Sunday, December 4, 2011
The agreement this past week between Boeing and one of its labor unions, the International Association of Machinists, was truly a blockbuster deal and elegant too. It's not only a cool deal, but an instructive one. It demonstrates just how quickly the aircraft industry can move and why we in the Northwest are fascinated by Boeing, its employees and its business.
The deal is full of interesting merits. Its economics and politics are very good news for our region. However, it also reveals a characteristic of the airframe manufacturing business that makes us in the Northwest skeptical when we hear good news. We have come to know just how violently Boeing can lurch from strength to weakness in no time at all.
Here's what happened last week. Boeing agreed to extend its contract with the Machinists -- there are nearly 28,000 in the Puget Sound area -- from September, 2012 to September of 2016. The company also made a commitment to manufacture its new 737 MAX at Renton, Washington, where nearly 6,500 have been manufactured in the past, rather than move the plane's manufacturing to another state, presumably a non-union state, as the company had threatened. In return, the union agreed to dismiss its complaint with the National Labor Relations Board that came from Boeing's decision to place a second Dreamliner production plant in Charleston, South Carolina, a non-union state. The union claimed that the move to Charleston was retaliation for strikes in 2005 and 2009. The NLRB agreed with the union in April of this year and this action elevated the issue into the national political atmosphere when Republicans claimed it was an example of how the labor unions really call the shots within the administration and that the NLRB is out of control.
The economics of the deal seem great both short and long term. First, a signing bonus of $5,000 will be distributed to 28,000 Puget Sound Machinists once the contract is approved. The vote is expected in mid-December, a nifty $140,000,000 falling into the Christmas-time retail of Puget Sound. That will be followed by other bonuses in the 1st Quarter of the new year. Those will be good ones. Boeing's profits were up 31% in the 3rd Quarter and the 4th Quarter earning expectations are somewhere around four and a half bucks a share. Investors loved this. Boeing was at $61 a share just before Thanksgiving and closed December 2 at $71.30.
The politics seem equally good. Candidate for governor Jay Inslee and other Democrats will not be forced to defend a regulatory tactic that weakens a hometown employer in the middle of a recession. The NLRB will be old news and people in South Carolina finally get to exhale.
Boeing is getting its work bench tidied up at the end of the year in anticipation of truly competing for $4 trillion in new aircraft orders it expects in the world market over the next 20 years. The company finally delivered its first lightweight 787 Dreamliner a few weeks ago, though three years late. The company delivered its revamped 747-8F, announced in 2005 and finally delivered in October. The new passenger version is going to be ready early in 2012. Finally, its decision not to build a brand new composite version of the 737, but rather follow the Airbus lead and add new, fuel-efficient engines to a more efficient redesign means that the basic line up is all ready to go.
The 737 is the most important piece. Boeing expects the total number of commercial jets flying will double between now and 2030, to more than 39,000 planes. Of that number, 33,250 have not been built. Finally, and most significantly, it expects that 23,000 of those new planes will be aircraft like the 737 -- that's two trillion dollars worth of airplanes. The big aircraft, like the 747 and the sexy ones, like the 787 Dreamliner, are relatively small parts of the overall market. The mules of the air are Boeing's 737 and the Airbus A320, nearly 13,000 of them flying today. At any moment, 1250 737s are in the air along with some 600 A320s. One day, we all assume, China will have a mule as well, competing for that two trillion dollar market, and perhaps others. So a solid head start is an important part of gaining market share. It's like coming out of Spring training with your line up firmly set.
Airbus was first out with a new engine option, the A320neo at the Paris Air Show in June. It was the star, making the plane slightly more competitive than the 737 on fuel use. Airbus announced 500 orders for the plane at the show (another 500 orders have rolled in since then) and the Associated Press declared that Boeing was being "trounced" by the Europeans in Paris.
A month later Boeing decided not to build a completely new aircraft. It decided to follow the European lead by adding fuel-efficient engines and other design changes that will regain the Boeing lead in fuel efficiency. The result, the 737 MAX, will bring back the leadership position for the home team and position the company as a healthy competitor for the most critical element of the new market. Not said is whether the company has enough confidence in the hard won experience in composite technology it gained with the Dreamliner, or whether it simply heard that its customers that they weren't ready to take on the kind of risk they took on the 787. Perhaps Boeing is simply ready to share the market with Airbus and risk another competitor, China let's say, coming in with something truly new and terrific.
However beguiling the good feelings about this deal, the idea of peace in the valley cannot stand up to the violence of doing business in the air. There are many examples that point to a conclusion that a great position at a given time is not necessarily cause for celebration but, rather, cause for terror.
In the mid-sixties Boeing was well-positioned. People were abandoning sea and rail travel in favor of airplanes. And Boeing had lots of those and a great position in space work to go with them. The 707, the 720, the 727 were all flying high -- the 727 was the first aircraft to sell a thousand units. In 1965 it introduced its most popular aircraft, the 737, and it was building the King of the Skies, the 747.
But as fast as the demand was rising, it fell at the end of the decade. Along with the fall in demand, the supersonic transport was voted down in the Senate -- Boeing couldn't do it without help -- and the space program went from national darling to near complete shut down in a year. Boeing went 17 months without a sale of a commercial aircraft. Layoffs followed -- 25,000 in 1969, 40,000 in 1970 and another 25,000 in 1971.
This higher, faster, farther company went on a troubling diversification program -- rail commuter systems in Chicago, San Francisco, West Virginia. There was a crazy program at Boardman in north central Oregon -- intensive farming and solid waste recycling for Portland.
For us, we wondered where our company went.
T. Wilson (it stands for Thornton), then the CEO of the company, told me once that he was standing in the middle of a garbage cluttered field in Oregon, looking down at a tennis shoe, sticking half in and half out of the ground. He said he kicked at it absently for a time, then focused on something really important to him:
"I thought we built airplanes at this company," he said to himself.
Another period where Boeing seemed well-positioned was in the middle of the 90s when its acquisiion of Northrup and its merger with McDonnell Douglas made it, at one time, the world's largest commercial airplane manufacturer, the world's largest space contractor and the world's largest producer of military aircraft.
The great heavyweight was, in fact, a real Palooka at the start. The management team, led by Phil Condit of Boeing and Harry Stonecipher from Mcdonnell Douglas, led their 1998 annual report this way:
"Financially, 1998 did not turn out the way we planned."
By 2002, the company's stock was at $30/share, down from $60, even after a massive $9 billion stock buyback program.
The struggles with the merger continued after Condit left, leaving the abrasive Stonecipher in charge, creating an atmosphere that led to the corrosive labor-management environment that this deal may have closed out.
So, good for Boeing. Good for the Machinists. Good for the retailers. Good for a cool deal that smacks, at the moment, like real cooperation in a town that welcomes it.