Al Root
Boeing simply needs to put the costly strike behind it.
It could happen on Monday, when tens of thousands of striking Boeing employees in the Pacific Northwest will vote on a tentative labor agreement reached on Oct. 31 that could raise wages by more than 40%, compounded, over four years.
Investors will be awaiting results -- which should arrive by about 10 p.m. Eastern time -- with nervous energy. If workers accept a new labor agreement, investors can move on to other, even more important, issues facing the plane maker. Another rejection would leave Boeing, and its stock, stuck in limbo.
The new deal is Boeing's fourth offer and will be the third time employees will vote. Workers overwhelmingly rejected a deal that raised wages by 27%, compounded over four years, starting the strike on Sept. 13. A second offer raising wages by about 33% was never brought to workers for a vote. In October, an offer to raise wages by about 40%, compounded over four years, was rejected, with about 64% of workers voting no.
The new offer will raise average machinist wages from roughly $76,000 a year to $119,000 a year, according to Boeing. (That is a little better than base wage increases imply, with some other benefits such as seniority and cost of living likely included.)
The offer came on the heels of Boeing raising $24 billion in new capital by selling stock and preferred shares that diluted existing shareholders by roughly 20%. Boeing needed capital to help repair its ailing balance sheet.
Boeing has added more than $40 billion in long-term debt since the end of 2018, just before the second tragic 737 MAX crash which grounded that jet worldwide between March 2019 and November 2020.
S&P Global reiterated Boeing's BBB- investment grade credit rating following the capital raising but kept the company's debt on "CreditWatch" for a downgrade noting the "company remains exposed to financial risks associated with the ongoing strike by its machinist union, and potential delay in the recovery of its aircraft production."
Boeing has more than 6,000 unfilled orders for commercial jets. If it can deliver jets, Boeing can generate profit and free cash flow. Wall Street projects $10 billion in 2028 free cash flow, based on some 860 jets delivered. Boeing delivered 806 jets in 2018. It's expected to deliver less than 400 in 2024.
Fixing the balance sheet and ending the strike were two items on investors' to-do list for Boeing management. Post-strike, investors will be looking for Boeing to raise 737 MAX production to its allowed rate of 38 planes a month. Boeing has been making closer to 25 a month in 2024. After hitting that rate the next step will be to have the Federal Aviation Administration give its blessing to raise the rate further so Boeing can make closer to 50 a month.
After production ramps higher, investors will be looking for details on Boeing's next new plane program to win back market share from Airbus. Boeing's backlog represents roughly 40% of the single-aisle jet market.
A new jet could help restore balance between Boeing and Airbus. It won't be cheap. New plane programs can cost as much as $30 billion to develop, according to BofA Securities analyst Ronald Epstein. That shows up in higher R&D and capital spending over many years.
Higher employee expenses are coming too. The new labor contract offer increases base wages by about $1.1 billion annually over the life of the contract, according to Jefferies analyst Sheila Kahyaoglu. Management will have to offset increases with higher productivity. Boeing recently announced it would lay off some 17,000 people which will help offset cost increases.
A lot is riding on Monday's vote. Predicting an outcome isn't easy, but things have been trending in a positive direction. Only 64% of employees rejected the past offer and union leadership didn't endorse it. They have endorsed the fourth offer.
"In every negotiation and strike, there is a point where we have extracted everything that we can in bargaining and by withholding our labor," read part of a recent union tweet. "We are at that point now and risk a regressive or lesser offer in the future."
Union leadership and Boeing management might finally be on the same page: It's time to end the strike and move on.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 03, 2024 13:09 ET (18:09 GMT)
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