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Boeing considers temporary layoffs to cut costs during Machinists strike

Dominic Gates, The Seattle Times on

Published in Business News

Boeing on Monday announced internally a series of sweeping cost-cutting moves in response to the Machinists strike, and said it may temporarily lay off some employees, including managers and executives.

The cost-cutting measures also include significant holds on taking aircraft parts from suppliers, an action that will ripple through the smaller aerospace firms around the region.

In a message to employees, Chief Financial Officer Brian West said that Boeing is “considering the difficult step of temporary furloughs for many employees, managers and executives in the coming weeks.”

Boeing is also “planning to make significant reductions in supplier expenditures and will stop issuing the majority of supplier purchase orders on the 737, 767 and 777 programs,” West said.

At the end of last quarter, drastically lowered production rates this year had raised Boeing’s accumulated net debt to $45 billion. Of that, $12 billion is due to be repaid within two years.

And because of the strike, Boeing’s credit rating is under review for possible downgrade to “junk” status, which would sharply raise the cost of further borrowing.

The note to employees provided no detail on either the supplier cuts or the temporary layoffs.

“I know that these actions will create some uncertainty and concern, as well as many questions,” West wrote. “We’ll be sharing additional information in the coming days as we have detailed guidance on implementation.”

There’s no realistic chance of permanently Boeing laying off the striking Machinists union members, who walked out early Friday after rejecting a contract offer. (Who would then build the airplanes?)

In addition to the practicality of doing so, there’s a likely legal bar. The union has asked the National Labor Relations Board to consider its action an “unfair labor practices” strike, which if granted formally protects strikers from layoff.

The union alleges that in the lead-up to the strike Boeing managers talked directly to employees to try to find out what they might settle for. Such “direct dealing” is proscribed by labor law, which requires management to negotiate only with the union and not with individual employees over the union’s head.

Requesting this status for the strike is a technicality intended to fully protect the strikers from layoff.

The other cost-cutting steps Boeing announced include:

—A hiring freeze

—A hold on manager and executive pay increases from promotions

—Stopping all employee travel that is not critical

—No first or business-class air travel for employees

—Suspending all outside consulting work

—No catered meals and food services at Boeing facilities except for customers

—Suspending charitable donations

 

—Pausing all advertising and marketing expenditures

—Suspending all nonessential spending on new equipment and facilities.

Boeing said that it will however “protect all funding for safety, quality and direct customer support work.”

Cash will run low

West wrote that these are “necessary actions to preserve cash and safeguard our shared future.”

“Our business is in a difficult period,” he said. “This strike jeopardizes our recovery in a significant way.”

On Monday, Bloomberg Intelligence analyst George Ferguson told investors that if the strike lasts through the end of September it “could lead to a $3.5 billion cash burn” for Boeing.

Ferguson added that this would reduce Boeing’s cash in hand to $9 billion, “near the minimum for the company.”

West has said on past earnings calls that Boeing needs between $10 and $12 billion to keep the company running — though with the cost cuts, it might need less during the strike.

In a separate development, arbitration of Boeing’s dispute with Brazilian jetmaker Embraer concluded Monday with a decision that Boeing must pay Embraer $150 million. However, that’s just half of what most analysts had expected Boeing would have to pay in compensation for Boeing’s decision in 2020 to back out of its commitment to purchase Embraer’s commercial jet business for $4.2 billion.

Repercussions of the strike

Ferguson wrote that the airlines most affected by missing expected jet deliveries during the strike will be Ryanair, United, Southwest, American and Alaska.

Alaska was scheduled to take two Renton, Washington-built 737 Max deliveries this month. Ryanair was set to take seven next month.

In addition, 767 freighter deliveries to FedEx will be delayed, as will deliveries of the 767-based Air Force KC-46 tanker.

Longtime aerospace financial analyst Rob Spingarn of Melius research, in a withering note to investors Monday, called the strike “a symptom of a bigger problem.”

He blamed former CEOs Jim McNerney and Dennis Muilenburg for Boeing’s current multifaceted crisis — including “a strategy of attacking, and arguably bullying” both workers and suppliers — and said “it will take years for Boeing to get back on solid footing.”

“Boeing isn’t just a financial turnaround,” Spingarn wrote. “It’s a financial, operational, cultural, public relations, you-name-it turnaround story.”

With another $1 billion of defense-side charges expected in the third quarter in addition to the cost of the strike, higher labor costs after it’s settled and a slowed commercial aircraft delivery ramp, he wrote that it’s possible Boeing won’t generate positive cash flow even in 2025.

Spingarn said new Boeing CEO Kelly Ortberg “is left cleaning up another mess that he didn’t create.” If he does so, the analyst continued, Ortberg “will be viewed as a hero in the aerospace industry.”


©2024 The Seattle Times. Visit seattletimes.com. Distributed by Tribune Content Agency, LLC.

 

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