Boeing Dodges Risk as Labor Peace to 2024 Spans Jets’ Debuts

Jan 06, 2014 4:41 pm ET

(Updates with closing share price in sixth paragraph.)

Jan. 6 (Bloomberg) -- Boeing Co. will be able to develop new versions of its best-selling jets without the threat of production-halting strikes after its largest union accepted a contract extension through 2024.

The decade of labor peace at the planemaker’s Seattle hub lowers development risk for the 777X and 737 Max, the heart of Boeing’s commercial jet lineup. Machinists voted Jan. 3 for an agreement that freezes pensions in exchange for Boeing’s promise to assemble the updated model of the 777 in Washington state.

“The Machinists accepting the contract is a best-case scenario for Boeing,” Eric Hugel, an analyst at S&P Capital IQ Inc. in New York, said in a telephone interview. “There would be a higher risk if they moved production.”

Boeing avoids having to follow through on its threat to move the 777X out of state, a step that would have meant building plants and training a workforce by its 2017 deadline to start manufacturing the makeover of its biggest twin-engine jet. The Chicago-based company also won’t have to worry about work stoppages slowing the Max, a revamp of the world’s most widely flown jetliner, ahead of a planned 2017 commercial debut.

“We like staying in Seattle because the agreement set the stage for a better opportunity to transition from one product line to the next,” Howard Rubel, a Jefferies LLC analyst, said in a note. He estimated that annual operating costs across the commercial unit may be cut by as much as $500 million.

Shares Advance

The shares rose 0.6 percent to $138.41 in New York. They advanced 81 percent last year, compared with a 30 percent increase in the Standard & Poor’s 500 Index. Rubel, who is based in New York, and Hugel are among 22 analysts who recommend buying Boeing, according to data compiled by Bloomberg. Eight say hold.

“It’s a defining moment for Boeing and the Machinists,” Harley Shaiken, a labor economist at the University of California at Berkeley, said by a phone. “It makes possible a high road to competitiveness that is based on a high-wage, high- skill unionized workforce.”

Machinists rejected Boeing’s initial contract offer in November, triggering a competition in which states from California to South Carolina dangled billions of dollars of incentives to land production of the 777X and fabrication of its composite wings.

With the 777X contest due to close in weeks, union members agreed to the givebacks rather than take a chance on speeding Boeing’s exodus from the Pacific Northwest. The revised accord passed with 51 percent of the vote.

‘Different Contract’

“This is a different animal, a different contract, than I think I’ve ever dealt with in 36 years at Boeing,” Machinist Chris Okeefe said. “A lot of people do feel resentful. At the same time, now we must live by what we’ve got.”

About 24,000 votes were cast, a low turnout that benefited the company, according to Okeefe, one of the union volunteers who counted ballots. A Machinists union spokesman, Bryan Corliss, wouldn’t confirm that number but said turnout was about 2,000 less than on Nov. 13.

The labor agreement, an eight-year extension of the current contract, included bonuses and other sweeteners added after the initial offer failed. Boeing had said it needed concessions such as a freeze on pensions to stay competitive as it prepares to build the 777X, the company’s first jetliner for the 2020s.

‘Cutting Edge’

“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 President Ray Conner said in an e-mailed statement after the vote. “This will put our workforce on the cutting edge of composite technology, while sustaining thousands of local jobs for years to come.”

With initial deliveries slated for 2020, Boeing can’t afford delays that would trim margins for one of its most- profitable jets, according to George Ferguson, senior aerospace analyst at Bloomberg Industries in Skillman, New Jersey.

Having Boeing employees build the 777X’s fuselage, wing, interiors and other major components breaks with the global factory concept that was a hallmark of the 787 Dreamliner, with major components built by suppliers around the world.

Development bungles and supply-chain snarls that pushed the Dreamliner’s debut more than three years late, to 2011, added to the pressure on Boeing to execute flawlessly on the 777X, Ferguson said in a December phone interview.

$100 Billion Orders

Since its formal unveiling in November, the 777X has amassed more than $100 billion in orders and commitments from blue-chip clients such as Emirates, Deutsche Lufthansa AG and Cathay Pacific Airways Ltd.

Boeing’s commercial output centers on Washington’s Puget Sound region, where workers at one factory build twin-aisle jets and assemble the single-aisle 737 at another. Boeing makes some Dreamliners at a new, nonunion plant in South Carolina in addition to the main wide-body factory in Everett, Washington.

The labor accord should help reduce Boeing’s capital spending since building a new plant to assemble the 777X and its fuselage would have cost $4 billion to $6 billion, Yair Reiner, a New York-based aerospace analyst with Oppenheimer & Co., said in a research report today. Boeing will still need to construct a new wing facility at a cost of $2 billion to $4 billion, said Reiner, who has the equivalent of a hold rating on the shares.

The labor agreement also helps ease risk inherent in transitioning from the current 777 to the new model at a time when Airbus SAS is also targeting the 350-seat market segment.

“Given the budding momentum of the rival Airbus A350-1000 and waning order flow for the 777, anything that makes a delay less likely for the 777X is a good thing,” Reiner said.

--With assistance from Britton Staniar in Seattle and Molly Schuetz in New York. Editors: Ed Dufner, Reed Stevenson