Boeing Co. (BA.N) is on the brink of resolving a labor strike that has crippled its production for more than five weeks. However, the financial and operational costs loom large, with analysts estimating that the proposed new contract could add over $1 billion to the company's wage-related expenses over four years. The contract is set for a critical vote on Wednesday, coinciding with Boeing's third-quarter earnings report, a period already clouded by projected losses.
The proposed agreement, reached after prolonged negotiations with the International Association of Machinists and Aerospace Workers (IAM), involves a 35% pay raise over four years, a $7,000 ratification bonus, and enhanced retirement benefits, including a one-time $5,000 401(k) contribution. Though an improvement over previous offers, the union leadership has refrained from explicitly endorsing the deal. The workers will now decide its fate, leaving investors, employees, and management in a state of suspense.
Despite the tentative deal, union acceptance remains far from guaranteed. In September, a similar offer that had the endorsement of union leaders was overwhelmingly rejected. This time, the union has chosen to remain neutral, offering members the chance to vote without recommendation. "It is worthy of your consideration," was the only guidance provided by IAM to its members.
The strike has placed significant pressure on Boeing CEO Kelly Ortberg, who took over leadership in August amid a cascading series of crises. Ortberg has had to juggle multiple challenges, including announcing a 10% workforce reduction and orchestrating a $25 billion refinancing package designed to stabilize the company in the coming years. The strike, which has halted production of Boeing's key aircraft models, including the 737 MAX, has compounded the company's struggles, with some estimates suggesting it has cost Boeing around $100 million per day in lost revenue.
Ortberg's leadership is under close scrutiny as Boeing's ability to navigate this crisis could shape the company's future. Richard Aboulafia, an aerospace analyst at Aerodynamic Advisory LLC, noted that a successful resolution of the labor dispute could be a turning point for the CEO. "If there's this perception that his first couple of months have been somewhat unblemished by success, this would be a terrific step in turning that around," Aboulafia said.
Analysts have mixed views on whether the contract will be accepted. Wells Fargo's Matthew Akers, who holds a bearish view on Boeing's stock, noted that sentiment among workers is still not overwhelmingly in favor of the deal, even though the latest offer has seen more support than the previous one. After reviewing more than 1,000 comments on the IAM 751 Reddit forum, Akers estimated that around 20% were constructive on the current proposal, compared to only 3% on the prior offer. However, he cautioned that online forums may lean toward a negative bias.
Financial analysts are already calculating the potential cost of the proposed agreement. J.P. Morgan's Seth Seifman projects that wage-related expenses could exceed $1 billion, while Jefferies analyst Sheila Kahyaoglu estimates the figure at approximately $1.3 billion. While these increases are significant, investors seem cautiously optimistic that the deal will pass, with Boeing's shares rising 3% following the announcement of the proposal.
Even if workers approve the contract, Boeing faces the daunting task of ramping up production to pre-strike levels. RBC Capital Markets analysts highlighted that, based on historical data, it could take Boeing 6 to 12 months to return to full production capacity after the strike. Moreover, the fragile state of Boeing's supply chain, exacerbated by the labor stoppage, adds another layer of complexity to this recovery.
Adding to Boeing's troubles is the threat to its credit rating, which could be downgraded to junk status if the strike drags on. This would result in higher borrowing costs and limit Boeing's access to capital, further straining its financial health. Ortberg has already taken steps to address the company's liquidity issues, but the strike has exposed deeper problems within Boeing's operations and labor relations.
Ortberg's efforts to rebuild trust with workers have been complicated by the announcement of job cuts and a range of other cost-saving measures. These steps have deepened the divide between senior management and the shop floor, where many employees have expressed frustration over stagnant wages and the loss of pension benefits under a controversial 2014 contract.
Boeing's third-quarter earnings, due to be released on the same day as the contract vote, are expected to reflect the ongoing struggles. The company has already disclosed some key metrics, including a cash outflow of $1.3 billion for the quarter, adding to a $7 billion cash drain over the previous two quarters. While the strike's resolution would allow Boeing to resume production, the long-term outlook remains uncertain.
Analyst Douglas Harned of Bernstein warned that even if the strike ends in late October, Boeing's recovery will be slow, with aircraft deliveries unlikely to ramp up until November. "Boeing is not going away," Harned wrote in a report. "But it is not clear today what the company will look like in five years."
