Why Boeing is Going to War With Its Employees

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Unlike a lot of businesses, Boeing’s commercial jet division knows what the future will bring. Its order book is stuffed like a Thanksgiving turkey, as the next version of the workhorse 737 rolls on and production of the 787 Dreamliner reaches full tilt after its wobbly start. The latest order book entries are $100 billion worth of the long distance 777x that three Middle East carriers plus Lufthansa have lined up to buy, with deliveries scheduled to begin in 2020.

What Boeing doesn’t know is where it will make the 777x. Last week, members of the International Association of Machinists (IAM) angrily voted down a new contract proposal that would have guaranteed the Triple Seven X be built in the Puget Sound region but would freeze their pension program, raise the cost of health care and create an adjusted wage scale for new hires, among other givebacks. Having to failed to lock in the lower long term labor costs that it craved, Boeing basically said it was going to take its marbles and play elsewhere. It already builds 787s in boss-friendly South Carolina, while sites such as Long Beach, California , a historic aerospace hub, Huntsville, Alabama, San Antonio and Salt Lake City have also been mentioned.  You can assume that Boeing will be shopping for a tax and incentives deal.

On the face of it, the decision by the machinists seems nuts. Boeing was offering guaranteed work for eight years and even offered a bonus to each worker to take the deal. That’s why the state of Washington coughed up $8.7 billion in tax breaks for the company to keep the work in the state.

Still, there’s been a mutual miscalculation. Given what has gone on in the steel, mining, aluminum, chemical, auto and tire industries among others in the last couple of decades, you would think the IAM would understand that labor costs have to be globally competitive. In the global economy, every job is part of a labor arbitrage. Airframe work is already being farmed out by Boeing to Japan, the Middle East and Asia, where the big customers are. Boeing’s deal includes an agreement to buy $5 billion worth of parts and components from suppliers linked to Abu Dhabi’s state investment fund. It is unlikely those workers will have a union scale. In Boeing’s view, it can’t afford to overpay for labor and probably figured that the offer of eight years of job stability would sway most workers. Consequently its bargaining team took a hard line in the negotiation. That’s what big corporations do.

But if Boeing thought a union faced with a my-way-or-the-highway offer would cave, it should have known better. The IAM has downed tools before. This is an old school union that, as the Seattle Times reported, was bitterly divided about even bringing the proposal to the membership in the first place— but uniformly angry at the terms.  Labor costs are not likely to be higher in the state of Washington than in Europe, where Airbus does most of its work. Airbus is headquartered in Toulouse, France, home of the 37 hour work week and 187 paid holidays. Okay, maybe it’s just 30. At the same time, Boeing and Airbus are a duopoly. You want a 200- to-400 seat jet? You can chose from B, or A.  As the union likes to point out, Boeing is running flat out. “Consistently strong operating performance is driving higher earnings, revenue and cash flow as we deliver on our record backlog and return increased value to shareholders,” said Boeing CEO Jim McNerney in the company’s third quarter earnings release.

Unions are not designed to give in. Even as the auto industry was crashing, some union locals preferred death to retreat, as older, more militant workers saw no point in doing more and getting less—the global economy be damned. They had worked decades to build a solid middle class existence.  For much of the same reasons the IAM, despite the threat of job loss, took to the streets of downtown Seattle to rally the troops against Boeing and the contract offer.

There will be a loss for both sides. Boeing is going to build jets in the Seattle area for a long time—its $400 billion backlog is too big, and its workforce, however militant, is an elite manufacturing force.  They are making jets, not cronuts. The current contract runs through 2016. Boeing could even build the 777x there yet, if the two sides can to get back to the negotiating table. It doesn’t seem likely, at this point. Boeing says it will decide in three months where it will build the 777x.