Boeing machinists ended a surprisingly suspenseful drama by accepting a new compensation package on 3 January in return for a guarantee that keeps the 20-year-old 777 production system firmly planted in Washington state for decades to come.
The 51%-in-favour vote by the International Association of Machinists and Aerospace Workers (IAM) in Puget Sound also marked a sea-change in Boeing’s relations with its largest and most militant labour group. The same union shut down Boeing’s final assembly plants for 54 days in 2008 in a dispute over far more modest concessions.
IAM did not exactly roll over in the latest round of negotiations. By roundly rejecting Boeing’s first proposal in a 13 November ballot, IAM forced the manufacturer to sweeten the deal by more than $1 billion over the term of the eight-year contract, says international IAM leader Tom Buffenbarger.
But the possibility of a second IAM rejection did not dissuade Boeing from withdrawing its most controversial demand to freeze pensions after 2016. Instead, the manufacturer took steps to take 777X production to another state, soliciting proposals from 54 sites around the USA and further afield.
The threat, combined with the sweetened offer, inflamed divisions within the union. Local IAM leaders in the Seattle area urged members to reject the deal. Buffenbarger called on Boeing’s machinists to embrace the offer, however reluctantly.
Whether Boeing’s move was really a bluff or a legitimate threat is no longer important. The union’s affirmative vote will keep the 777X in the Seattle area.
“We’re proud to say that together, we’ll build the world’s next great airplane – the 777X and its new wing – right here,” Boeing commercial airplanes chief executive Ray Conner says. “This will put our workforce on the cutting edge of composite technology, while sustaining thousands of local jobs for years to come.”
The union vote also capped a year-long campaign by Boeing to revamp every part of its production system, from slashing labour costs to squeezing suppliers on prices to experimenting with productivity-enhancing automation.
Underlying the strategy is a long-term concern about competitiveness. Airbus’s recent moves to expand commercial aircraft assembly operations in low-cost sites – such as Mobile, Alabama and Tianjin, China – have not gone unnoticed at Boeing’s Chicago headquarters.
Meanwhile, the commercial aircraft industry is facing potentially destabilising pressures on two fronts, even as annual orders and deliveries soar to unprecedented levels.
Aircraft manufacturers have traditionally reaped profits even when customers suffered in an irrational and unstable airline industry. A new generation of disciplined carrier chiefs, however, is changing the industry – and demanding better deals from capital equipment suppliers.
As Boeing reaps its share of profits from a stable duopoly in a booming market, shareholders also do not want to be neglected. In December, Boeing announced a $10 billion share buyback – the largest in company history – and a 51% increase in the quarterly dividend.
To meet those financial commitments, Boeing has adopted a broad strategy for controlling costs. The machinists in Seattle are not the only labour group affected. Boeing has moved hundreds of engineering positions in Seattle to lower-cost design centres around the world. Work transferred includes the design of the 777X itself and the propulsion system for the 737 Max.
Increasing automation has been another Boeing strategy to reduce costs through productivity gains. To boost 777 production to 8.3 per month in 2012, Boeing rolled out flex-track drilling of the fuselage and wing panels, automated floor drilling and a robotic painting system for the wings. Those initiatives are expected to be expanded dramatically on the 777X.
And if any machinists feel singled out by Boeing’s cost-cutting drive, hard-pressed suppliers will surely feel even more aggrieved.
Earlier this year, Boeing sent letters to an undisclosed number of suppliers, informing them not to bother bidding for work on the 777X. It was the first move in Boeing’s “partnering for success” campaign, an attempt to squeeze price concessions or productivity improvements from the supply chain.
Analysts have now priced in a higher share price for Boeing, as the fruits of the supplier squeeze are realised in 2014.
“As we head into 2014, we believe better-than-expected execution will be the primary catalyst, specifically as the benefits of the partnership for success programme start to flow into the commercial margins,” says Canaccord Genuity analyst Ken Herbert.
Source: Cirium Dashboard