August 2012

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Boeing, the IAM, and the month that shook aviation

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Boeing Field 737 Delivery Center

When October ended the 787 hadn't yet entered scheduled revenue service, the A350 wasn't delayed, the A320neo had no launch customer, Embraer hadn't picked a direction for its future products, Continental Airlines still existed and American Airlines wasn't bankrupt.

Add the record aircraft orders from Emirates and Lion Air, retirement of ZA001, the first flight of a Sharklet-equipped A320 and November 2011 was the month that shook commercial aviation.

One event in particular, the landmark deal between Boeing and the IAM to place the 737 Max production on its ultra-lean Renton final assembly line will shape the landscape for at least the next half-decade.

The agreement was the month's biggest surprise, the culmination of four weeks of secret negotiations, which began in late-October, and whose commencement came just a month after the IAM released once-secret documents related to Project Gemini, the 787's second line selection. 

That moment in a downtown Seattle hotel meeting room was arguably the low-point in relations between the union and Boeing management. The revelation was called the "smoking gun" that validated the IAM and National Labor Relations Board complaint against the company's selection of Charleston as the 787's second home.

This is where the relationship stood nine weeks ago:
This revelation will no-doubt spur a discussion that laments the actions of management or labor, but the publication of the documents - and their content - illustrate just how deep the adversarial "arm's-length" relationships runs between Boeing and its workforce stakeholder. Boeing's own description of a labor "hostage situation" is perhaps the clearest example of the state of its interaction with the representation of its largest group of employees.

The Piepenbrock Framework explains not only product development strategies of big "Blue" leaps, but the short-term decision-making that erodes trust and collaboration for mutual benefit of the organization's stakeholders. Boeing's relationship with labor, and labor's relationship with Boeing, by this standard, is a deep shade of Blue with little collaboration or trust to be found.

The documents illustrate, above all, how Boeing's leadership views its strategic decisions through a zero-sum lens that any move that creates a winner, must also by definition, create a loser.
The landmark nature of Boeing's new four-year agreement, which is being voted on today at union halls around Puget Sound and Portland, is notable primarily for its timing, coming nearly a year before the contract's expiration. The new contract extends its existing contract to 2016 and slows employee wage growth compared to the 2008 contract and increases healthcare contributions, but was greeted by many with great relief, as it accompanied a Renton promise of 737 Max production, a $5,000 ratification bonus and the avoidance of a strike next fall.

Though the sentiment is not universal, tweeted the Seattle Times aerospace reporter Dominic Gates, who was speaking with Machinists in line to vote earlier today: "Machinists don't love this Boeing deal. But voting yes anyway for the most part."

Boeing initially planned to select the 737 Max final assembly line site in mid-2012, in the thick of its contract negotiations. Whether it was explicit or not, the Max line had become a proverbial bargaining chip in lieu of a production decisions for a now-shelved New Small Airplane. The production system now matches Boeing's "minimum change" goal for the new variant's development.

While the event reflects a changed tone between the leadership of both parties, what remains to be seen is if this direction toward cooperation can be sustained for the long term. Lasting structural change doesn't happen after four weeks and Boeing and the IAM's detente provides labor stability over the next four years. That stability has prompted a 9% increase in its stock price since the agreement was first announced.

The coming 40% expansion of its production rates means the hiring of more machinists and higher revenues with which to bolster Boeing's corporate earnings, a definitive short-term benefit for both.

"We wouldn't go up in rate if we didn't think we could sustain it for 2-3 years," said Boeing Commercial Airplanes CEO Jim Albaugh last week, indirectly portending reduced production rates later in the decade.

How the parties work together to either mitigate the impact of an oversupplied market or manage a reduction in production rates, will likely test sustainability of the relationship. Boeing's production habits have reflected, and arguably been a significant contributor to, the cyclicality of the industry and rapidly accelerating and potentially decelerating production rates will be the test of the future. While the stability of the Boeing/IAM relationship in good times is necessary, the relationship in challenging times is perhaps even more essential.

On the other end of the 737 Max supply chain, Spirit AeroSystem's engineers, represented by SPEEA's Wichita Technical and Professional Unit (WTPU) reached a nine and a half year agreement last week as well, complete with an incentive package tied directly to the performance of the largest aerostructures supplier in the world. 

The contract mirrors Spirit's decade-long agreement with its own machinists, offering both labor stability and predictable costs as it manages its growth. The company, formerly Boeing Wichita, has supplied fuselages, pylons and thrust reversers for each of the more than 7,000 737s built to date.

For Boeing, which has yet to firm its list price for the new re-engined narrowbody, the production economics of the 737 Max are beginning to come into focus, but more than the dollars and cents of the agreement, beginning the work of developing long-term stability and trust at the company can provide a positive ripple effect across the industry as airlines and suppliers plan for the future.

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