Kelly Ortberg’s winning debut as Boeing Co.’s chief executive is causing some tension as workers vote the same day on whether to accept the aircraft maker’s latest proposal and end a five-week strike.
Boeing and the union representing 33,000 striking members have worked out a tentative new agreement that calls for a 35% wage increase over four years, an unprecedented wage increase.
But wage workers will have the final say with their vote on October 23, and approval is far from certain. They overwhelmingly rejected a deal in September that had the blessing of union leaders. This time, union negotiators are not supporting the proposal.
The result of the vote, which requires a simple majority to pass, will not be announced until late in the day in Seattle, Boeing’s main production site. That means investors, employees and executives will remain uncertain for hours after the earnings release as to whether Boeing can finally get on the road to recovery – or be forced to continue struggling with anemic production and dwindling cash reserves.
The strike has become a defining episode for Ortberg, who inherited a series of interlocking crises when he took office in early August. He has already announced a 10% workforce cut that will affect all levels of the plane maker, and he has put together the early outlines of a $25 billion refinancing package aimed at stabilizing the company over the next three years.
“If you feel like his first few months have been somewhat flawless with success, this would be a great step to change that,” Richard Aboulafia, an aerospace analyst at Aerodynamic Advisory LLC, said of the contract vote. “It would reduce the risk of an incredibly dangerous situation.”
The manufacturer risks credit impairment if the work stoppage drags on, which would increase borrowing costs and make access to capital more difficult. The shortage also extends to Boeing’s fragile supply chain, where staff cuts could hurt efforts to restart factories after the end of the conflict.
Ortberg’s efforts to reshape Boeing’s culture and employee relations were impacted by the strike. The announcement of job cuts, along with a variety of other measures, threatens to drive a wedge into the already fragile relationship between management and the workshop.
Boeing’s crisis of confidence extends to more than just investors, who have pushed the stock down 41% this year. The company was the subject of whistleblower reports detailing years of unauthorized work and defects that accused management of prioritizing production goals and financial goals over care and sound workmanship.
Cascading crises
The new CEO, who came out of retirement after several crises since the start of the year that led to his predecessor’s departure, has tried to appeal to a sense of solidarity and shared destiny. He also made a point of being closer to the action, buying a home in the Seattle area and spending more time on the factory floor.
Ortberg has made it clear that he is considering structural changes and has told employees that resources are spread too thin. The manufacturer could make up to $20 billion if it sells a range of assets that are not essential to its core commercial and defense businesses, such as its navigation subsidiary Jeppesen, TD analyst Cai von Rumohr said Cowen wrote in an Oct. 1 report.
The strike has exposed fault lines within a company where senior executives have long focused on returns while machinists have seen their wages eroded by inflation and their pension plans vanished under a controversial 2014 contract. Many employees have therefore vowed to wait for a significantly better offer.
Therefore, it is not certain whether the latest initiative, achieved with the help of an encouraging push from the White House, will be successful. Leaders of District 751 of the International Association of Machinists and Aerospace Workers made no recommendation on how members should vote on the tentative agreement that does not restore pensions.
Boeing will report earnings before markets open on October 23 in the US. The company already disclosed some key metrics when it announced planned job cuts on Oct. 11, including quarterly revenue that fell short of analysts’ estimates and $5 billion in charges related to various programs.
Take your time
Boeing also said it had a cash outflow of $1.3 billion in the period, adding to outflows of more than $7 billion in the previous two quarters.
With key results already in place, Ortberg will have more leeway to implement his plans for Boeing. Recovery efforts will be easier once key commercial factories around Seattle restart and a strike that is estimated to have cost about $100 million a day in lost sales ends.
However, given the complexity of coordinating hundreds of thousands of parts, getting assembly lines back online will be a gradual process, while problems still arise in the aerospace and defense supply chain.
Douglas Harned, an analyst at Bernstein, said even a strike resolution in late October would mean deliveries of newly produced planes would remain essentially halted until November. If past strikes are any guide, recovery will take time, he said.
“Boeing is not going away,” Harned wrote in an Oct. 17 report. “But it is not yet clear today what the company will look like in five years.”