The Boeing strike entered its sixth week on Friday. With 33,000 International Association of Machinists (IAM) workers off work and on the picket lines, Boeing (NYSE:BA) production of the 737, 767 and 777 aircraft is halted and, according to even the most conservative estimates, Boeing is losing $1 billion per month as the strike continues. (Other estimates range as high as $1 billion a week.)
With IAM’s rejection of Boeing’s offered 25% wage increase, and the union’s refusal to consider a Boeing ‘best and final’ offer of 30%, you might think that the pressure on Boeing to end this strike to settle becomes unbearable.
But something just changed – and now I believe the advantage is in Boeing’s favor.
Main risk
Is Boeing or is the union ‘the bad guy’ in this debate? That depends on who you ask. But ask any of the 17,000 Boeing employees about to lose their jobs, and chances are they’ll blame IAM.
Last Friday, Boeing’s new CEO, Kelly Ortberg, issued a memo within the company explaining that the IAM labor strike has put Boeing in a “difficult position,” forcing management to make “difficult decisions.” Under these decisions, Boeing will delay the introduction of its new 777X aircraft (which would be built in Washington state, where the strike is taking place) by about a year until 2026.
The company will also end its 767 Freighter program, effective in 2027, once it completes production of the 89 Boeing 767s it has under contract. (Production of KC-76 aerial refueling tankers for the Air Force, which are based on the 767 design, will continue – so it’s possible the 767 will be revived in the future.)
Worst of all, Ortberg announced that Boeing “will have to reset our workforce to match our financial realities and set a more focused set of priorities.” And specifically, Boeing will “reduce the size of our overall workforce by approximately 10 percent” – 17,000 employees.
What this means for Boeing and IAM
Granted, this isn’t all the union’s fault.
Boeing management did itself no favors when it made a low bid for the KC-76 contract in 2011. The resulting losses haunt Boeing to this day – a key reason why Boeing’s Defense and Space (BDS) business is now losing money and will continue to do so. losing money while Boeing continues to build KC-76s for the Pentagon.
And speaking of space, that side of Boeing has also suffered from unforced errors. These include multiple problems with its Starliner spacecraft, and an overdue and overbudget Space Launch System that (NASA says) both stem from “a recurring and deteriorated state of product quality control” and a “lack of adequately trained and experienced aerospace workers at Boeing.” ”
I can’t imagine that laying off 17,000 space workers will help solve that last problem. But this is just one more reason why IAM could come under fire for making Boeing’s problems worse at the very time the CEO is trying to solve them.
Boeing is playing for time
As this strike enters its sixth week, with no end in sight and the potential to last longer than the 2008 strike (which lasted almost two months), pressure will increase on both sides to return to the negotiating table and to make a deal.
However, Boeing will soon be in a better position to withstand these pressures.
As I predicted last week, Boeing will return to its “How to Survive a Crisis” playbook, which was first written during the peak of the COVID-19 pandemic. Today, as then, Boeing suffers from a lack of incoming cash to keep itself solvent. And today, as then, Boeing has decided to replenish its cash reserves with a combination of stock sales and debt increases.
On Tuesday, Boeing announced an additional credit agreement with four major U.S. banks that will give the company access to a $10 billion line of credit — enough money to keep Boeing in business for two and a half months (assuming Boeing takes a $1 billion loss). a month is correct). This alone could allow Boeing to survive a strike even longer than the one in 2008, but Boeing is making plans to ensure it can last even longer if necessary.
Coinciding with the credit agreement, Boeing made plans to raise an additional $25 billion through the sale of debt securities, common and preferred stock and other securities. Combined with the credit agreement, this will give Boeing access to as much as $35 billion in cash if needed – enough cash to survive the longest strike IAM could conceivably attempt.
The result for investors
Granted, depending on how management structures its capital raise, Boeing will could will also end up with a massive debt burden of up to $93 billion – even more debt than its own market capitalization – which could make the shares uninvestable. (At least I would have serious reservations about recommending Boeing stock with so much debt). The plan therefore resembles a threat of mutually assured destruction: if the IAM continues to strike, Boeing could blow up the company, which would not be good news for either side.
But that doesn’t mean the threat won’t work.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This labor strike only cost 10% of Boeing employees their jobs, originally published by The Motley Fool
