the IAM “standstill.”
We spoke with the IAM and Boeing and each side is waiting for the other to pick up the phone and ask to talk. The mediator is staying in touch with each side, but there’s little for him to do as present.
Boeing insists that the IAM narrow down its “wants” to two or three items from the three pages presented at the last-ditch Florida talks immediately preceding the walk-out. For the IAM, it’s not that simple and without resolving the list of issues, these elements would become part of a contract.
We remain pessemistic about any early settlement.
As any aviation advocate knows, the future of International Lease Finance Corp. is uncertain due to the problems at its parent, AIG. The US government has bailed out AIG for $85 billion (which would fund the acquisition of 360 USAF tankers, BTW, but that’s a different issue) and plans to have an orderly sale of AIG assets.
ILFC’s CEO and founder, Steven Udvar-Hazy, is trying to arrange financing to buy the company back from AIG, which bought it from Hazy and his co-founders in 1990.
Today, Boeing stock is down on fears ILFC’s troubles will lead ILFC to cancel orders for 74 787s and some 30 737s. (Disclosure: we have a long-term holding in Boeing stock.)
We don’t think that will happen and we believe the stock market is off base on this one.
The orders, especially for the 787, are a great asset for ILFC and will be an important part of any sale of the company. Furthermore, even if ILFC were to cancel, other lessors and airlines will snap up these positions, resulting in no net loss in orders for Boeing.
In today’s column we discuss the tanker, how much the IAM strike is costing Boeing every day and how long the strike may last.
Out of all the twists and turns in the seven year old effort to replace aging Boeing KC-135 aerial tankers, no one we spoke with predicted that the Department of Defense last week would dump the entire competition in the trash can. What happens next and what are the ramifications for Northrop, EADS, Boeing and the Air Force?
A full re-start by the Air Force/DOD on the competition will probably take anywhere from two-four years before a new contract is awarded. There would have to be a full reassessment by the Joint Requirement Oversight Council (JROC) and the Request for Information (RFI) process; the Defense Acquisition Board reviews and approval of the Request for Proposal; determination of the Source Selection Authority; and the actual evaluation process. Plus any additional appeals of the decision.
Could the new Administration, whether it is McCain or Obama, simply pick up more or less where the Bush Administration left off? We suppose that in theory it could but in practice it’s unlikely. Boeing has been very clear that it views any changed to the specifications for a larger airplane as requiring a compete re-start, and having won its political point and getting DOD Secretary Robert Gates to cancel the Northrop Grumman award, Boeing and its supporters are hardly likely to support anything absent a full do-over.
In the meantime, in what is a reversal of rhetoric by Boeing and DOD, both now take the position that the aging KC-135 tankers are good enough to last while the competition is re-run. Throughout the competition both originally took the position that there was great urgency to proceed with the tanker replacement program because the KC-135s were essentially ready to fall out of the sky. (A separate government-funded study took a different view, arguing there was plenty of life left in the airplanes.) After Boeing protested the Northrop award, Boeing’s spin shifted to “what’s the hurry? There’s plenty of life left in the KC-135s.” Boeing ought to know; it also has the maintenance contract on the KC-135 fleet.
Be that as it may, who are the winners and losers in the decision by Secretary Gates to punt this to the next Administration? Here’s our take:
As the Boeing strike enters Week 2, we continue our “media watch” for continuing coverage.
Seattle Post-Intelligencer: BCA President Scott Carson hopes talks will resume in a “couple of weeks” and a settlement will come shortly thereafter. The P-I’s James Wallace also has a Q&A with Carson.
Reuters: Boeing’s CEO gambles on strike.
Forbes: Analyst predicts additional 3-6 mo 787 delay before the strike. The headline of the story is about the strike lowering demand for titanium. Yeah, fine. What caught our eye is the additional delay in the program. Boeing CFO James Bell told a Morgan Stanley conference the program delay should be one day-for-one day. Which means either others are looking for a long strike (we only hear 4-6 weeks and Bell would be happy with only a month) or there are deeper issues in the 787 program.
Business Week: This magazine predicts a two month strike.
Seattle Post-Intelligencer: Obama rips McCain on outsourcing.
Seattle Post-Intelligencer: Boeing’s Carson confident of settlement.
Marketwatch: IAM strike may be hurting themselves. This is a good analysis with a good illutration of where parts of the 787 are built.
Aviation Week: This is a good summary of the stand-off between IAM and Boeing.