Boeing: Machinists Union Strike Unavoidable and Unfortunate

Key Morningstar Metrics for Boeing

• Fair Value Estimate: $216.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

On Sept. 12, Boeing’s BA machinists union voted by an overwhelming margin to reject the four-year contract proposed on Sept. 8 and strike. The company’s relations with the union have been contentious for decades, and the strike fits a historical pattern. We assume it will last through the holidays until the end of 2024.

We have lowered our fair value estimate of Boeing to $216 per share from $219 to reflect the loss of productivity in the 737, 767, and 777 production lines in the fourth quarter and slowing production ramp-ups in subsequent periods. We also assume a new contract will offer at least 4% higher pay raises for machinists, representing the equivalent of a bonus plan in the previous contract. The result is 41% total pay raises, 47.6% cumulative over four years, and $1 billion higher annual costs on the 737 production line by 2027 (versus $600 million in the rejected proposal). It seems likely that a new agreement will meet the union’s additional demands, such as some form of board representation or further assurance that future airplanes will be produced near Boeing’s Puget Sound manufacturing base of operations.

The rejection of the contract and ensuing strike are an unfortunate test of Boeing’s new management: Kelly Ortberg, CEO only since Aug. 8, and Stephanie Pope, COO since January and commercial airplanes division head as of late March. They announced readiness to return immediately to negotiations. We think this is appropriate in the context of Boeing’s panoply of operational woes, stemming from decisions made many years ago, including particularly rancorous negotiations with the machinists union in 2008.