46-Union Negotiations During Good Times

Boeing and its key union, the International Association of Machinists and Aerospace Workers, are clashing over negotiations for a new contract. The company is enjoying some of the best of times. As a result, the union has unprecedented leverage. So, what do these negotiations tell us?

The odds seem stacked on the union side. Boeing is in one of its most prosperous periods. Customers are lined up to buy almost 900 planes, and its current order book is being delayed because outside suppliers have been overwhelmed by the amount of work Boeing has sent them. This is partially the result of the struggles of the outside suppliers and partially the result of growth in the business. Boeing has hired nearly 12,000 employees over the last several years to bring the union’s ranks to nearly 27,000 workers. Boeing believes it cannot take a strike because it would anger customers who are already upset with delays. The union has unusual leverage to make strong demands. Almost a year ago, the union began urging its members to set aside money in case of a strike.

Boeing has learned from the troubles of many other U.S. manufacturers. The company has three objectives in its negotiations. First, it wants to limit its pension and healthcare liability by limiting the employees covered by the plans and by asking employees to pay part of the costs of health insurance. Second, the company wants to limit future retiree benefits. And third, the company wants changes in job security language that would permit the company to farm out work or bring in outside non-union employees to save costs.

One thing is clear from the outset. The union employees’ long term outlook for job security is already poor. Boeing is paying today more than it would need to pay in order to attract qualified employees The union has set a price for its product that is higher than the current open market price. Sooner or later, the market corrects these imbalances. Often, the correction takes the form of a new, lower-cost competitor. For examples other than domestic autos, see color TVs, airlines, trucking, railroads, steel and machine tools, among others.

The two sides spin these negotiations differently. The union argues that Boeing is negotiating like it’s in bankruptcy. The company says that it wants to stay off a course that would make it look like the three domestic automobile manufacturers in a few years.

The company is right here. (See the Perspective, “What Makes Returns High?” on StrategyStreet.com.) If they do not negotiate in a tough-minded way, they are almost certain to end up looking like the “Big Three” automakers in the long run. It is in the interest of all stakeholders, and especially of the current unionized workforce at Boeing, that the company hold down the rate of increase of cost for a work force that already exceeds what the company could purchase on the open market today.

This is the best, rather than the worst, time for Boeing to take a strike. Its profits are high and its products are the most popular in the marketplace. A few more weeks of delays are a small price to pay for long term safety of an employment contract that will enable the company to continue growing years into the future. The people who really cannot take a strike are those who let opportunities to hold down excessive employee cost increases slip away from them. Ask Ford, GM and Chrysler whether they could take a strike today.

Posted 9/4/08

Update:

Prior to the 2019 grounding of the 737 MAX, Boeing led the market for large aircraft. It had a faster growth rate and lower costs than its main competitor, Airbus. The 737 MAX grounding severely damaged Boeing and its reputation. Airbus took over leadership of the industry.

Boeing was successful in its cost reduction negotiations with its unions. Its outsourcing continued to grow. In fact, Boeing outsourced some of its core functions on its newer planes. These outsourced functions included some engineering and manufacturing. In part, the outsourcing of core functions hurt Boeing even while reducing short-term costs.

Boeing’s outsourcing of some of its core functional costs ended up severely damaging the company’s reputation for quality and Reliability. In order to reduce costs effectively, a company must change costs in a way that customers either do not notice or that mirror broader cost reduction efforts by the industry as a whole. HERE are some implications for a difficult market witnessing outsourcing. It is paramount to keep the relationship with the customer first and foremost. See HERE and HERE for very short videos on this idea.

***