By Thomas Black / Bloomberg Opinion
It’s hard to overstate the damage that a machinists strike could do to Boeing Co. and, more important, to the planemaker’s fragile supply chain.
Suppliers had already been whiplashed by the groundings of the 737 Max and the 787 and then the pandemic. Boeing was just beginning to get back to building planes in an orderly fashion and keeping work steady for its supply base, which is key for their financial health and the production of high-quality parts.The overwhelming support to go on strike — 96 percent of the 33,000 members of the International Association of Machinists and Aerospace Workers in Seattle voted to take to the streets — is an ominous sign for Boeing. This walkout could drag on for weeks, and Boeing will have to pay a high cost it can ill afford to satisfy workers. The company is burning through its $12.6 billion of cash and has a huge $58 billion debt burden, raising concern it could lose its investment-grade ratings. In fact, Moody’s Ratings said on Friday that it had placed the company’s debt rating on review for a potential downgrade to junk.
Unfortunately, Boeing’s new chief executive officer, Kelly Ortberg, is reaping what was sown a decade ago when the company thought it was smart to put the screws to union workers with the threat of moving more production to its nonunion South Carolina facility. That 10-year contract extension reached in 2014 froze pension benefits, among other things, planting the seeds of this thorny conflict.
The union now has the upper hand because Boeing desperately needs to ramp up production of planes to help heal its supply chain and stem its losses. The company offered a general wage increase of 25 percent over four years and a $3,000 bonus for approving a new contract. Workers wanted a 40 percent raise and annual performance bonuses.
How does Boeing pay up without breaking its finances? Here’s a quirky suggestion for both sides of the bargaining table: tie an extra bonus to any future share repurchases.
The reasoning behind this suggestion is that the aggressive negotiating tactics that Boeing wielded a decade ago coincided with the company’s zeal to maximize returns to stockholders through huge share repurchases. The union has an opportunity to make sure management doesn’t go on another massive stock buyback spree in the future (although it’s difficult to imagine that the company has the free cash flow for that now).From 2014 to 2018, Boeing repurchased $38 billion worth of shares. These repurchases had their desired effect of juicing up the stock price. But the spike was temporary, and unless investors sold their shares in that period of high prices, they lost out. That cash, which Boeing could certainly use now, just went up in smoke after the two fatal crashes of the 737 MAX and the quality issues exposed during the pandemic caused shares to plummet.
Now, Boeing is the symbol for those who oppose buybacks as solely a financial engineering tool that serves to mask the big payouts in stock that are awarded to C-suite executives. The company clearly lost its focus on making high-quality aircraft and instead made moves such as outsourcing more of its production to drive up its cash earnings.
Wall Street, of course, loves share buybacks. The large investment banks are often involved in the repurchases, and the earnings-per-share boost that results from shrinking the number of outstanding shares fits with the short-term mentality that emphasizes the next quarter’s targets rather than the long-term strategy. Company executives also love this financial tool. Without buybacks, the large share-based compensation packages would push up the share count, creating a headwind for earnings per share and making it harder to defend the large stock bonuses.
On the flip side, Wall Street isn’t a huge fan of dividends. Those payments carry a higher tax rate than the capital gains from selling shares. Dividends also lock in the use of cash because cutting that payment generates negative publicity. Buybacks give a company much more flexibility on how much and when to return cash to investors. It’s easy to overlook the small investors who depend on dividend payments for real cash that they can spend.
Boeing’s story could be much different if the company had sat on a bunch of cash to either plow back into the business to fend off rival Airbus SE, which is now eating Boeing’s lunch, or to hold on to for shelter during a rainy day. Well, Boeing has just gone through a monsoon season without as much as a rain suit.
The union should set a precedent and demand that its workers receive a bonus tied to a percentage of share repurchases. It can’t be a small percentage, such as the 1 percent tax on share buybacks that took effect at the start of 2023. That small speed bump hasn’t put the brakes on the buyback frenzy.
It would have to be a large percentage, say 5 percent or 10 percent, to create a disincentive for Boeing executives to burn up more cash when the good times return, if they ever do. If the board just can’t wean itself off the buyback steroids, then at least the workers would share in the largesse.
Yes, this idea is a bit far-fetched. The union likely won’t want to waste its new-found bargaining power on something that doesn’t provide an immediate payout. Boeing’s management would resist at all costs because it would tie its hands on one of Wall Street’s favorite financial tools. Still, the workers are in a rare position to think outside the box and bring important changes to the company.
Thomas Black is a Bloomberg Opinion columnist writing about the industrial and transportation sectors. He was previously a Bloomberg News reporter covering logistics, manufacturing and private aviation. More stories like this are available on bloomberg.com/opinion©2024. Bloomberg L.P.
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