Podcast: What Boeing’s Strike Means For The Industry

Joe Anselmo:

Welcome to Aviation Week's Check Six podcast. I'm Joe Anselmo, Editorial Director and Editor-in-Chief of Aviation Week magazine. And the topic of today's podcast was supposed to focus on Airbus and Boeing deliveries so far this year, and what that meant for the rest of the year. Dan Williams, Aviation Week's director of Fleet Data Services, is visiting from the UK here in Washington and was to be the focus of this podcast. But Dan, you don't get to go first because guess what? Boeing went on strike last week, Boeing's machinists went on strike. So we're going to have to kick off with the strike. Aviation Week Executive Editor for Business, Michael Bruno is here to talk about that, along with Richard Aboulafia, managing director at Aerodynamic Advisory and a regular Aviation Week columnist. Michael, let's start off with you. What are the potential consequences of this strike on Boeing's business?

Michael Bruno:

Thanks, Joe. And great to be here with everybody, including Dan and Richard, obviously two other experts here and delighted to join you all. So here we are at the first strike at Boeing in the Seattle area in 16 years. We can debate whether we should be surprised that this happened or not, but the fact is it's happening. And now the question becomes how long does the strike last and what are the ramifications from that strike? And there's a linear connection between how long the strike goes on, and how costly it is not just for Boeing's bottom line but for Boeing's supply chain, and what the ramifications are for potentially reducing orders in the future. Ramping down the master schedule even more, whether suppliers take their own initiative and start de-stocking just because some of them that have proven to be more savvy said at the beginning of the year with the Alaska Airlines door plug incident, "We're not waiting for Boeing. We see what the purchase orders are in our system and we're going to produce at either contract minimum or something close to what we think Boeing is. We're already producing now.”

he ramifications just continue to go on and on. Certainly, if you're an airline customer or lessor and you really, really are interested in getting those aircraft potentially before the end of the decade, you're going to go to Airbus and continue to try to make deals and work with their backlog and who might swap slots, that kind of thing. So all kinds of ramifications here that we can explore. But again, it comes back to how long does the strike last? And I will say that I was one of the people who predicted that a strike would occur, particularly once we saw the tentative agreement that was announced. It just felt like it wasn't enough.

And if you had any kind of finger on the pulse of what the workforce was saying in the Seattle area, they were at least expecting what their benchmarks were going into the strike. And the tentative agreement didn't come close to that. So not surprised there is a strike. Now the question is how long do the passions drive these embers? How bright do they burn? And I feel like they're going to go at least a couple of weeks, partly as a show forced by the union. But partly because it's going to take, I believe, Boeing management and Boeing directors that long to really come around and accept the reality that they're going to have to at least meet what the going in requests were by the union. And potentially at this point, they're going to have to exceed them.

Now that the strike has begun and the Boeing workers are empowered, there's a potential here that the Boeing workers are going to say, "Hey, we wanted 40% going into this, now we want 45%. We're so mad that you all just didn't listen to us that we're up in the ante." I personally believe that's a possibility. So I think it's a one to two week strike at the minimum. Could we go back to a 58-day strike like we had in 2008? This could happen. So a lot of discuss in the ramifications that I know Dan and Richard can go into even better than me.

Joe Anselmo:

And Michael, the last couple of years you've been on this podcast many times talking about Boeing, and one of the key focuses was cash, cash, cash. They had to stop bleeding cash, start generating cash. And obviously the linchpin of that was to increase narrowbody production which they've been struggling to do. They also had to spend another $8 billion, or they will have to spend $8 billion to acquire Spirit Aerosystems, the troubled aerostructures supplier. So this strike if it goes on just bleeds off more cash, doesn't it?

Michael Bruno:

Yeah. As you said, the linchpin of the cash flow machine at Boeing is delivering 737s. And of course, to deliver more of them you got to produce more of them. And that was the entire basis in which the credit rating agencies, Moody's, Fitch, S&P, if you go in and you read their reports about where they have Boeing when it comes to grading their credit rating right now, when you boil it all down, it was they believed that if Boeing could get back to what it said its goal was, which was producing 50 new 737s a month, if they could do it certainly by next year, but even by this year, that that was the cash flow generator and that you could overcome all the other obstacles. And all those other obstacles have amounted to currently a net debt position of about $45 billion.

And that's pretty scary. And if Boeing were any other company, they would've already been downgraded into junk status. But the credit rating agency said, "No, we think they have a plan to get there." Well, guess what? If you have a long strike and a long strike is going to be more than a week or two, you have a long strike, there is absolutely no way that Boeing is going to deliver let alone produce these aircraft. And if you're a credit rating agency, you are essentially forced by your own standards to now finally cut Boeing's credit rating into junk status. And oh my goodness, that has so many ramifications. I won't bore you with the investor details at the moment. We can get into them later on. But that is a whole new world for Boeing if they become a junk company that affects so many things, and it affects suppliers too. So financials are a big, big thing here that are happening in the shadow. They're not getting all the attention right now, but they will the longer this goes on.

Joe Anselmo:

Richard, I see you nodding your head in agreement with Michael.

Richard Aboulafia:

Yeah, as I often find myself nodding in agreement with Michael, there are a couple of strange boogie men out there in the world of micro and macroeconomics. If you're a country manager like a Secretary of the Treasury, you'll be aware of the bond vigilantes that you don't generally hear discussed in the general public but they're out there. And in the micro world of business, absolutely credit ratings folks. And it's a blunt instrument, they're never very clear about what it takes to downgrade debt. And there's a lot of animal spirits in it, as Michael implies. But nevertheless, it's there. And sure enough, the great cash machine that is the 737 production line gives them a clear path towards financial health. But the longer it gets cut off, courtesy of the strike, the more it jeopardizes that.

So yeah, you could easily see this as being a possible triggering event for a debt downgrade. And I'm sure that's in the mind of [new CEO] Kelly Ortberg. But I keep coming back to my optimistic view that this is the first time in decades that someone who actually is technically qualified for the job is at the helm. So he knows this and he knows a whole lot more that his predecessor certainly and the one before, and the one before did not know or did not care. So I tend to be a bit more optimistic.

Joe Anselmo:

Let's move on to the Numbers Guy, Dan Williams. Dan, because before the strike began, you were already tallying up the numbers for us. You're readying your forecast that's going to come out in a few weeks. Michael talked about Boeing wanting to get to 50 737s a month. They've come nowhere near that. But Airbus also has had some problems in getting up to its projected output, hasn't it?

Dan Williams:

Yeah, this comes as no surprise. Ultimately, I've heard the two word supply chain so often. I even made a joke about it at our recent show that every time someone says supply chain, you should have a bell and you go ding. And you eventually get sick of it like Pavlov's dog. So supply chain is constantly an issue Prior to the strike, so let's just go back one more week, and we were looking at our commercial forecasts for 2024 deliveries. Basically it’s about the same for what we class as commercial fleet, so 19 plus seats, props and jets. is 2023 levels, give or take a handful let's say. That's where we're at. The Boeing strike obviously is going to have an impact on that. I can spin this two ways. Every day there's a strike in theory is one aircraft less produced because Boeing allegedly say they produce 30 737s per month. The reality is that it's probably near a 20, low 20a but let's give them the benefit of the doubt.

So in the similar way that the Spirit strike in July last year, that in effect was the same. They had a 10-day strike, so in theory that was 10 fuselages less in the system, and this was before they found the issues. So that has a knock on effect, but you can see the effect that it had on Boeing immediately after that. So for every day the strike goes on, is one aircraft less Boeing is going to deliver this year. It is that simple. So if it's a 58-day strike, there's your number right there. We already know how low those numbers could be. So if I put the positive spin on it, go back to what Michael said before, rate 50 was lofty and ambitious by this time but they wanted probably to be at 40 something. So the strike in that respect is less impactful because they're only producing about half of those numbers.

But again, Boeing workers are looking left and right, and they saw the deal that Spirit [workers] got last year and they got nearly 40%. And okay, they're very different but now Boeing wants to acquire Spirit. So the workers have got some leverage because everybody on this has said that at the end of the day, I'm not saying they need to give in a little bit, but like Michael says, they probably need to give in what at least they asked for and possibly it might even now cost them more with the strike and the longer it goes on. I think the unions have built up a big war chest. This is purely speculation, this could carry on through Thanksgiving. And if you wipe out that much, that's a big number of aircraft.

The silver lining is it shouldn't affect the 787 production because hey, they're non-unionized workers so at least they can deliver those. When it comes to who this is going to impact, ultimately it's going to impact the U.S. legacy carriers. It's United, American, Southwest that have reasonable chunks of orders of MAXs that are scheduled, let's say for delivery in '24. The reality is those scheduled delivery dates are everywhere anyway, so they probably were due to get a couple of dozen each, United and American. And Ryanair is the other non-U.S. carrier impacted because they've been taking five, six, seven aircraft a month for the past few months. So they're going to be the ones that had impact. And potentially this could mean that Boeing delivers in 2024, potentially, less than they did in 2019, which was obviously the MAX grounding year. So it's going to have a big impact.

Joe Anselmo:

Let's say Michael's right and it last two weeks. That's just going to be a blip. So let's say if the strike last two weeks, what is your forecast then for Airbus and Boeing?

Dan Williams:

Yes, it's a blip. It's going to be 15 aircraft less this year, which is a percentage of Boeing deliveries. It's not that much because their numbers are lower. Obviously, Airbus had announced at the start of the year they were like 800 deliveries in '24. We got to around Farnborough time and they're like, actually 770. They're at about 450 now and they could get to 770. It's not beyond the realm of possibility. Last December, for example, they delivered 112 aircraft. Some of those were paper deliveries, but at the end of the day they got the cash for them. So 770 is a stretch but it's not an unattainable stretch, but it is a stretch. Whereas Boeing, they're at 250, give or take. This could mean that they end up at 350. Could mean if there's a short strike it got be 400. Ultimately, the length of strike is going to determine how much more than 2019, which was obviously a horrendous year for Boeing.

Michael Bruno:

Joe, I just want to jump in and say not to be Mr. doom and gloom necessarily, because I see myself more as a realist. The unfortunate thing is this strike has unique elements to it that even if you're a realist it kind of makes you look at the pessimistic side. And where I'm going with this is if you have a two-week strike or certainly a four-week strike, there are unique ramifications, because it's Boeing and production has stopped, that can be felt later on. So Dan's absolutely right that if you just as a rule of thumb knock off one aircraft a day for the length of the strike, I think that's a great rule of thumb. That's an awesome way of looking at it. But unfortunately, if there are side effects where suppliers start to ramp down their own production, and it's really hard to account for that until you get to the point where they can't ramp back up, then you're going to start to see even more of a slowdown that goes beyond that rule of thumb of one a day that you didn't know how to quantify.

And you're not going to know how to quantify until it's actually happening. And because this strike is happening at the time that it's happening, where Boeing was already struggling after the Alaska Airlines [mishap], trying to get beyond 20 or 25 new 737s a month, suppliers were already inclined to lower their production to try to get ahead of this bow wave of the master schedule of getting reduced because of the Alaska Airlines incident. This can very well push a lot of people over the edge. I will say that there is a potential silver lining here, and I'll turn to Richard in a moment because Richard has been making the argument that while this is the worst recovery in living memory of anybody in the aerospace industry, that could potentially lead to a more stable recovery later on. And Richard, I'm wondering if you can just get over the immediate pain of the strike and what it means, could this actually help things in the long run?

Richard Aboulafia:

Well, thank you for asking. First of all, I'm struck by the fact that you and I agree with each other in terms of the duration of the strike and the impact of the strike. And Dan is an outlier on the other direction. But on the other hand, both of us I think are realizing that maybe Dan could be right. We just have no way of knowing and that the ramifications of that departure scenario being correct are pretty damn severe. And I'm hard-pressed to think of any happy upshot of that. My thesis has been that because we've got constrained production rates, we can't overproduce. And overproduction is usually the root cause of most bust cycles, then inevitably follow booms.

The absence of a party has gone on way too long here in terms of production. And meanwhile, Airbus is going to benefit, I expect. Even though the supply chain isn't terribly fungible, hey, they're going to have a clearer path to getting to where they want to be. So we're just talking about lost market share, especially as I think both of you agree, some people are going to be pushed over the edge and order more Airbuses. So I don't think it's going to have an impact. I still have my thesis that we're going to avoid a bust cycle this decade because of production constraints in most of the market segments in the aerospace business. But I'm hard-pressed to see an upside from this particular strike. All I can see is loss of market share and potentially investment grade rating for Boeing. I was going to riff in the direction of demand, but I think it would be an unwarranted expansion of our mission here. But I would point to everybody…

Dan Williams:

That’s a separate podcast.

Richard Aboulafia:

Very much a separate podcast. But air travel numbers aren't cratering but they're plateauing out. They're starting to embody that division sign metaphor that people posited at the start of the... That's not good but not only that, Mrs. Lincoln, but also you all know this book to build doesn't look really good at all this year. In other words, people are mindful of this potential for overcapacity exacerbated by slowing numbers. So it could be that the good times are slowly rolling to a halt here.

Joe Anselmo:

Unfortunately guys, we're running short on time, but I wanted to give the Numbers Guy the final word here since he's our visitor.

Dan Williams:

I just want to jump out, there is a silver lining and it's obscure, but the silver lining is CFM have got the ability to get some LEAP-1Bs built and produced. And assuming they don't ramp down, because what happened during COVID, like Michael said before, everybody ramped down. If they keep those levels there, that's going to get some 1Bs to the market and provide some spares. So, there is a small silver lining if you are in engine OEM.

Joe Anselmo:

Okay, so let's end that on a positive note. Dan Williams, Richard Aboulafia, Michael Bruno, thanks so much as always for sharing your insights. And of course, you'll all be back on this podcast. But for now, that is a wrap for this week's Check Six. A special thanks to our podcast editor in London, Guy Ferneyhough. Thanks for listening and join us again next week for another Check Six.

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