Podcast: Strike—A New Day For Aviation Unions?

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Transcript:

Molly McMillin: Hello, and welcome to today's BCA Podcast called Strikes: A New Day for Aviation Unions. Thank you for joining us today. I'm Molly McMillin, managing editor for business aviation at the Aviation Week Network, and I'm delighted to have with us today Sheila Kahyaoglu and my colleague, Michael Bruno. Sheila is managing director in equity research at Jefferies covering the aerospace defense and airline sector. Michael is Aviation Week Network's executive editor for business, overseeing coverage of aviation, aerospace and defense. So welcome, Sheila and Michael. Thank you both for being here.

Michael Bruno: Thank you.

Sheila Kahyaoglu: Thank you, Molly.

Molly McMillin: For a little bit of background, there are now three recent and major union strikes underway in the U.S. as we speak. More than 30,000 workers represented by the International Association of Machinists and Aerospace Workers, or the IAM, turned down Boeing's offer of a new labor contract and walked out off the job on September 13th. That was followed by the machinists at Textron Aviation here in Wichita where I live on September 22nd. And now there's a strike by 45,000 or 50,000 dock workers, which halts shipments at U.S. ports on the East Coast and in the Gulf Coast. So Sheila and Michael, what do these multiple strikes signal? Are we in an environment in which labor feels like now they have power?

Sheila Kahyaoglu: Yeah, maybe I'll start, Molly. Thank you so much for having me at Aviation Week. I don't think we've ever come across a time where we have two major aerospace strikes coupled with the port strike that's affecting 5,000 machinists at Textron, 33,000 at Boeing and about 40,000 port workers. As you mentioned, Textron has never had a work stoppage in aviation outside of Beechcraft and one at Bell, so I think it's super interesting. One of our thesis is that the labor force, clearly the strikes are because wages are not keeping up with inflation, and that's reflective in the lifestyle of maybe the lower end of the workforce where you can't work from home.

You don't have any flexibility around that, and it's creating a tough comparison to maybe an office position or Amazon, which is essentially setting minimum wages. So, I think that's really affecting aerospace. We don't have demographic stats, but I'm guessing the workforce, there was attrition post pandemic, is younger. Maybe they're not as attached to their employer and that's creating some of the pushback as well  because inflation is, of course, not Boeing or Textron management's fault. It's just the way the world is that you and I, we all live in. So, I do think it's a demographic change, and that's continuing to cause supply chain issues across business aviation and the commercial aerospace.

Michael Bruno: I would just add on to what Sheila said, that we are absolutely in a new era of labor relations writ large in the world, in the country, in the aerospace and defense sector. And we can get into how did we get here and why and how does this play out? But specifically within aerospace and defense, there have been and almost always have been strikes going on. There were a couple of minor strikes just between the last major strike of Spirit AeroSystems last summer and where we are now with Boeing and Textron. It's just that they didn't get a lot of news coverage because they were over relatively quickly, and they were smaller groups of people at smaller factories in different places. Now we're talking about a couple of major strikes as well as the big port worker strike that's going to affect everybody. So, the size of the union force that is on strike matters a lot and it particularly matters to Boeing and Textron.

Molly McMillin: What do you think the trickle-down effect will be here in Wichita? One of the main suppliers to Boeing through Spirit  AeroSystems put out a notice that they were furloughing 20% of their workforce because of Boeing strike and Textron strike too, but maybe more of a minor cause there. But what kind of trickle-down effects do you anticipate?

Michael Bruno: I'll jump on that one first because I've been watching the supply chain for those kinds of announcements and seeing how people are responding. Suppliers are really, they're caught between a rock and a hard place, to use that cliché. They are trying to stay up to capacity and trying to stay responsive for the day that will come eventually when the strike is over and Boeing or Textron or whoever the OEM is says, "Hey, we want to raise our production rates," and you don't just do that overnight. You can't just have the factory floor space and the tooling, the machines, and most importantly, you can't have skilled labor just turned on and off. You've got to be ready for that day well in advance. So, these suppliers want to be ready for these production rates that are supposed to go up according to everybody's schedule at some point.

We can disagree on when they're actually going to happen, but the rates are supposed to go up. Suppliers want to be ready for that. The problem is getting between that day and today when purchase orders are getting cut if you're a Boeing supplier or possibly a Textron. If you're a Textron supplier soon, that may be happening. We don't have that announcement yet, but we know it's happening at Boeing where purchase orders are getting delayed or pushed out or suppliers are being told, "Keep producing, but I want you to hold onto the inventory so that you're carrying that cost of that inventory longer." Whatever it is. Suppliers are being told that they have to foot the bill of staying in this gray area in limbo before the strikes are resolved and everybody can get back to making airplanes.

Sheila Kahyaoglu:  So, I think we're starting to see that with more the commercial aerospace supply chain. We have a small supplier that has uncovered Albany International today down 10% as they've cut guidance 4% on the top line with only 90 days to go to finish 2024. And some of their exposure is across the ‘37, the’ 87 and Gulfstream G700 programs. So clearly that's I think something we're going to start to see more of; maybe not necessarily impact 2024 financials, but certainly as we think about 2025 flatten out revenue growth rates in terms of commercial build. And I think that's some of what we're seeing out of Spirit. And that's going to ripple through 2025 numbers rather than 2024 necessarily, although we've had one smaller company and smaller supplier relative in the supply chain take down revenue assumptions already.

Molly McMillin: Sheila, you had some numbers out this week on revenue for Textron Aviation. I think you were mentioning that they typically deliver about 15, is it jets and turboprops a month? And you had some revenue numbers that if the strike continues that that can hurt their bottom line as well, right?

Sheila Kahyaoglu: Yeah, I think with Textron, to put it in context, I think the element of labor is much smaller than it is at Boeing and the potential impact to the financials, just given the Wichita Machinists Union represents 5,000 of Textron's 35,000 employees or 14% of total Textron's workforce. And obviously aviation accounts for about 40% of 2024 revenues and 55% of earnings given it's one of the highest margin segments. So, our assumption on deliveries, which have been running slow, is that it could be impactful to the deliveries on a monthly basis of about, yes, exactly 15 aircraft on a monthly basis is what our assumption is, assuming Textron delivers about 45 aircraft a month. So, we took a haircut a little bit based on that.

Molly McMillin: Is that something that, I know it all depends on how long this lasts and for Boeing and Textron too, when they get back to work, can they work a lot of overtime and catch that up and so then their expenses might be higher, but maybe they'll catch up deliveries, on or is it too late in the year to do that?

Sheila Kahyaoglu: I think it's interesting 'cause with Boeing and Renton, we've seen that Boeing is delivering 33. Our assumption is they haven't reported yet for September, 33 737s in the month of September. The strikes have started September 13, might come as a surprise to you deliveries are up on the max a month over month, a September versus August. And that's interesting because they were able to deliver seven or so aircraft even during the strike. So, I'm sure those aircraft were partially finished, so it's almost a freebie, but that's why we're not anticipating much of a September impact for Boeing. For Textron, I think we're estimating about a disruption of 15 deliveries on a monthly basis. Assuming a $20 million job price, that's $300 million to profitability and you take some sort of margin on it, let's say 10% for fun, the 35 million of profit hit, essentially. So, I think for Textron, perhaps it could be made up with overtime, but I don't know how much they'll want to impact their margins as well. So that's something to keep an eye out on.

Michael Bruno: I would just jump in and say that I think with Boeing, there's really no expectation that Boeing can necessarily make up this year the production loss that's going to occur from the strike. It takes good, long time to fully recover from a strike, and the longer the strike goes on, the longer it takes. It's very linear in that way. But one of the more immediate effects is that I think now that the strike at Boeing has entered this kind of unending phase, unfortunately, we're not really sure how this thing is going to conclude at this point.

Because of that, any idea that you were going to hit 38 737 Max production by the end of this year is probably out the window for sure, and it's a question of when in 2025 you may hit that rate. And of course, that's got consequences for other things such as hitting rate 50 someday in the future two or three years from now, but it's not going to happen this year. The recovery from the strike at Boeing is going to take a while, and nobody should expect that they can just stay open late on nights and weekends and produce those aircraft once everybody comes back.

Molly McMillin: Good point. How strong are unions in general? I think the U.S. Labor Department said only 10% of the U.S. workers are represented by a union these days. It's been on the steady decline. Do you think this will increase that rate?

Michael Bruno: To me, the strike at Spirit AeroSystems in the summer of 2023 was eye-opening for everyone, including me. Going into it, nobody thought, or most people didn't think that they were going to strike and certainly caught everybody off guard at the air show in Europe when the strike emerged. And it became the cold water that got poured on the end of that air show 'cause there was otherwise a lot of good feelings, good spirits about the recovery in aerospace. And then I think that was a curtain raiser for us about just how bad relations have become between the workforce in general and management in general across aerospace, whether you're talking union or not. And then the relations specifically by the Boeing workforce that hadn't had a renegotiation of their contract in 16 years, not a full-fledged renegotiation. We should have seen this straight coming.

Everybody in industry should have seen the straight coming at Boeing, and we didn't. And I think we are still wrestling with just how bad the state is in the relationship between the laborer and manager, and it's going to take a little while for us to figure that out. Now, it's interesting to note that at Boeing, only 21% of the workforce is IAM represented. There's another 10% that's SPEEA, and then I think there's 1% that's UAW. You put it all together, you're talking 33% of the workforce that's unionized. And I think sometimes for people outside of aerospace, you hear only 1/3 of your workforce is unionized.

You can work around that maybe and just try to find stopgap measures. You cannot, not in aerospace, because it's so dependent on skilled labor, and skilled labor are not people that you just hire off the streets. They're people you hire, train and then you put them on the production line and six or 12 or 18 months later, they might finally get good at what they're doing, not because they're dumb or not good people, it takes that long to learn the job. So aerospace is in this unique position where labor relations are particularly bad. There's an opportunity for unions to renegotiate, and at the same time, the companies are stuck working with the unions because they absolutely need those workers. This is an issue I think we're going to see play out for the next couple of years at least.

Molly McMillin: Spirit's strike didn't last very long, though, right?

Michael Bruno: It didn't. It went for a week. They were essentially back within a week. But even then, if I recall, it took at least a month and a half or longer for them to really get back to operations being settled. Now, of course, there was a lot going on at Spirit and Spirit's a different case, and we know where Spirit AeroSystems is now. It's in the process of being sold to Airbus and Boeing, and I don't want to tie that back directly and only to the strike. But I absolutely believe that the strike was the first of many steps that set all of that in motion. If Spirit AeroSystems had not had issues with its labor force, it may not have gone the way it did in the ending, having to get broken up and sold. We can debate how much that had to play into it, but it was certainly a big step.

Sheila Kahyaoglu: Yeah, I think in terms of the original question, which is how strong are unions? I'm not sure because they have become a smaller portion of the workforce. And I think part of it is Boeing's contract, like Michael said was so... we all should have seen it coming. It was 16 years in the making. There was a lot of anxiety behind it. Then I look at Textron, and I think to myself, ‘Well, this employer has a four-year contract period,’ which is very reasonable. They put through a 2022 6 1/2% (wage increase) good gesture, which was obviously not enough, but it was a gesture that should bode well and they're still having the same issues. So, what's the right way to go about it? If I'm an employer, how do you possibly keep your employees happy, which it doesn't seem like negotiating often works as well.

Molly McMillin: Right. I know with Textron, I went out to their union rally before the final contract was offered to talk to them. And once I could hear between the whistles and the foghorns, because they showed up in solidarity to show the company that they were together wanting a good contract, and I asked a couple of people if the Boeing strike had emboldened them, if they thought that that was anything that they were looking at. One person said it wasn't Boeing, it was Spirit last year, because after six days they did come away with a better contract. Now, this particular strike has already lasted double that, but I just hadn't thought about it that way. And then when I saw the final offer that Textron made to them, it was like 57 pages, and I went through and actually read the 57 pages or skimmed through it. And then the union came out, one of their leaders and said this was the best offer they'd had in decades. And I thought, ‘Well, they'll take it and everybody will go back to work,’ and so I personally was surprised that they didn't take it.

Michael Bruno: But I think that speaks to the point we are in this labor relations question, particularly here in aerospace, striking has now become a recognized tool to get more. You may very well get the best and final offer and the best, the absolute best offer that anyone in your union's history has ever received from a company, and that doesn't matter because you know you could possibly get just a little bit better if you go ahead and go on strike. And this is one of those things that I think management in aerospace needs to start to realize is a ground truth. Your best and final offer may have to come after the strike happens, and you need to be ready for that strike no matter what.

Sheila Kahyaoglu: Yeah, but in the meantime, there's implications of that, right? Not delivering aircraft, missing customer deadlines, so therefore customer concessions in the case of Boeing, potentially putting your own liquidity at some sort of risk. Although with September deliveries being good, that's set off the table, so it's like how long can you wait? When do you provide the best and final offer? It's really a tough war game for employers to figure that out.

Molly McMillin: Let's talk about the dock workers for a minute. It seems like all of us will be impacted for one reason or another. But as you look at aviation in particular, what might be the trickle-down effect into the supply chain, the OEMs and that for them going out on this strike?

Sheila Kahyaoglu: So maybe I'll start with that one if it's okay, Michael. The aviation impact we're looking to, and we don't fully understand, we don't know every product that comes through it, what company it impacts, but the easiest one to track is titanium, given the importance on the 787 program that's manufactured in Charleston. But the good news is, if we look at the Port of Charleston, it only accounted for just 1% of titanium imports over the last 12 months, which mitigates some risk. Ironically, they're all from the Western ports, so that's a positive, assuming those workers are not striking at Boeing that are moving that titanium across the country to Charleston. So very positive data point, but only 1% of titanium in the U.S. was imported out of the Port of Charleston.

Michael Bruno: To me, I think there's a couple of ramifications from the port worker strike, one of which is, again, moving supply has just made that much harder right now. So if you're a supplier, if you're a provider and you're working on Airbus programs in America, you may have more difficulty than you did before the strike happened. We don't quite know to what level, but it's certainly not in the direction anybody wanted. The other thing is it just plays into the atmospherics of striking. Here we are back to talking about striking. Striking is a tool. Striking is something to be expected. Striking is something that the workers are going to do. It should no longer be a surprise. So even if you don't have an immediate strike coming up in your near future at your company, you may have to pay attention to what's happening at the ports with the unionized workers there.

Molly McMillin: I spoke to someone the day that the dock workers went out on strike, and he had been to Costco that day here, and he said almost all the toilet paper was already gone.

Michael Bruno: Right. We're back to those days. How great.

Molly McMillin: Right.

Michael Bruno: There's one thing here I think is worth remembering in the end, which is, I would venture a guess, Molly, that when you talk to the workers at Textron on the picket line and what we hear from Boeing picket line, people do want to get back to work. There is a dedicated workforce here that does want to do their job. People can argue about what they should get paid and how they should be compensated, but there is a desire to work here and for product to be made. And in the end, I do think there's a recognition that there's a good thing with these large order backlogs that can be served.

And so, it's a question of how do the rewards of this backlog get fairly allocated, whether it's to shareholders or to workers? Like I said, I believe this is an issue we're going to face for the next several years in aerospace, but I don't think it's worth questioning whether the workforce itself wants to get to work or whether management wants a resolution. I think everybody wants to get this stuff behind us and move on. We just don't quite know how to get there.

Molly McMillin: Right. Long strikes, it seems like nobody really wins, right?

Michael Bruno: Right.

Sheila Kahyaoglu: Yeah. I would just add what's next, 'cause clearly we missed Boeing, and a couple items we're watching is obviously Textron's Bell has the union negotiation in the fall of '25. Woodward has 14% of employees represented by a union with one contract up in September '25. GE, General Electric, has 11% of employees under one union contract expiring in '25 as well, so Bell, Woodward and GE. And in terms of contracts that were just negotiated, lucky for these employers, they didn't see any massive impacts. Excel has 30% of its workforce represented by unions in the U.S. That last contract was approved in '21 for five years. Howmet is 25% unionized. They had a contract approved in late '23, and Honeywell just got its contract approved in March '24. So, also TransDigm, you wouldn't expect it, but they have 18% of workers represented by unions with negotiations, various states through 2027. So, some of them are further out, but the three to watch next year are Bell, Woodward and GE.

Molly McMillin: Well, that's all the time we have. I sure appreciate you listening and thank you to Michael Bruno and Sheila for joining us today today. Have a wonderful rest of your day.

Jeremy Kariuki: Thanks for listening to the BCA Podcast by Aviation Week Network. This week's episode was produced by Jeremy Kariuki and Andrea Copley-Smith. If you enjoyed the show, don't forget to or follow us on your podcast app of choice. If you'd like to support us, please leave a rating wherever you listen. Thanks again, and we'll see you next time.