Boeing Strike Would Hurt, but How Much?

Updated from 7:49 a.m. EDT

Normally, with a strike by 27,000 workers looming and with the clock ticking down to a midnight contract expiration, negotiators would be talking feverishly, hoping to whittle down the differences that separate them.

But not today, not at Boeing ( BA).

Instead, the company made its final offer Thursday to workers represented by the International Association of Machinists. "This is, as we told union leadership, our best shot," Doug Kight, Boeing's lead labor negotiator, said then, as talks ended six days before the contract vote.

Voting began this morning and is scheduled to conclude at 9 p.m. EDT. "Turnout is heavy," IAM spokesman John Carr said Wednesday. The votes should be counted by 11:30 p.m. A strike, if there is to be one, would likely start around that time, with second shift workers walking off the job.

Boeing shares were trading at $65.69 Wednesday, down 18 cents. In recent weeks, however, the shares do not seem to have been hurt by strike speculation. Rather, they have risen steadily since trading opened Aug. 1 at $61.39.

The stakes are high because this company is the largest employer in Washington state, the largest exporter in the U.S. and one of just two companies in the world that makes big jet airplanes. Revenue in 2008 is expected to approach $70 billion.

Boeing has a backlog of more than 3,400 aircraft, and somewhere in the airline industry, every airplane it will make for the next several years is awaited eagerly, if not impatiently.

(Which areas of the country could be most affected by a Boeing strike?)

A month-long strike would force the company to defer about $3 billion in revenue, industry consultant Scott Hamilton estimates. A month of production includes 31 Boeing 737s, seven Boeing 777s, a 747 and a 767, he says.

With most of those aircraft headed to airlines outside the U.S., that would cause an approximately 2% drop in U.S. exports -- which totaled $164 billion in June -- and would boost the trade deficit.

Additionally, a strike would further jeopardize the delivery schedule for the 787, already a source of embarrassment due to repeated delays. The first flight is now scheduled for the fourth quarter of 2008, with the initial delivery in the third quarter of 2009. Of course, future delays could be blamed on strikers.

At Northwest ( NWA), the U.S. launch customer for the 787, the company is "disappointed by the continued timing slide in the delivery of our first aircraft, but have no additional news from Boeing on further delays," said spokeswoman Tammy Lee Stanoch. Northwest has orders for 18 aircraft, with the first delivery in the fourth quarter of 2009, delayed from August 2008.

Nevertheless, it is clear that Boeing has calculated what the results of its "no more talks" position might be.

First, although IAM workers are unlikely to approve the contract, it is possible they vote not to strike. In 2002, workers rejected a contract, but did not strike. In 2005, they walked out for 28 days. The union's constitution requires that two thirds of voters must support a strike before a walk-out. The high bar recognizes that strikes are arduous and demand a firm commitment.

Secondly, "I think Boeing is calculating that a strike is not necessarily the worst scenario," says Bill Swelbar, a research engineer in MIT's International Center for Air Transportation, and a labor consultant. "They have said 'Here's my final offer, this is what I can live with, figure out if you can live with it."

The tactic may reflect a new approach to collective bargaining, one that follows on the bankruptcy strategy -- utilized in recent years by airlines -- that left little room for negotiating, Swelbar says. At US Airways ( LCC), for example, unions were told that they could either accept contract offers, or potentially be forced to accept even harsher terms likely to be approved by a bankruptcy judge.

"This could be a point where pattern bargaining changes," Swelbar says. "Boeing is saying that the traditional form of labor leverage is not going to produce anything better than what they are offering."

Swelbar says Boeing's primary concerns include a comparison of its costs with costs at Airbus, its only major competitor. Several months ago, Airbus suffered as the dollar weakened against the Euro, but more recently the dollar has been strengthening.

"Ultimately, their costs converge," Swelbar says.

Boeing's defense side would be unaffected by a strike. Boeing Integrated Defense Systems is expected to produce 2008 revenues of $32 billion to $33 billion, slightly less than half of the company's total. "From an airline customer relations standpoint, you wouldn't want to strike, but financially, Boeing can take a strike," Hamilton says. As for Wall Street, he says, "small investors will see their shares fall and might be unhappy, but analysts might rally behind management."

As a company that has recorded $13 billion in after-tax profits over the past five years, Boeing recognizes it cannot stand pat on salary. It has offered 11% over three years, plus a series of sweeteners, and says the average worker would gain $34,000 over three years. The union is seeking a 13% increase. Health care, pensions and other items also separate the two sides.

Outsourcing remains a key issue. For years, Boeing has been increasing the amount of outsourcing in its aircraft. Today, about 70% of the work on Boeing aircraft is done by outside employees.

"Boeing never has made 100% of the airplanes it builds," says Boeing spokesman Marc Birtel. "Sourcing from suppliers domestically and internationally has always been part of the Boeing business model and any other aerospace manufacturer's model."

As outsourcing has increased, he notes, "a number of our legacy airplane programs e.g. the airplanes other than the 787 are now comparable to the make/buy percentages for the 787, predominantly resulting from the sale of several former Boeing-owned operations."

The IAM says it is determined to protect the jobs it still has.

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