STEEEEEE….rike 1

It is September and pennant races are in full stride. The “wild cards” are up for grabs too as Major League Baseball works its way toward the playoffs.

In what is starting to be a rather ho-hum event in the aerospace/defense world: the International Association of Machinists and Aerospace Workers (IAMAW) have decided to strike the Boeing Company for the second time in three years. Is this a “yawn moment” or a precursor of things to come as the airline industry begins in earnest the renegotiation of concessionary contracts?

I am thinking this a precursor of things to come. Not quite sure if it is a yawn just yet. Whereas the aerospace/defense industry is quite different than the airline industry, there are similarities. The similarities begin with the simple fact that the manufacturers are a most important stakeholder in the virtuous circle of airline industry success; or failure as they represent an important cost element to the industry. For certain airline class and crafts of employees, a Boeing contract represents a trend.

Boeing is outsourcing. The airline industry is outsourcing. The world is outsourcing.

As J. Lynn Lunsford reports in this morning’s Wall Street Journal: “Resentment over outsourcing has been festering since the mid-1990s, when Boeing began a sweeping campaign to modernize its factories. The company has relied increasingly on contractors across the world to build larger and larger sections of its airplanes. By adopting many of the methods pioneered by the automobile industry, Boeing has been able to reduce the time it takes to build some of its jets by 50%.”

Resentment over Outsourcing - Airlines Too

Beginning in the mid 1990s, US airline industry labor has been festering over outsourcing too. First it was pilots and scope clause restrictions (1995 – 2001) that govern who could fly the first regional jets (50 seats and under for the most part). Those airlines with the fewest limitations placed large numbers of the small jets into service and garnered a “first-mover” advantage to be sure. There should be no mistake as to why US Airways was among the first to file for bankruptcy protection as the carrier had the most restrictive scope clause language and their network was attacked by those with freedom to overfly it. Finally, by 2001, relaxation of the scope limitations, allowing this size jet to fly, had largely been won in return for unaffordable fixed price contracts. Some mainline pilot agreements permitted the flying of 70-seat jets; others did not.

During the restructuring round of negotiations, scope clause limitations on the flying of 70-seat jets by regional partners were significantly relaxed. During that same period, the industry turned to outsourcing more of its heavy maintenance work as carriers looked to find ways to trim costs ala Southwest Airlines that has historically outsourced its heavy maintenance. Well here we go again. I see a pattern. And I do not like what I see because it just simply ignores fundamental issues.

Whereas the Boeing business/economic climate has been quite good and has produced significant profits of late, let’s not forget that the order book is full. Some say until 2017 and some say 2020. Whatever it is, profits can be forecast as the revenue stream can be calculated with some measure of certainty. Adjustments will need to be made to account for pre-strike delivery problems. And there may be some adjustments to be made for strike-related delays. But if the supply chain has been the issue, doesn’t a strike possibly allow certain suppliers to “catch up”? No matter, with the revenue stream reasonably certain it becomes a cost issue just like it did for the airline industry beginning in 2001.

Labor Arbitrage

This is what is at play for each Boeing and the US airline industry, isn’t it? As I turned to the financial dictionary online for a definition of labor arbitrage, this is what I found. Outsourcing: A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

Notes:
Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant.

Damn, that outsourcing word again.

Where is the Crux of the Problem? Or Begin to Really Think About It

This is what few want to explore it seems. This round of negotiations simply needs to be a continuation of the transition/transformation period for the US airline industry and the contractual relationships with its labor force. I am not going to perfume the pig here. This is about a different set of wages and rules for the new workers that will comprise tomorrow’s industry that will be increasingly impacted by the ebbs and flows of global trade. The airline and aerospace industries can do better than the automobile and steel industries who acted much too late to protect the many good-paying jobs that remain.

And yes, there does need to be something in it for those that make up the industry today as well. The crux of the problem for labor as I see it is a lack of appreciation of the delicate balance between pay and productivity. Boeing is looking to balance an economic offer with flexibility if the business cycle requires it. Without recognition that balancing the formula is critical, the industry, and individual carriers, will continue what has become known as the "September Swoon" and miss the playoffs altogether. The “spiral down” - read job loss - will continue, strike or no strike. Markets will continue to be successful in finding the most efficient provider - they always are.

The simple question: why are job losses among the legacy US carriers approaching 200,000?

Or maybe the real crux of the problem is the seniority system. Ever wonder if tomorrow’s workers will really want such a system because it stands in the way an individual’s right to participate in the free market?

So I do think we will see strike 2. And probably a high, hard one that produces a swing and a miss that will cost someone the opportunity to continue on in the chase for the title of World Champion.

We are going to be bringing up many issues over the next couple of months.

More to come.