Boeing union strike won't last too long, analyst explains why

Boeing (BA) factory workers are out on the picket line for the first time in 16 years after nearly 96% of its union members voted to reject a tentative labor agreement and go on strike. Bloomberg Intelligence analyst George Ferguson joins Morning Brief to break down the news and how it may add to an already rocky year for the company.

Ferguson believes that the strike is "extremely significant" to Boeing's second-half recovery as it looked to deliver more of its 737 jets. "It's their money-making airplane, best cash generator, best profit generator. So to have deliveries get shut down on that is really problematic for their financials," he explains

Ferguson notes that the workers on strike are likely looking at the agreement at Spirit AeroSystems (SPR), and will likely seek higher pay and a bigger commitment on the successor to the 737. "The way the commitment was written, Boeing sort of guaranteed to the union that they would build that airplane in the Pacific Northwest if it was launched in the next four years. I suspect they would want maybe a bigger commitment on that... That would ensure union jobs on the most important program," Ferguson highlights.

He adds that the aircraft manufacturer has "really been sort of squeezing the union over the last bunch of years to try to improve financials, and I think they get a sense now for what their value is to the company." The company will likely have to "give ground" to the union since it "needs the workers right now more than the workers need Boeing." With this dynamic at play, Ferguson doesn't expect the strike to last long.

However, if the strike persists for a longer period of time, there will be "ripple effects through the aerospace supply chain," and airliners like Southwest (LUV) and United (UAL) will be impacted most by a stoppage in deliveries. Ferguson expects these effects to be felt within a week: "I just don't see management teams going down there and getting that many airplanes completed and out to customers."

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This post was written by Melanie Riehl

Video transcript

Boeing workers are already out on the picket line early this morning.

You're looking at pictures of employees protesting outside the company's factory in Renton, Washington.

95% of more than 30,000 union members voted to reject a tentative labor agreement and go on strike.

Instead, the company's first in 16 years.

Boeing has to stop breaking the law, has to bargain in good faith and we will be back at the table whenever we can get there to drive forward on the issues that our members say are important.

Congratulations.

Cheers of Boeing are under pressure this morning here with more reaction we want to bring in George Ferguson.

He's an analyst at Bloomberg Intelligence.

George, it's great to have you here.

So very early when we're trying to evaluate just the financial impact that this could potentially have on Boeing.

But how significant is this strike to Boeing?

Uh It's uh extremely significant, right?

So, excuse me, Boeing, second half recovery is really built around delivering a lot more.

730 sevens getting up to about eight a month by the end of the year, it's their money making airplane, best cash generator, best profit generator.

Uh so to have deliveries get shut down on that is uh is really problematic for their financials.

George, what type of difference do you think will ultimately come through in these negotiations?

I mean, from what was already offered by Boeing versus where they might have to come up a little bit in the package that they're putting together.

Yeah.

So I suspect that the machinists are looking at uh the agreement at Spirit Aero Systems, which is sort of mid thirties kind of increase.

And my guess is they go after uh more pay.

Uh I also suspect that they're looking at the uh commitment to build the next airplane in the Pacific Northwest.

The, the way the commitment was written, uh Boeing sort of guaranteed to the union that they would build that airplane in the Pacific Northwest if it was launched in the next four years.

Um I suspect they would want maybe a bigger commitment on that.

They want a commitment to launch the next 737 the 737 successor whenever it gets launched to build it in the Pacific Northwest, that would ensure union jobs on the most important program.

George, when it comes to the numbers here, 94% of members voted to reject the contract, 96% voted to go on strike.

I bring that up because what is this?

Do you think the signals about the, how long this work stoppage could potentially last for given the fact that so many of the union workers were opposed to it.

Yeah.

I mean, clearly the rank and file is not happy.

Right.

I think it's, uh, it, it just a function of a lot of the problems they've had at Boeing after over the last number of years.

Uh, you know, I think Boeing has really been sort of squeezing, uh, the union over the last bunch of years, uh, to try to improve financials.

Uh And I think they get a sense now for what their value is to the company.

Um So as far as how long it means, how long they'll be out on strike.

Uh I suspect it means Boeing needs to give ground here.

Uh But the way I look at it is is that Boeing needs the workers right now more than the, the workers need Boeing.

And so I don't think it's gonna be a long strike because I think Boeing is gonna have to go back and, and make their offer better.

And so what type, what type of downstream impacts would it have if Boeing didn't ultimately net out uh an agreement here in the near term versus a more extended strike here, given the backups that we've already seen in some of the deliveries and, and production.

Yeah.

So, I mean, the way Boeing's playbook has been to date is that they've been, they had their, uh suppliers building around a 31 rate while they're trying to ramp the 38.

And so, you know, if you do some math and that at some point, Boeing will absorb all the inventory.

They've got like $85 billion in inventory on their balance sheet.

If this persists at some point, they'll have to tell suppliers stop delivering.

Right.

And so that'll have ripple effects through uh the aerospace supply chain as well.

A lot of smaller ones, smaller companies that may have difficulty surviving uh at, at a, at a stoppage or lower rates.

And on the airline side, you know, the airlines have taken a lot of deliveries so far this year, Southwest Alaska Ryanair, United.

Those are the ones I expect to be most impacted on deliveries.

And, and what, what is the time frame that from your assessment, you would perhaps think that uh it would take for us to get to that point uh to impact deliveries.

I would say, I would say impacting deliveries you're gonna know within a week.

Right?

I, I just don't see management teams going down there and getting that many airplanes, uh you know, completed and, and out to customers.

So I think within a week you're gonna see impact there supply chain.

I think they'll let that go a little longer.

I think they could let it go, who knows, even a month, but they can't burn a lot of cash here.

R Boeing has a bit over 10 billion on the balance sheet.

I think it's a 11 something, we think they need about 10 to run the company.

Probably cash burn in the third quarter.

Already dipped them below that level.

They may need to go back to capital markets and need to need to go back and raise either equity or debt.

Uh, so that they could shore up their finances.

Debt holders won't like that.

Right.

Their credit ratings under pressure, equity holders never like being diluted.

Uh And so I think that means that Boeing has to, again within 2 to 4 weeks, probably if they don't look like they have a resolution shut down supplier delivery so they can really stem cash burn.

Uh George certainly a tough start, uh, for Kelly Org there at the helm.

I, I guess my question is, do you think he has the confidence of shareholders in order to reach a deal and reach a very timely before we see that significant financial impact?

Uh You know, uh Yeah, I think Kelly Ortberg is, is so early to this that he's not that much of a factor.

I think the machinist really looking past the fact that there's a new CEO uh they're, they're thinking just longer term economics uh for themselves.

And as a and shareholders, I can tell you, you know, from a fa person that's focused on Boeing's financials can't really see much of an effect from him either yet.

So I'm not sure he's much of a factor here.

All right, Boeing, releasing a statement on the outcome of the vote here writing quote, we remain committed to resetting our relationship with our employees and the union and we are ready to get back to the table to reach a new agreement.

It's a story we are going to continue to follow here at Yahoo Finance, George Ferguson.

Always great to have you.

Thanks so much for hopping on with us this morning.