Boeing's Billion-Dollar Threat Pays Off


Boeing 777. Photo: Boeing.

Great news! On Friday, Boeing and the International Association of Machinists and Aerospace Worker came to an agreement, and now the 777X will stay in Puget Sound through 2024. More importantly, this agreement is great news for Boeing, and its investors.

Was Boeing bluffing?
Contract negotiations between the Machinists union and Boeing have been contentious. And one of the big issues was Boeing's insistence on moving away from traditional pension plans to a 401(k)-style retirement plans. However, in Friday's vote, the union agreed to Boeing's demand -- although the vote was close, with 51% in favor and 49% opposed.

More importantly, one of the driving forces behind the union's concession was Boeing's assertion that it'd move production from the Puget Sound area to another state, if the union didn't agree to Boeing's offer. This would've resulted in the loss of thousands of jobs and significant tax revenue, as well as a possible downgrading to Washington's credit rating. However, as I recently wrote, I found Boeing's threat somewhat unlikely, given the impact it could have on 777X production, as well as the fact that there were significant incentives for both sides to come to an agreement. Nonetheless, Boeing's threat paid off.

777 production line in Washington. Photo: Boeing.

Skilled workers and structured pay
In addition to freezing pensions for current workers, and giving new Machinists a 401(k)-style plan, the contract between Boeing and the union locks in modest wage increases of 1% every other year, but gives union workers a $10,000 signing bonus, and a one-time $5,000 payment. It raises employee health contributions by as much as $4,000 a year over 2011 levels by the end of the contract, but it also increases dental coverage.

In other words, what this contract does for Boeing is guarantee skilled labor, and a predictable cost structure, through 2024. And to be blunt, it represents a significant cost-savings win for the company.

Why this matters for investors
Boeing has garnered significant orders since it started selling the 777X in May. But it still has to deliver them, and to do that, Boeing needs a skilled labor force. As such, locking in the Machinists union till 2024 is great news. Moreover, the contract that Boeing negotiated is a victory for the company, not the union -- although, as The New York Times reported: "A Boeing official wrote to workers saying that, despite the concessions, they would still 'receive market-leading wages and benefits.' Many have base pay of $70,000 a year, with some earning $100,000 with overtime." Still, what this all boils down to for investors is a "win" for Boeing. Therefore, if you're a Boeing investor, the contract agreement between Boeing and the Machinists union is good news.

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