Boeing's Potential Losses Amount to Nearly $4 Billion Amid Ongoing Strike

The ongoing International Association of Machinists & Aerospace Workers (IAMAW) strike, along with supplier issues and internal delays, have led to a 38 percent drop in profit for The Boeing Company (Chicago, IL) for the third quarter of 2008. The company posted a profit of $695 million, down from $1.1 billion in the same period last year, according to a report from Industrial Info Resources (Sugar Land, TX). "Clearly, economic conditions have become much tougher during the quarter, with unprecedented events within the financial services industry and credit markets," Chairman, President and CEO Jim McNerney said in the earnings conference call. "These conditions are putting additional pressures on the aircraft-financing environment and our commercial customers."

The commercial airplane industry has been dealing with delays from a supplier of customer-furnished galleys, McNerney said. He said Boeing has been working with suppliers and is making progress toward a solution. However, Boeing has repeatedly delayed the delivery of its 787 Dreamliner plane, citing development problems and issues with software and parts. In April, the company officially announced a fourth delay, moving the 787's first flight to the end of the year. But, as nearly 27,000 members of the IAMAW walked off the job on September 6, it is unlikely that the 787 will take off this year. The IAMAW represents electricians, riveters, forklift operators and other hourly workers.

The strike represents the second walkout for Boeing in the past three years and the fourth in less than two decades. At the end of August, union leaders urged its members to reject a contract offer from Boeing, citing concerns over pay, job security, retirement benefits and medical coverage. The union is trying to keep work from being outsourced in order to protect nearly 2,000 positions, leaders said. However, a Boeing spokesman reportedly responded by saying that there was no way the company could agree to preserve the jobs in this economic environment. Considering the company's order backlog, Boeing is losing between $100 million and $110 million per day in deferred revenue, according to various news reports. The strike is now in its seventh week, which translates to nearly $4 billion in losses.

The company states that its backlog grew during the quarter to a record $349 billion, as near-term demand continues to stay strong. Orders in Boeing's Integrated Defense Systems division in the quarter included a multiyear U.S. Army Chinook contract, C-17 order from Qatar and an extension to the International Space Station contract. However, as problems have continued to mount, the earliest that the company could begin flight testing for the Dreamliner is spring 2009, although resolutions are unlikely to appear in time. Even after Boeing is able to complete the flight tests, it will not be able to start filling orders until several months afterward.

McNerney said, though, that the 787 plane reached several important milestones in the third quarter, even as the strike continued. He said the company completed successful tests of the hydraulic system and landing gear, a process that required several of the planes systems to work together. Another step was the successful test of the air frame, which is important for validating the structural integrity of the 787's all-new composite fuselage. "While the strike has stopped most production work on the early 787s in our factories, we have used the intervening period to better organize our factories for the ramp-up that will continue once we return to work," McNerney said.

Despite the economic downturn, McNerney said he believes that the company is positioned to weather the challenges because of the diversity of its business, strength of its backlog — including significant international orders — and the strength of its balance sheet. He said he hopes for a resolution soon regarding the strike. "We're committed to working with the union leaders and federal mediator to reach a settlement," he said. "We will be resuming discussions in the coming days and are hopeful of finding a way forward sooner rather than later."

Industry insiders, however, have said that they don't expect the strike to end anytime soon. Some predict that this strike will be longer than the 69-day strike in 1995 and maybe even surpass the 140-day strike in 1948, The Associated Press reported. Two active projects in which Boeing is involved is in Salt Lake City, UT, where the company is working on an $8 million expansion of an aircraft-parts plant, and in Ouyen, Australia, where the company's Australian subsidiary is involved in a $420 million grassroot photovoltaic power plant.

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