The International Association of Machinists voted Friday to accept Boeing’s contract offer that was previously rejected by union leadership, extending the contract by eight years and guaranteeing that the 777-X will continue to be built in the Puget Sound region. The implications of this vote are significant.
Boeing: This is a big win for Boeing, which called the IAM’s bluff by seeking economic development funding publicly and letting it be known that Washington State was not a slam dunk for manufacturing of the 777-X program. They have achieved several benefits:
- Cost Reduction: Boeing has been able to reduce costs and rid itself of the existing pension plan, replacing it instead with a defined contribution plan. Boeing had attempted twice before to eliminate the pension plan, resulting in strikes in 2005 and 2008 and union resistance. The roller coaster of over and underfunded pension plans will be end, enabling Boeing to more accurately forecast cash flows. (Ken Herbert at Canaccord Genuity put it this way: “While the IAM 751 represents ~33,000 of the total 145,000 BA employees with a pension, we believe freezing the pension in 2016 represents a material financial benefit for BA. BA did offer slight improvements to its offer to help win passage, but we believe this is a clear positive for BA.”)
- Risk Reduction: This agreement ensures that Boeing will be able to enjoy the experienced workforce already familiar with the current 777, reducing training costs and significantly reducing risk. This is critical after the 787 debacle, and should result in investor confidence.
- Familiar Surroundings: Boeing will avoid the need for greenfield facilities elsewhere, and will likely build new facilities in Everett adjoining its current facilities. Boeing will also take advantage of State of Washington economic assistance, which could raise further WTO issues unless the formula is changed.
- Stability: Boeing has gained another eight years of labor stability, with solid labor relations through 2024 with the contract extension.
- Leveraging Economic Realities: Boeing’s threat of moving the program elsewhere, and sending an RFP, was able to break the back of any solidarity within a union that suffered contention between local and international leadership. The current state of the economy, in which good paying manufacturing jobs have disappeared, was a factor in Boeing’s favor as employees considered the lack of alternative employment against the Boeing proposal. Apparently most decided that a job, even with a different retirement plan, was better than no job at all.
This is a significant cost reduction and a major defeat for IAM leadership, which ran a strong “Vote No” campaign that was apparently ignored by the rank and file. The implications are significant:
- Lack of Solidarity: Union leadership misjudged the sentiment of its members, who were clearly divided. The union now needs to win back the trust that it is working in the best interest of its members, and provides benefits worthy of its cost.
- Need for Leadership Change: The current union leaders at the local and international level have been in conflict, with the local leadership apparently more in touch with its members. Nonetheless, it appears with a defeat of this magnitude, change is likely at both levels.
- The Agenda: The union lost its key economic issue, and with an eight year extension to the contract, will need to create value by the next contract renewal in 2024. The key question is whether they can justify their existence, as the major loss on the key economic issues brings the benefits of union membership into question. Boeing’s other facilities are non-union, and with a leadership struggle, could a De-certification vote be next?
- Communication: Globalization, and the hammer of moving jobs, presents a real threat that the union failed to address. While Boeing’s union employees are economically competitive and could make a compelling case to management, the contentious nature of the IAM (which once forced Eastern Airlines out of business) is obsolete in today’s world. The IAM hasn’t publicly made the case for the competitiveness of its workforce, nor cited the advantages of experience and the learning curves at new facilities (as the quality of Air India’s early South Carolina 787’s seem to illustrate), and needs to bring its philosophy into the 21st century, where maintaining competitiveness rather than confrontation will be the driving force for employment security.
The Bottom Line:
Boeing has a major win, providing economic stability and the productivity advantage of an experienced workforce for the foreseeable future. The IAM appears out of touch with reality, but fortunately its members had the common sense to reject its leadership’s recommendations. The egg is clearly on the face of the feuding IAM leadership, which clearly needs to regroup and join the 21st century.