Leeham News and Comment

Assessing the settlement

Update, October 30:

Seattle post-Intelligencer: Bill Virgin, an astute business columnist, opines on who won and who lost in the strike settlement.

Update, 5:00 PM: Here is a 17 minute podcast about the settlement with Richard Aboulafia, Scott Hamilton and Addison Schonland.

Update, 1:00 PM: The IAM set the vote to ratify the new contract offer for Saturday, Nov. 1. Voting will be until 6 PM PDT, with results announced later that evening.

Original Post:

Now that the dust has settled a bit and the details of the settlement between the IAM and Boeing are emerging, it’s time to assess the outcome. Inevitably, the question is asked, Who won?

On balance, it looks like the IAM did, but Boeing came away with important victories as well.

From Boeing’s perspective, spokesmen as well as the official Boeing statement hammered home the retention of outsourcing flexibility, the key stumbling block in pre- and post-strike negotiations. The only change in the contract over this issue, Boeing told us, is that the IAM gets consulted and a chance to bid on any work proposed to be shifted from the Puget Sound (Seattle area) to any other Boeing facility. None of the five strategic reasons for outsourcing was eliminated or altered. On balance, we think Boeing prevailed on this issue.

Another point of contention was Boeing’s plan to revise health care benefits for workers and institute an employee contribution plan whereby IAM members would have to pay some share of the premium costs and other costs. The IAM called this a take-away. The parties agreed to keep the present coverage in place, with no employee contribution. It’s hard to call who “won” this one; the employees don’t have to co-pay, but the coverage isn’t quite as good (according to Boeing), and we don’t know whether Boeing is saving any money or not for less coverage but no employee cost-sharing.

A four year contract was crafted in place of the standard three year deal. Both sides “win” on this one; Boeing gets longer labor stability and the union gets an additional 4% raise in the fourth year, for a total of 15% over the life of the contract. Boeing originally offered 11% over three years and the union wanted 13%. Though we dislike the over-used term, “win-win,” this one fits the description.

Boeing slightly sweetened the pension retirement payments, for a “win” for the union.

The question is when does production get back up to pre-strike levels. We addressed this in our post on the tentative settlement, citing Boeing CFO James Bell’s earnings call statement that it could take as long as two months. A Boeing spokesman we spoke with thought Bell said there would be a day-for-day delay (actually that was Boeing CEO Jim McNerney talking about the 787 development and first flight delay). We returned to the transcript of the earnings call and reproduce the relevant conversation below:

JB Groh – D.A. Davidson

But, well let’s say theoretically if it ended after 60 days, can you get up to that rate in two months’ time or –?

James Bell

I don’t know. I really don’t know and I don’t want to speculate but I think that two months is a long period of time, so I would suspect that we could get close to it, if not there, in the two-months period. Hopefully, we can do it in a lot less time.

Boeing, its employees, the customers and the suppliers can breath a sigh of relief…for the moment. With SPEEA negotiations starting tomorrow, we could be in for this all over again. The SPEEA contract expires December 1. If no agreement is reached, look for a strike for; if successful, look for a return to the bargaining table with SPEEA’s hand strengthened, armed then with a walkout planned for January or February.

JP Morgan had this to say: The end of the Boeing strike should provide a short-term boost to the commercial aerospace stocks. We also find the stocks attractive on a long-term basis. However, the plethora of bad news likely to come on the cycle, the aftermarket, margins, and further 787 delays make us more cautious on the intermediate outlook.

Details of IAM-Boeing settlement

October 28:

STATEMENT FROM DBR TOM WROBLEWSKI:

This synopsis reflects the highlights of the issues that you identified: job security, wages, pension and health care. This is just a summary of some highlights, we will be providing additional information.

“Our Union has delivered what few Americans have – economic certainty and quality benefits over the next four years.

We have secured health care benefits with no additional cost shifting. The amount members will pay in deductibles and co-pays by the end of this contract, will have remained constant since 2002.

Preserving a defined benefit pension plan for all members is becoming rare; improving the defined benefit plan is a positive move.

As the financial markets have crumbled, the Union delivered 15% guaranteed pay increases for every member over the life of the agreement. In addition, there are significant lump sum payments in the first three years.

The fight for job security is something we battle every contract, every opportunity and every day. In this round, we won the battle and made some significant gains. In the fight for job security, we won. We will fight again in every contract going forward, as long as companies like Boeing see an advantage in bolstering their bottom line by sacrificing quality for the cheapest labor. At 30,000 feet airline customers want quality.”

JOB SECURITY

Letter of Understanding #2 – Updated Letter of Understanding to protect nearly 2,200 facilities/maintenance employees currently on the payroll for life of the Agreement.

Revisions to Article 21.7 – Expanded the scope of our subcontracting review. Secured the ability to compete for work that moves from one Boeing facility to another Boeing facility.

Improved Letter of Understanding #37 with the following protections.

• Forklift Drivers, MPRF’s, Factory Consumables Handlers, Environmental Control Workers and Shipping/Distribution will not be laid off or removed from their job classification and grade as a result of Materials Delivery and Inventory Process. This revision expanded protection to 2,920 jobs for the life of the Agreement.

• Except for 787 final assembly, vendors are limited to delivering products to designated areas only. From there, bargaining unit employees will track use, disbursement, acquisition, and/or inventory of parts, materials, tools, kits and other goods or products.

• Jointly work with the Company to improve material delivery process and ensure our members grow with the new technology and innovations.

• Parties will explore options for retraining or reassigning bargaining unit employees to equal level jobs when employees are impacted by process and technology changes.

COMPENSATION

General Wage Increases

1^st year – 5%

2^nd year – 3%

3^rd year – 3%

4^th year – 4%

Lump Sum Payments

1^st year – 10% (of previous year’s earnings) or $5,000, whichever is greater

2^nd year – $1,500

3^rd year – $1,500

In addition, the second and third year lump sum can be diverted into VIP to bolster members’ pension savings.

Rate Range Minimums – All rate range minimums increased by $2.28

Progression – Employees in progression on 9/3/08 will receive supplemental wage increase sufficient to bring them to the new rate range minimum or $1 per hour, whichever is greater.

PENSION

Effective 1/1/09 – $81 per year of service

Effective 1/1/12 – $83 per year of service

HEALTH CARE

Boeing retreated from their takeaways and cost shifting in medical and benefits and reverted to the 2005 contract levels. This means the medical cost structure and benefits remain the same through 2012.

RETIREE MEDICAL

Went back to the 2005 language – eliminating language that would have been detrimental to existing retirees currently on retiree medical.

DURATION

Four years, expiring September 8, 2012

Breaking News: Tentative Deal, IAM-Boeing

8:00 PM PDT

Seattle Post-Intelligencer: Aerospace writer James Wallace has one of the first, comprehensive reports following the tentative settlement between the IAM and Boeing.

Bloomberg News has this report.

9:00 PD PDT: So where do things go from here? On the earnings call, Boeing CFO James Bell said it could take as long as two months to ramp up to pre-strike production levels. This would be during the Christmas holidays, and just before the January timeline SPEEA likes for its own strike, should it come to that.

A strike by SPEEA doesn’t have the same hurdle to jump over that the IAM does. A two-thirds vote by IAM members is necessary to strike (reminder: the vote was 87%); for SPEEA, a strike vote only requires a simple majority.

Obviously, Boeing doesn’t need another strike, regardless of how long or short it may be. The pressure will be on Boeing to reach an accord with SPEEA and avoid a strike. Obviously Boeing wants to avoid a strike; after this IAM event, how much pressure will there be on Boeing to avoid one with SPEEA?

6:15 PM PDT:

Boeing and the IAM reached a tentative settlement after five days of talks that went well into the evening October 27 in Washington, DC. We immediately posted the IAM’s statement and by 7:10 PM, we were still waiting for the Boeing statement.

The breakthrough is good news for Boeing, the IAM and the customers. It will take 3-5 days for a vote to be taken, by which time the strike will be ending its eighth week.

No details will be immediately released, so we don’t know where the give was on either side.

Undoubtedly, this new contract will form the basis for the SPEEA negotiations, which were to start tomorrow and which were postponed for one day in order to conclude the IAM talks.

Wall Street analysts were nearly unanimous in thinking the strike could last through November and perhaps even into December.

SPEEA’s contract expires December 1 and this union’s leadership already said it would not strike while the IAM was out. The leadership also said any strike would most likely come in January or February.

With a tentative IAM settlement sooner rather than later, perhaps this bodes well for the SPEEA negotiations.

Whenever a Boeing statement is issued, we’ll add it below.

7:50 PM PDT: Here is Boeing’s short statement:

SEATTLE, Oct. 27, 2008 — Boeing [NYSE: BA] and the International Association of Machinists and Aerospace Workers today reached tentative agreement on a new four-year contract covering 27,000 employees in Washington, Oregon and Kansas. Union leadership is recommending that employees vote to ratify the contract.

The company retained the flexibility necessary to manage its business, while making changes to the contract language to address the union’s issues on job security, pay and benefits. The offer provides general wage increases every year and increases pension benefits. In addition, Boeing is proposing no changes to the cost share employees currently pay for a selection of outstanding health care plans.

“This is an outstanding offer that rewards employees for their contributions to our success while preserving our ability to compete,” said Scott Carson, president and CEO of Boeing Commercial Airplanes. “I thank both negotiating teams and the federal mediator for their hard work and commitment in reaching this agreement. We recognize the hardship a strike creates for everyone — our customers, suppliers, employees, community and our company — and we look forward to having our entire team back.”

By mutual agreement, details of the agreement will be released first by the union. If employees vote to approve the offer, it will end the strike by approximately 27,000 employees in Washington, Oregon and Kansas.

From the IAM (6:15 PM PDT):

Update October 27, 2008 – Machinists in Tentative Deal with Boeing