Boeing speaks to Morgan Stanley

The Boeing Chief Financial Officer spoke to the Morgan Stanley conference September 10. James Bell is the presenter. Highlights as the presentation proceeds:

(Unless there are quotation marks indicating a direct quote, Bell’s comments are paraphrased as we took notes in real time during the presentation.)

  • Bell reiterates Boeing’s best offer to the IAM.
  • He is concerned about the cancellation of the tanker competition but Boeing needs time to prepare proper bid.
  • Outsourcing is major concern with the IAM strike. “We are in sort of a cooling off period,” he said. “We’ve always had language in the contract that gives them the opportunity to bid for work. We need to make sure we have process in place” to outsource work, support our marketing efforts. A lot of the backlog we have for orders is supported by the ability to share the work in other countries.
  • Backlog remains solid because traffic remains essentially strong. “We are really feeling comfortable” due to diversity in backlog around the world. “We have looked at it, we’ve seen it,” and have not had more than normal kind of deferrals and cancellations. “That doesn’t mean we’re not concerned about it, or looking at it,” but right now 80% of our backlog is ExIm financable.” Only 3% of our backlog has been financed by Boeing.
  • Question: What are the sticking points, are you at an impasse. Bell: We are not at a complete impasse. They want all the work done there, which isn’t practical, and we want flexibility and we’ll come in between. But that’s not the only issue we’re apart on. We are going to retain our ability to be competitive.
  • How long for the strike before delivery of 787 slips to 2010? Bell: doesn’t give a timeline. (Later says one-for-one for every day there is a strike.)
  • Delay on the 787: Bell says we are not overly concerned about growth in costs vs escalation costs in contracts, but will have to negotiate with customers on payments that might cover the costs. Productivity efficiencies will be important to keep costs down. Initial deliveries (undefined) will be at zero profit (doesn’t quantify what a loss per plane might be).
  • We have a pretty good model for 1,000 planes about what the pricing ought to be and we have a pretty good idea what the costs will be for costs and we’re getting a pretty good idea what the penalties will be, and [all-in] I’m not going to tell you what that will be. There is significant profit to accommodate all the costs.
  • My basic understanding on tanker is that the DOD has canceled the contract and there will be a new RFP issued. We may offer the same airplane or something new depending on what the requirements are.
  • Right now there is a one-for-one (day-for-day) slip on the 787 and all other programs due to the strike.
  • Boeing’s IDS defense division is avoiding bidding on fixed price contracts going forward.
  • We have been preparing for the possibility that we will have to help our (US) domestic customers (for financing) but the reality is we haven’t had to. There is enough liquidity in the market. Customers are able to get better deals out of the market than Boeing’s backstop financing.
  • The A350-1000 challenge to the 777: We will respond when we know what it is. A350 looks good on paper and we have the resources to invest the R&D necessary to respond [with a refresh or a new airplane]. We’re not going to jump out in front of it until it gets finalized.
  • 737 replacement: We’re looking at the end of the next decade, and the key is to have technology to get improvements. Composites don’t scale down as well as they scale up. It could be a small twin-aisle. Engine technology needed. I don’t think the CSeries will change dynamics that materially, engine technology could, but issue is reliability. We’re all excited by the Geared Turbo Fan but question is whether it will have reliability to give advances required for a new airplane.
  • DOD has actually canceled this procurement and this means an entirely new RFP. This is an important distinction from merely postponing the competition from the Bush Administration to the next Administration.
  • Bell predicts the strike will last at least a month.

Tanker canceled (update 9/12)

Update, Sept. 12:

Reuters: EADS threatens no-bid in Round 4. Here we go again. First Northrop threatened a no-bid. Then Boeing. Now EADS. Or not. Now Reuters reports that EADS denies the first story.

Chicago Tribune: Obama slams McCain for ties to EADS, tanker controversy. It was bound to happen: the tanker is now fully caught up in presidential politics.

Mobile Press-Register: McCain ‘just doesn’t get it,’ claims Obama.

DOD Buzz: Direct sale of KC-30 to USAF pondered. Military.com’s blog reports some Northrop supports are trying to figure a way to offer to sell 20 KC-30s to the Air Force on a “commercial deal” that would by-pass the ordinary procurement process. Separately, we learned from two sources that US cargo airline Atlas Air considered a plan to buy the winning tanker and provide fueling services to the USAF.

Update, Sept. 11:

DOD Buzz: IAG does a 16 minute podcast with DOD Buzz, relating a conversation with US Rep. Norm Dicks (D-Boeing) about a possible split buy on the tanker (right at the top of the podcast); and the possibility that Northrop might offer a commercial deal to sell 20 KC-30s to the USAF (about 11:45 minutes).

Steve Trimble at Flight International has one of his as-usual insightful blog items.

Politico: Tanker delay may help McCain.

The Motley Fool takes a whimsical look at the tanker debacle.

Update, 7:00 PM Sept. 10:

Business Week reports that EADS is pondering a legal challenge to the DOD decision to cancel the competition.

CNN/Dow Jones: EADS howls over contract cancellation.

AFP (Europe): Politics charged in cancellation.

Seattle Times: Timeline in tanker saga.

September 9:

The Wall Street Journal reports the Department of Defense has canceled the competition for the KC-X tanker. The report:

The Pentagon cancels tanker competition, saying it’s impossible to pick a winner by January. The Department of Defense is expected to notify Congress and the companies today. Full article to follow.

Bloomberg now also reports cancellation. Here is an update with more information.

Wall Street Journal: Here is the full article, but paid subscription may be required.

This is another stunning twist in the tanker saga. More news to come.

DOD Buzz has this piece.

Our take: We agreed with Boeing that six months was reasonable to do the re-bid, but we don’t know why the analysis could not have transcended administrations. Although the top leadership at the Pentagon might change (even though there has been plenty of speculation that DOD Secretary could stay on, no matter whether McCain or Obama is elected), presumably the evaluators would not change–only the deciders. This development is not good news.

Update, 9:15 AM PDT: Boeing CFO James Bell told a Morgan Stanley conference that the DOD has canceled the procurement and an entirely new Request for Proposal process will begin. This is an important distinction from postponing the competition. See the last bullet point of our post of Bell’s presentation.

Update, 10:45 AM PDT: Here is the statement by Defense Secretary Robert Gates:

DoD Announces Termination of KC-X Tanker Solicitation


Today, the Department of Defense notified the Congress and the two competing contractors, Boeing and Northrop Grumman, that it is terminating the current competition for a U.S. Air Force airborne tanker replacement.
Secretary Gates, in consultation with senior Defense and Air Force officials, has determined that the solicitation and award cannot be accomplished by January. Rather than hand the next Administration an incomplete and possibly contested process, Secretary Gates decided that the best course of action is to provide the next Administration with full flexibility regarding the requirements, evaluation criteria and the appropriate allocation of defense budget to this mission.
Secretary Gates stated, “Over the past seven years the process has become enormously complex and emotional – in no small part because of mistakes and missteps along the way by the Department of Defense.   It is my judgment that in the time remaining to us, we can no longer complete a competition that would be viewed as fair and objective in this highly charged environment. The resulting “cooling off” period will allow the next Administration to review objectively the military requirements and craft a new acquisition strategy for the KC-X.”

Maybe this could be the new tanker:

Airbus: jobs and cost cutting

Airbus has hit the news this week with a series of stories about jobs and cost-cutting.

September 9:

International Herald Tribune: No job cuts, just more US$ purchases.

Reuters: From Tunisia, with love.

Business Week: Airbus seeks new cost cuts.

Forbes: Airbus aided by strong dollar.

Flight International: Airbus to offer A330HGW to take advantage of 787 delays.

Week 1, Boeing-IAM strike

For the duration of the IAM strike against Boeing, we’ll divide updates into weeks (Week 1, Week 2, etc.). Any special, breaking news will be its own posting. The Weekly updates probably will consist of linking significant news stories but may also include any tidbits we pick up.

Update, September 10:

Washington Post: Outsourcing key to strike.

Seattle Times: Outsourcing key issue; economic issues not insurmountable.

Update, Tuesday, Sept. 9:

New York Times: Boeing strike dynamics changed.

Seattle Post-Intelligencer: 1986 strike averted with bluff.

Defense Industry Daily: DID has this lengthy story about the potential impact of the IAM strike on a variety of programs.

Associated Press: IAM strike fund good for six months.

Associated Press: Suppliers look for silver lining in strike.

Outsourcing is a key strike issue for the IAM. Marketwatch has this story reporting that an analyst thinks outsourcing will help Boeing recover from the strike within six to nine months if the strike is 60 days or less.

Fitch says Boeing’s ratings and cash flow can be affected by a long strike but Boeing will recover once the strike is over.

Update, Monday, Sept. 8:

Seattle Post-Intelligencer: Interview with the head of the IAM.

Business Week: Why isn’t Airbus on strike?

Update, Sunday, Sept. 7:

Wall Street Journal, Outsourcing crux of Boeing strike.

Wall Street Journal, Strike may cost $100m a day.

Seattle Post-Intelligencer, No sign of talks.

Reuters, Global Supply Chain for Boeing.

Tanker countdown-maybe

First it was mid-August, then late August and now it’s supposed to be this week. Pardon our skepticism if the US Department of Defense slips yet again on issuing the Final RFP for KC-X program.

We’ll update this column this week as necessary as we all wait for the tanker RFP.

Update, Tuesday, Sept. 9:

Update, 1:00 PM PDT: Defense News: Tanker statement may come Wednesday.

From earlier today:

Reuters: DOD brass to meet, make statement.

Flight International: Citing engine test problems, the A400M program looks for yet another delay.

Update, Sunday, Sept. 7:

Defense News: Italian KC-767 delivery slips to 2009, four years late.

Breaking News: IAM-Boeing strike is on!

From the IAM website, 3:45pm PDT Sept. 5:

The Strike Is On!

Brothers and sisters:
The strike will commence at one minute after midnight tonight. This Company disrespected the process, bargained illegally and most of all, disrespected the finest Aerospace workers anywhere on the planet by failing to meet your expectations.

Despite meeting late into the night and throughout the day, continued contract talks with the Boeing Company did not address our issues. Armed with your strong strike vote, the IAM Negotiating Committee continues to try and convince the Company to meet our members’ demands.

Your Negotiating Committee appreciates the support of all of our members during this interim time period and will appreciate your continued support as we picket the gates at 12:01 a.m. Saturday, September 6.

I want to thank the mediation service, who diligently tried to help secure a contract short of a strike to avoid hardships on our members. Unfortunately, those services did not secure an offer.

We are ON STRIKE at 12:01am tonight.

If this Company wants to talk, they have my number, they can reach me on the picket line.
In Solidarity
Tom Wroblewski
District President and
Directing Business Representative

From Dominic Gates at The Seattle Times:

BREAKING NEWS: Machinists strike is onAfter the failure of a last-ditch bargaining effort, Boeing machinists will go on strike from midnight tonight.
“The strike is on,” said Mark Blondin, speaking from Orlando Fla., where talks between the top International Association of Machinists union leaders and Boeing executives in Orlando, Fla., failed to reach agreement and ended today at about 3:00 Pacific Time.

“We just didn’t get to a place where we could reach an agreement,” Blondin said. “”We tried to exhaust every avenue.”
“We met with the mediator last night and all day today,” he said. “There was no formal offer to bring back to the members. There’s nothing to bring back.”

At the expiry of a 48-hour extension of the contract to allow time for the Florida talks, some 27,000 workers will go on strike and production of Boeing jets will cease as machinists stream out of the plants and set up pickets at the factory gates.

About 25,000 machinists work in Boeing’s factories along Puget Sound, some 1,200 in Portland, 700 on Wichita, Kan. and about 70 at Edwards Air Force Base in California.

Our take:

“Going into the mediation, I thought that the gap was too wide for Boeing and the IAM to reach an agreement in 48 hours,” said Scott Hamilton, managing director of Leeham Co., an aviation consulting firm based in the Seattle suburbs. “While the gap between the 11% wage hike offered by Boeing and the 13% sought by the IAM was, I think, probably the easiest issue, the step-ups in the wage scale (six years in the Boeing proposal, three years sought by the IAM) may have been contentious.

“Health care and retirement benefits were extremely important to the union and equally so to Boeing. The IAM’s desire to limit future out-sourcing was probably a show-stopper. I think this has the makings of a long strike.”

Full story from The Seattle Post-Intelligencer, 4:10 PM PDT.

A long story from KING5 News.

From MyNorthwest.com.

Boeing’s statement, 4:14 PM PDT:

Boeing Statement: Renegotiation Fails; Strike Called
Friday September 5, 7:14 pm ET

SEATTLE, Sept. 5 /PRNewswire-FirstCall/ — Boeing (NYSE: BANews) issued the following statement after mediated talks with the International Association of Machinists and Aerospace Workers concluded today without reaching agreement on a new collective bargaining agreement, covering nearly 27,000 employees mainly in Washington, Oregon and Kansas:

“Over the past two days, Boeing, the union and the federal mediator worked hard in pursuing good-faith explorations of options that could lead to an agreement. Unfortunately the differences were too great to close,” said Scott Carson, president and CEO of Boeing Commercial Airplanes.

The IAM has called for a strike to begin at 12:01 a.m. Saturday, Sept. 6. Boeing operations in Washington, Oregon and Kansas will remain open. Employees who are not represented by the IAM are expected to report for work as normal.

During the work stoppage, Boeing will support its customers and their airplanes in service. The company will continue delivering airplanes that were completed prior to the strike, and will continue providing customers with spare parts. Boeing does not intend to assemble airplanes during the strike.

MSNBC story, 4:10 PM PDT: Strike could cost Boeing billions.

Wall Street Journal story: Labor talks fail.

Update, 6:35 PM: Boeing is holding a press conference that so far is reiterating the statement (posted above) and a recap of its “best and final offer.” Boeing has been in contact with suppliers to tell them whether to ship parts, store them at their facilities or stop producing parts. No names were mentioned.

Boeing did not identify sticking points.

Boeing did explore options but the spokesman did not know details. The future “we are interested in speaking to the IAM and we’re open to that and when we hear from them, we’ll do that. There have been no new meetings” scheduled.

That’s it for the conference.

Nothing new from the IAM at this time.

Update, 6:55 PM PDT: We just spoke with the IAM spokesperson, and it seems there is some common ground with Boeing after all. Tim Healy, the Boeing spokesman, said he didn’t have any details because he wasn’t in Florida during the negotiations there. Connie Kelliher told us she didn’t have any details because she wasn’t in Florida, either. Just as Healy could not provide any details about what was discussed and where the impasse lies, neither could Kelliher. Like Healy, Kelliher restated the IAM position.

Healy said Boeing will wait for the IAM to call; the IAM leadership said it’s up to Boeing to call, and they can be reached on the picket lines.

Countdown to Midnight for Boeing, IAM

Update, 11:50 AM PDT Sept. 5: Innovation Analysis Group has a 15 minute podcast with Jon Ostrower of Flightblogger. Ostrower is on-site at Everett and Renton and talks about what amounts to an “in-plant strike” by the IAM. Among the things Ostrower notes is that this action probably is resulting in daily missed deliveries for the 737s. We know that there were delivery delays prior to the strike vote as well.

Midnight tonight Seattle time is the deadline for Boeing and the IAM to reach an agreement to avert a strike authorized by an 87% vote of the union membership Wednesday.

Boeing’s Portland and Puget Sound units are in the Pacific Time Zone but the Wichita unit is in the Central Time Zone, while negotiations continue in the Eastern Time Zone. A Boeing spokesman said the deadline is based on the Pacific Time Zone, so it’s not clear if Wichita workers must wait to 2 AM CDT for a strike or whether they might walk out at midnight CDT. We presume Wichita would have to wait to the Pacific time zone deadline. The spokesperson for the IAM could not be immediately reached for clarification on this point. The Wichita unit has about 700 workers.

Update on the time-zone issue: Wichita, it appears, can walk off the job at midnight CDT, 10 PM PDT.

Boeing will issue a press release either at Midnight PDT or before (if a conclusion is reached). The IAM’s plans are unknown pending reaching the spokesperson.

We’ve updated our “Morning After” posting below twice this morning; any further updates today will be in this post.

What’s next at Boeing?

If the IAM didn’t have enough reason before to be concerned about out-sourcing, here’s another: Mitsubishi just announced it’s entered a deal with Boeing for its support in building the MRJ regional jet.

The so-called Japanese Heavy is an industrial partner with Boeing on the 787 program, building the composite wings. The 70-90 seat MRJ regional jet will have composite wings. Boeing is shying away from planes with less than 150 seats in the future. If the MRJ is a success, we think it likely Mitsubishi will grow the airplane up to 150 seats, particularly since Kawasaki Industries, another 787 partner, has announced plans to create a 100-150 seat jet.

From there it’s only another step to grow into 200 seat jets and a full family. It took Airbus 14 years to create a family and 34 years to have a full product line.

This is not good for American industry. And in our view, Boeing is creating its own future competitor.

Morning after IAM Strike Vote/with updates

Update, 9:30 AM PDT Sept. 5: Dominic Gates of The Seattle Times just posted this insightful story on negotiations. Gates paints a dramatic picture of events leading up to the decision to suspend the strike for 48 hours to midnight tonight while negotiations continue.

Update, 8:10 AM PDT Sept. 5: Jon Ostrower of Flightblogger picked up on a story none of the local Seattle media has, and that’s why the IAM agreed to mediation. It’s an important element the IAM leadership did not discuss Wednesday night when they told their membership they were returning to the bargaining table for 48 hours. This turned an enthusiastic crowd into a hostile one, hostile to their own leadership. This reason still hasn’t been explained to the membership. Here is Jon’s report:

According to one veteran machinist deeply familiar with Boeing/IAM labor policy, had the IAM refused to accept the help of a federally appointed mediator and the 48-hour extension, immediate beginning a strike, the IAM would have been deemed negotiating in bad faith, opening themselves up to legal action.

Article 24 of the existing contract allows for a potential extension of up to 1 year if the union agrees to it. It has never been done for this long, though it was done for 5 days in 1986 to give additional time to the Union membership to see the changes to the contract and vote. The same could be done this time around to call for a vote later this weekend without going on strike. A simple majority (50%+1) is required to approve the new contract.

The link to Jon’s full posting is here.

Meanwhile, the IAM contract website has several updates, including a video. There is nothing new on the Boeing contract website beyond the election night disappointed-with-results press release.

(Following section from Thursday morning with this original post.)

We may be updating several times today with news and analysis.

Our first take on the morning after: the salient points from last night are:

  • The vote was a stunning rebuke to management. The vote to reject the contract was 80% and the vote to strike was 87% (we don’t know how to explain that one). Boeing had hoped for a majority vote in favor of the contract and would have settled for a one-third-plus-one vote against a strike (which would have prevented a walk-out, since a third-thirds vote is required by the IAM by-laws to strike).
  • The workers are angry and they want to walk the picket lines.
  • Having the strike postponed for 48 hours for mediation enraged the membership with their own leaders.
  • The leadership, booed and shouted off the podium last night, and emboldened by the overwhelming vote, probably will be very aggressive with Boeing negotiators to seek everything the union proposed in the first place.
  • The membership will want to walk out unless they see a total capitulation from Boeing.
  • Doug Kight’s remark that Boeing is coming back to the table without a new offer and to listen to understand what the issues are will only add fuel to the fire. Kight is the Boeing negotiator.

What we think will happen now: unless Boeing capitulates–an unlikely prospect–we think a strike will occur at 12:01 AM Saturday. The union membership is angry and wants to make a point. With outsourcing a key issue for them (among others), and one on which Boeing doesn’t want to budge, we think the 48 hour stand down only postpones the inevitable.

Seattle Times: Strike on holds 48 hours.

Seattle Post-Intelligencer: Boeing avoids strike for now.

Flight International: Last ditch talks.

Bloomberg News: Strike delayed for talks.

Chicago Tribune: IAM votes to strike; engineers are next.

Update, 12:45 PM PDT: Here is a 13 minute podcast with James Wallace, the aerospace reporter for The Seattle Post-Intelligencer, about the strike vote and 48 hour stay.

Here is a press release from the engineers’ union, SPEEA, in support of the IAM.

Flightblogger has this report from a pub across from the Everett plant, where IAM workers frustrated with the 48 hour strike-stay congregated into the wee hours Thursday morning.

James Wallace of The Seattle P-I obtained a memo sent by Boeing CEO Jim McNerney to all employees following the strike vote.

Dominic Gates of The Seattle Times has this story on Boeing, the IAM and Mickey Mouse.

Investor blog Motley Fool says Boeing should let the IAM strike.

IAM risks Boeing moving jobs to right-to-work states, reports this Reuters article.

Boeing: IAM votes to strike

Sept 3, 645PM PDT: We are at IAM HQ watching the vote count. By eyeball only, things look discouraging for Boeing.

Update, 7:30PM PDT: No vote tallies posted but eyeballing stacks continues to suggest it’s discouraging for Boeing. No information about if all the votes from outlying areas have been delivered for counting, but by this hour they should have been.

Update 7:45 PM PDT: All votes delivered. Individual table counts show 75%-80%+ for a strike.

Update 8:15 PM PDT: IAM just reported that results now expected about 9 pm.

Update, 8:45 PM PDT: IAM warming up the press room for announcing the results. Standing by.

Update, 9:03 PM PDT: Still standing by; press room filled with “On Strike” signs.

Update 9:38 PM PDT: The strike is on; the vote to strike is 87%; the vote to reject the contract is 80%; workers hit the line at 12:01 tomorrow; Boeing to hold response press conference in an hour or two.

Stunning surprise, 9:45 PM PDT: Governor’s office, mediator’s office asked IAM to extend contract, mediate; leadership agreed for 48 hours; membership is booing. They want to hit the line now. IAM lead negotiator Mike Blondin gives Boeing 48 hours to reach a deal. Crowd turned ugly on Blondin in an instant. Drowning out Blondin; cannot hear him. Blondin says we will meet with mediator and back in 48 hours. Strike is off for 48 hours.

Our take: This was an outcome that nobody predicted, and the IAM membership is irate–to put it politely–with its own leadership. Clearly Boeing miscalculated everything leading up to this vote. With the huge backlog, unhappy 787 customers and large oversales for the 737 line, it appears that Boeing has blinked–but appearances may or may not be accurate. See the Update below from the Boeing press conference.

We’re signing off and heading over to Boeing HQ for their press conference.

Update, 11:59 PM PDT: Boeing’s chief negotiator, Doug Kight, told a press conference following the vote that Boeing is responding to a request of the federal Mediation and Conciliation board to return to the bargaining table.

Kight reiterated Boeing’s belief that it offered the best contract in the aerospace industry.

“For mediation to be successful both sides have to focus on key issues,” Kight said. “The key for us will be to continue to listen and understand. We need to listen to the union and understand specifically what the issues are.” Read more