The phrase "everything old is new again" appears to be the most apt descriptor for Boeing's (BA 2.33%) situation at the moment.
It's been 16 years since the Great Boeing Machinists Strike of 2008, when contract negotiations between Boeing and the International Association of Machinists labor union came to an impasse and led to a two-month-long strike. This month, the IAM is on strike again at Boeing after the latest round of contract negotiations failed to end with an agreement.
While the two situations have some similarities, they're really not the same. And it's the differences that make this an especially dangerous time to be invested in Boeing stock.
NYSE: BA
Key Data Points
Something old, something new
You see, 16 years ago, Boeing was coming off its most profitable year ever, 2007, in which the company reported a $4.1 billion profit that was nearly twice what it had earned in 2006. IAM quite understandably wanted a piece of that action, and its demands weren't even all that out of line, centering on a 13% increase in wages spread over three years. (The parties ultimately settled on a 15% increase over four years.)
Now, both Boeing and its union are in much different places. Begin with the union itself, which demanded a 40% wage hike over four years this time around -- nearly three times what it got last time around. (Boeing and union leadership had actually settled on a generous 25% pay hike package over four years -- still better than in 2008 -- but the union membership voted it down and elected to strike for more.)
Even more important, though, is the dire financial condition that Boeing suffered as it entered into these latest negotiations.
It's no great secret that Boeing has been struggling lately. Plagued by problems with first its 787 Dreamliner program, then its 737 MAX aircraft, and more recently with its defense and space business, Boeing was losing money even before the pandemic struck in 2020.
Things have gotten worse, not better, since. Hurt by weak plane demand for commercial airplanes during the pandemic, Boeing actually lost money for five straight years. Data from S&P Global Market Intelligence show a $2.2 billion loss in 2023, and a year-to-date loss nearly as big -- $1.8 billion -- in the first six months of 2024 alone.
What this means for Boeing
All of which is to say, Boeing's union demand for a massive 40% pay hike seems out of step with the company's financial position today. Boeing's already losing money hand over fist, and if the union gets the pay hikes it's demanding, Boeing's financial condition will get worse, not better, as its costs rise even more.
These facts notwithstanding, Boeing is in a lousy position to negotiate. Heading into the strike, The Wall Street Journal pointed out Wednesday, Boeing was already burning $1 billion in cash every month. And with 737 airliner production now halted for the strike, it's going to add $500 million in losses per week, potentially tripling the rate at which the company loses money for as long as the strike lasts.
Boeing's taking steps to mitigate the damage, with new CEO Kelly Ortberg taking a pay cut, "non-essential contractors" being let go, and the company furloughing white-collar workers (for one week out of every four) for the duration of the strike. Still, these measures can only lower the flame on Boeing's cash burn, not put out the fire. When push comes to shove, Boeing's negotiating position is so very weak right now that it probably has little choice but to cave to the union's demands or offer something very near to it.
Is this the end game for Boeing?
Previewing the inevitable, Jefferies aerospace analyst Sheila Kahyaoglu told CNBC last week that if the IAM had agreed to Boeing's offer of just a 25% pay hike over four years, the annual impact would amount to about $900 million in added labor costs for Boeing. If the pay hike goes to 40%, investors should anticipate a bigger $1.4 billion outlay for additional labor costs at the company.
The good news is that, despite all appearances, Boeing might actually be able to afford the increase. After six years (including this year) of reporting nothing but losses, analysts polled by S&P Global expect Boeing to finally return to profitability in 2025, earning potentially as much as $3.6 billion in net profit. The bad news is that a 40% wage hike is going to eat up a lot of that profit -- not all at once, as wages will rise over four years. But the earnings hit will begin immediately, and will get steeper as time goes on.
Investors betting on Boeing being a buy based on its valuation of 37 times expected 2025 earnings could be in for a rude surprise.
