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Boeing Machinists Strike Will Delay Dreamliner Jetliner Test Flight Until the New Year, Company Says

By , Executive Editor, Money Morning •

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By William Patalon III
Executive Editor
Money Morning/The Money Map Report

For The Boeing Co. (BA), the strike may be over, but the fallout continues.
Just days after resolving an eight-week strike by 27,000 unionized machinist workers, the Chicago-based aerospace giant announced that the job action will force it to delay the first test flight of its problem-plagued 787 Dreamliner passenger jet until next year.

Boeing was planning to make the inaugural flight of the next-generation jetliner – already delayed four times – during the fourth quarter. But company spokesman Jim Proulx said the strike – which started Sept. 6 and forced Boeing to temporarily shutter its commercial aircraft business – forced the firm to push the test flight into next year.

Boeing is conducting a special assessment to determine just how much the strike affected its production schedule. The company will revise the Dreamliner’s schedule – including a new date for that first test flight – based on the assessment’s findings, Forbes.com reported.

“Given the duration of the ... work stoppage, the first flight of the 787 will not be accomplished in the fourth quarter 2008,” Proulx told journalists. “The time frame for the first flight has not been established and will be based on the strike recovery assessment.”

Prior Test Flights Delayed

Boeing – which also produces the 737, 747, 767 and 777 jetliners – postponed the 787 Dreamliner test flights in September and October of 2007, and again in January and April of this year. The delays have cost the company substantial credibility with investors – and caused it to incur billions of dollars in anticipated additional costs and penalties – and have left the Dreamliner program more than a year behind schedule.

The company’s longest strike in 13 years was just the latest problem to induce a program delay. The job action ended Saturday when workers in Washington State, Kansas and Oregon ratified a four-year contract with the company. Workers then workers returned to their jobs for the third shift on Sunday night (Nov. 2). The company and the workers represented by the International Association of Machinists and Aerospace Workers union had reached a tentative agreement on Oct. 27.

The postponement was merely the latest in a series of program delays for the super-hot-selling 787, a commercial passenger jet whose construction from lightweight carbon-based composite materials is expected to lead to a very high degree of fuel efficiency.

One of the key problems with the Dreamliner program stems from the extensive use of overseas suppliers – a first for Boeing, which is trying to establish itself as the world’s most-economically superior builder of aircraft. Boeing wants to regain that reputation as it attempts to wrest back the worldwide No. 1 market share spot, now held by archrival Airbus SAS, a subsidiary of pan-European defense giant EADS NV.

The labor impasse cost Boeing an estimated $100 million per day in deferred revenue. Last month, Boeing said that supplier problems and the strike combined to force third-quarter profits down 38%, to $695 million, or 96 cents per share. The strike alone cut earnings by about 35 cents a share, while the supplier problems shaved profits by an additional 25 cents a share, Forbes reported.

The Boeing 787 Dreamliner, shown here in the colors of British Airways PLC (ADR: BAIRY), is a key product for the U.S. jetliner company. [Photo courtesy of The Boeing Co. (BA)].

Laborious Labor Issues

This was the third strike Boeing has endured in 13 years, and both sides claimed victory this time around. The union said that it “won the battle and made some significant gains,” while Boeing claimed it had “retained the flexibility necessary” to manage its business, Reuters reported.

The production workers walked off the job because of a dispute over contract provisions related to health-care benefits and job security. The machinists had initially wanted a 13% pay raise over three years and to rewrite certain language in the contract related to outsourcing. The agreement gives workers a 15% raise over the four-year life of the contract and gives the union more scope for challenging Boeing’s use of outside contractors. The deal also grants lump-sum payouts totaling at least $8,000 per employee over the four-year term of the deal and immediately lifts pension payments.

The pact, longer than ones Boeing previously signed with the IAM, “addresses the union’s job-security issues while enabling Boeing to retain the flexibility needed to run the business,” Scott Carson, president and chief executive of the Boeing Commercial Airplanes division, said in a statement.

Boeing now must turn to its labor negotiations with its engineers and technical workers. Boeing’s current contract with the Society of Professional Engineering Employees in Aerospace expires Dec. 1, MarketWatch.com reported.

Credibility Quandary

Scott Hamilton, an aviation consultant and managing director of Leeham Cos. LLC in Sammamish, Wash., believes that first test flight may not take place until the second quarter of next year.

The mounting delays are “the cumulative effect of issues they find in putting these airplanes together, as well as the strike impact,” Hamilton said.

Boeing, the world's second-largest commercial airplane maker after Europe's Airbus, has roughly 900 orders for the Dreamliner. The strike put it behind schedule on 80 deliveries.
The first airline scheduled to receive one of the planes, All Nippon Airways Co. Ltd. (OTC ADR: ALNPY), expects to get its first Dreamliner in August.

According to Hamilton, the ongoing global financial crisis has caused only two cancellations and 80 delivery deferrals; Boeing has said that other customers quickly grabbed those production slots.

The 787 Dreamliner is Boeing's first newly designed jet since airlines started flying the 777 in 1995, and it will be the world's first large commercial airplane made mostly of the carbon-fiber composites, which are more durable than aluminum.

It remains a competitively strategic airplane for Boeing. The reason: The competing Airbus A350 won’t be ready before 2013, which is a key reason that Boeing has an order backlog for the Dreamliner that reaches all the way to 2017 or 2018.

Even so, the persistent delays have eroded Boeing’s credibility with investors and with customers, Hamilton told Forbes.com.

“Boeing lost [its] credibility on the 787 program a long time ago,” he said. “What this does is [raise] additional questions about what's next.”

The test-flight delay was announced Tuesday. Boeing shares nosedived $3.83 each, or 7.73%, to close at $45.72 yesterday (Thursday). They are down 54% from their 52-week high of $98.43, and are down more than 50% since the start of the year.

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Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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