(Updates with comment in fifth paragraph and closing share price in 14th paragraph.)
Feb. 19 (Bloomberg) -- Boeing Co., already struggling with the grounding of its 787 Dreamliner, is facing a possible strike by union engineers, threatening even more upheaval as it tries to fix the plane and resume deliveries to customers.
Voting ends tonight for 23,000 engineers and technical workers considering whether to authorize a walkout in their dispute over retirement benefits. Approval would allow the Seattle-based union to call a strike at any time.
Labor strife may undermine the company’s efforts to recover. Union workers are involved in trying to find the source of two battery failures that prompted the 787’s Jan. 16 grounding and potential solutions that could get the plane back in the air. They’re also helping boost jet production to pare a seven-year order backlog and develop upgrades for three models.
“The timing would just be horrible,” Brad Lawrence, chief executive officer of Esterline Technologies Corp., said in an interview. Bellevue, Washington-based Esterline gets about 8.9 percent of its revenue from Boeing, according to data compiled by Bloomberg. “To have your engineers’ union be this disconnected that it would walk out right when your company needs you most, it would just be horrible.”
The clash reflects long-standing differences between engineers who design Boeing planes and managers at the helm of the company. A “big divide” opened after Boeing Chairman Frank Shrontz left as it acquired McDonnell Douglas in 1997 and adopted a new emphasis on cost control and risk reduction, said Wolfgang Demisch, a retired aerospace financial consultant who has followed the industry for 40 years.
That merger led to cultural changes that altered the tone of labor relations and played into the Dreamliner development, he said. Alan Mulally, an engineer who headed Boeing’s commercial airlines business, was passed over for the top job in 2005 in favor of James McNerney, a former General Electric Co. star who was then CEO of 3M Co.
Mulally went on to lead the revival at Ford Motor Co. and was replaced by Scott Carson, Boeing’s sales chief. Communication between management and engineers suffered, according to accounts over the years from former employees including Jim Albaugh, who succeeded Carson.
Negotiations on the latest contract turned bitter in recent months. Chicago-based Boeing said work will move to less expensive sites outside its Seattle jet-manufacturing and development hub if labor costs keep rising. The company said it’s facing increased competition and needs to pare its growing pension liability so it can invest in new models.
The Society of Professional Engineering Employees in Aerospace union, or Speea, cites Boeing’s $12.6 billion in profits since 2009. It says engineers deserve to be rewarded as the company has returned cash to shareholders with buybacks and a 15 percent dividend boost in that time period and increased McNerney’s compensation about one-fifth through 2011 to $22.96 million, the most recent figure available.
“It’s too close to call,” said Richard Aboulafia, a consultant with Teal Group in Fairfax, Virginia, who has been in the industry more than 25 years. “I’ve never seen any labor dispute in aerospace with this degree of uncertainty.”
Boeing was founded in 1916 by William Boeing, a Yale University engineering student, and built its success on the innovation of its engineers.
The 787 battery issues and labor strife show an erosion of that traditional strength, said Demisch, the consultant. Company and government investigators still haven’t found the reasons behind last month’s battery failures that caused a fire in one 787 at an airport and forced an emergency landing by another.
“The overall performance is just inadequate, and that’s not world-class engineering, which is what Boeing is known for,” Demisch said. “Boeing is heading toward a possible strike of its engineers. That’s suggestive that Boeing’s employee relations also need a re-engineering.”
Boeing’s share price has never recovered from the first of what were eventually seven delays to the Dreamliner’s commercial debut. The stock tumbled 26 percent from the day before the first postponement in October 2007 through today, when it closed at $74.65. That compares with a 2.2 percent decline in the Standard & Poor’s 500 Index.
Any reworking of the Dreamliner would come alongside the development this year of the 787-9, a stretched version due to fly in 2014, and the 737 Max, scheduled to enter airline fleets in 2017. Boeing is also working on a 787-10 variant and the so- called 777X, a revamp of its popular 777 wide-body jet that won’t be ready until at least the end of this decade.
“Since the 787 appeared to be out of the woods, and the 777 was put off until the next decade, Chicago likely didn’t think it needed much from engineers,” Aboulafia said of executives at Boeing’s headquarters. “Then that damn 787 battery thing happened. Oops.”
The Dreamliner was conceived in 2003, shortly after Airbus SAS began selling the A380, a superjumbo jet that would steal the 747’s ranking as the world’s largest airliner. Boeing responded by proposing a lightweight, composite plane that would help airlines reduce fuel bills on long-haul routes by as much as 20 percent.
To save costs and reduce risk, Boeing decided to rely on a web of global suppliers to design and build most of the plane. That took some of the emphasis off the company’s own engineers.
The development coincided with McNerney’s entry, Mulally’s departure and Carson’s promotion to replace him. Engineers subsequently complained that management discouraged them from voicing their concerns about technical and safety issues.
“At times, people were reluctant to share some of the views and thoughts they had,” Albaugh said in a July 2010 interview.
Delays persisted over 3 1/2 years and some customers grew angry. Qatar Airways CEO Akbar al-Baker famously told reporters at the Paris Air Show in 2009 that Boeing was being run by bean counters and lawyers and threatened to cancel his order for 60 Dreamliners.
At that show, the 787 was about two years behind schedule, and Carson promised it would fly within two weeks. Instead, it encountered its fifth delay one week later, after a structural flaw came to light that some engineers had known about for weeks. The 787 finally entered service at the end of 2011.
Carson retired early from Boeing a few months after the 2009 air show and was replaced by Albaugh, an engineer who had been running Boeing’s defense division. He met regularly with engineers and hired an outside consultant to encourage employees to share their opinions and ask for help when they needed it.
Albaugh lasted less than three years before abruptly announcing his early retirement in June 2012. McNerney replaced him with Ray Conner, who like Carson had been the company’s sales chief.
Conner, who started his career at Boeing as a machinist, was credited with getting machinists to agree to a new contract a year ago. He’s been less successful with engineers, who have been working without a contract since November.
The company’s initial offer was rejected by a vote of 96 percent on Oct. 1. Boeing sweetened its proposal on Jan. 17, offering salary-increase pools of 5 percent a year over a four- year contract, matching the raises in the last wage deal.
Boeing didn’t budge from its plan to switch new employees to a 401(k)-style retirement plan from the pension workers get now. The union calls it a “big poison pill” in an otherwise good contract offer and says it’s concerned that in a few years the pension will be eliminated entirely.
“Hard bargaining is a part of any negotiations and we expected that,” Doug Alder, a Boeing spokesman, wrote in an e- mail. “But at the end of the day, we believe this offer proves just how important engineers are to the company’s success.”
A simple majority of votes would grant the union authorization to call a strike. Speea Executive Director Ray Goforth said that wouldn’t necessarily result in a walkout; it would just give the union time to keep negotiating.
Conner, 57, meanwhile is appealing to engineers’ allegiance to Boeing as it tries to get the Dreamliner flying again.
“As you know we are facing challenges on the 787 program,” he wrote in a Feb. 7 memo to employees represented by Speea, urging them to accept the company’s offer. “It was your innovation, talent and skill that brought the 787 Dreamliner to life. … Now more than ever, we need to deliver on those promises by coming together as one team.”
McNerney said on a Jan. 30 conference call that Boeing will be able to figure out the 787 battery issues without Speea- represented engineers.
That confrontational strategy may alienate engineers further, said industry consultants including Demisch.
“It’s a marriage, not a one-night stand, and I don’t understand a management process that doesn’t appear to recognize that,” Demisch said. “The idea that your engineers could be seen as the problem is really troublesome for an engineering company. What is it the Bible says about houses divided against themselves?”
--Editors: Kevin Miller, Carol Hymowitz, Ed Dufner