First published Oct. 17, 2008
Boeing’s labor issues continued to make headlines last week. But before we dive into that, let’s consider news from some other key industries.
First, finance. It was probably inevitable, but it emerged last week that federal agencies – including the FBI – are investigating allegations of fraud involving Washington Mutual’s mortgage lending business. Shareholders also are taking action, with class-action suits alleging a range of misfeasance, from dubious accounting practices to improper insider sales by 
executives dumping stock before the news got worse.
Also inevitable – WaMu’s collapse is becoming a case study. Long-time real estate writer Tom Kelly describes the rise-and-fall of our one-time Friend of the Family in this two-part series. “You wonder,” he writes, “what the Rodeo Grandmas are saying now.”
(I don’t know what the Grandmas are saying, but in Tacoma, the smart money’s saying that when JPMorgan finally fires the remaining headquarters staff, WaMu’s then-empty downtown Seattle office space will be filled by Tacoma’s Russell Investments, which has been noisily looking for a new home for months. Officially, all Russell’s saying is that it’s putting off any decision on a move for 12 months – just enough time to see what comes open in downtown Seattle.)
Second, software. Those Microsoft-Yahoo! rumors are back. Some investors took CEO Steve Ballmer’s comments last week that a merger “would make sense economically” to mean he’s still interested in doing a Yahoo! deal and pushed shares up 10 percent. Redmond moved quickly to quash the speculation, but the rumor is still out there.
Third, wheat. You think the stock market’s been volatile? I chatted with WSU ag economist Doug Young last week. He notes that prices for soft white wheat (the main variety grown in Washington) have fallen from over $15 a bushel in January to as low as $4.85 recently. That’s a drop of about 60 percent – the Dow’s merely down 40 percent.
Big crops worldwide have eased last year’s food panics – and pushed down prices. That’s good news for those of us who eat, but bad news for growers, who are seeing prices below the cost of production. (High fuel prices mean it costs about $7.30 to grow that bushel that sold last week on the spot market for around $5.10.) Some growers seem to be responding by holding onto their wheat, hoping prices will rise again. All in all, it’s a sharp reversal from a year ago, when prices soared and eastern Washington prospered.
Now, Boeing. As you probably heard, the renewed talks with its Machinists union collapsed last week (more on that later), but there were optimistic words coming out of a meeting with the unions for engineers and technicians.
Formal talks begin Oct. 28, but SPEEA union officials announced progress after a preliminary meeting last week. “There was more substantive talk about issues during this two-hour meeting than we’ve had with Boeing since committees started meeting eight months ago,” said Ray Goforth, the union’s executive director. Still, those preliminary talks were “at times heated and confrontational,” the union said, and they didn’t address some of the key sticking points – like outsourcing.
Last week’s renewed talks between Boeing and the Machinists fell apart over outsourcing, both sides said.
Boeing’s argument – which has undeniable merit – is that it shouldn’t be paying Machinist-scale wages to materials handlers. Assembly workers are some of the world’s most-skilled laborers, worthy of top-of-the-line pay; materials handlers are essentially warehouse workers, and with new bar-code technology, much of their work can be automated.
In addition, allowing vendors to handle parts inventories and deliveries, the way New Breed Logistics does on the 787, can be more efficient operationally: it eliminates the hand-off that occurs when a supplier delivers a part at the factory gate to a Machinist union worker who takes it from there.
And my guess is that there’s a financing advantage as well. I don’t know the details of Boeing’s contract with New Breed, but it shouldn’t be hard to arrange it so that the vendor keeps custody of the part – and, more importantly, carries it as inventory on its books – right up to the moment it’s delivered to the assembly line. That keeps Boeing’s inventory number down, at least as far as the accountants are concerned, which improves Boeing’s efficiency ratios, which is something that Wall Street watches closely and rewards.
So that’s all well and good. But here’s the catch. On a strictly cash basis, it doesn’t really matter all that much whether a Machinist or a non-union contractor is handling those parts. The average Machinist makes $54,000 a year in base pay; the average base pay for warehouse and transportation workers in Washington – according to just-released state wage data – is just over $45,000 a year.
Now let’s say – because of the technology and efficiency gains – you’re able to replace those 2,000 union workers with 1,000 non-union vendors. And let’s say those vendors have far lower benefits (costing an additional 10 percent per worker rather than the 20 it costs to give benefits to the union). That’s a savings of $80 million a year, or $240 million over three years – or less than the $300 million in revenues Boeing’s foregoing every three days during the strike, which now seems doomed to last for more than two months.
The union is taking fire in some quarters for taking a self-defeating stand on outsourcing, and for good reason. By fighting for those 2,000 jobs, it risks losing all 27,000, should Boeing decide to up and move production somewhere else.
But if Boeing’s management is willing to indefinitely defer a couple billion in revenues to win a few hundred million in labor cost savings, then we also have to wonder whether Chicago is being equally pennywise and pound-foolish.
