Strategic Musings - Labor & Next Generation Narrowbodies

The WSJ today covers an issue of customer confidence for both Airbus and Boeing with respect to airplane delays.

Click here for more.

This entry has been provided courtesy of Aurora, a member over at FleetBuzz.com and I’m sure you’ll enjoy the read.

Two key issues are covered today by my guest writer. Firstly unions and secondly the competition to replace the 737 and A320 families.

Comments and feedback are most welcome.

Labor.

Boeing’s contract with the International Association of Machinists expires in 2008. Traditionally these contracts have been negotiated for three year periods. They generally follow the typical “class warfare” model, in which the “have nots”, i.e., organized labor, grapples with the “haves”, the company to secure a slice of the riches for their downtrodden members.

This model has outlived it’s utility in today’s global economy and will only hasten the day when the outsourcing level witnessed on the 787 program will look like the “good old days” to Boeing’s North American workers. Boeing and the IAM (and SPEAA) are at a crossroads where they can either go forward with the obsolete “sharecropper” model, or venture down a new path in which both sides will have to accept a more risk for the company’s success, broaden their strategic vision, and realign their entire way of doing business.

Image courtesy of MSNBC/AP

The way forward is a long term labor contract in the range of seven to nine years. This will assure labor peace for the company, breaking the old three year cycle of negotiation-strike-settlement (and the attendant bad feelings on both sides) and leaving the company’s management free to focus on the real struggle: EADS and the global marketplace. The union must quit their public and internal posturing of “management is the enemy”. They aren’t; their real enemy is across the Atlantic.

In return for giving up their most powerful weapon, the strike, the union members must be given job security—in times of good and bad. A good starting point would be for Boeing to commit to “in-sourcing” any future expansion of the 787 production, as well as the next generation 737 replacement. Labor must not be viewed simply as a “variable cost” (despite all the pious pronouncements to the contrary) but the company’s most precious resource.

After all, would the 787 be experiencing the production delays it is now if the work being done elsewhere was done in house?

Long term labor peace would confer with it an enormous strategic advantage in the marketplace where price is becoming the primary selling point, despite the record demand. After all, no one has yet figured out how to inoculate commercial aerospace from the pitfalls of the business cycle.

Next Generation Narrowbody Airplane

The high development costs, risk, and technology demands attendant in bringing a new commercial aircraft to market have reached the point where they are almost too much for one company to handle. As Mr. Richard Aboulafia and other analysts have noted, going forward, the 787 model will likely be industry template for spreading costs and risks.

This represents a golden opportunity for Lockheed Martin to diversify its business back to the commercial aerospace arena and join with Boeing and its Japanese, Italian, and American partners.

Image courtesy of Boeing.com

Boeing would secure a major risk sharing partner, additional production capacity and capital, and access to a large well trained and experienced labor force of aerospace workers.

One of the strategic advantages the A320 has over the 737NG is Airbus’ ability to manufacture, and sell, more of it’s product than Boeing. This joint approach with Lockheed Martin will obviate that advantage with two production lines in the continental U.S. from the program’s outset.

The market for narrow body jets in the 150 seat range is huge and will be the largest battleground between Boeing and Airbus. In fact, both OEM’s will likely see competitors emerging from China, Russia, Canada, and Brazil in this segment. Strategic alliances may be the only way to survive.

Image courtesy of Airbus/C.Brinkmann

This joint venture is not inconsistent with the need for a long term labor contract and the “in-sourcing” necessary to secure it.

The huge market for a 737/A320 sized follow on aircraft, both for replacement and growth, and will provide more than enough employment opportunity for the current workforce, as well as require new workers to replace those retiring and for expanded production.

Given the difficulties experienced with the fasteners on the 787 program, Boeing may want to consider more vertical integration as well!

11 comments October 29th, 2007