Boeing's Tough Choice

The machinists' union's strike against Boeing Aircraft has been big news for the last few days.

Among other aspects of the story is that of how much Boeing's situation and fate may be like, or unlike, those of GM and Ford, before them.

Stretching back over several decades, the auto makers caved in to exorbitant union demands, ultimately crippling their manufacturing competitiveness, to add to the Detroit car makers' troubles with designing vehicles which Americans wanted to buy.

If observers of Boeing are correct, then the management of the firm faces a crucial, agonizing choice this month. Do they restart production of their planes, including the already much-delayed 787 Dreamliner, at higher costs, or hold the line on costs and take a prolonged strike, in hopes of preserving their longer-term ability to remain competitive with European and Asian aircraft producers?

I'm not personally expert in the area of aircraft manufacture and assembly management, but it does seem that Boeing's leaders screwed up pretty badly on their outsourcing choices and management for the Dreamliner.

As a Wall Street Journal article noted, it's ironic and rich for Boeing's managers to turn the to workers from whom they took the work, to ask them to hurriedly hand-assemble the first Dreamliners, thus saving management's chestnuts.

The series of charts in this post depict Boeing's, GM's, Ford's and the S&P500Index's price performance over, respectfully, 2, 5 and 45 years.

In the first chart, even Boeing hasn't beaten the S&P in the past two years. It looks uncomfortably like Ford and GM.

Over the five-year timeframe, Boeing looks different. It's trajectory has remained similar to that of the S&P, while it has also remained above the index's curve, as the auto makers fell precipitously.

Since the early 1960s, not surprisingly, the collapse of the auto makers has not been mirrored by Boeing. The aircraft producer has had a fairly solid, upward trajectory, even above that of the index. But it is marked by some fairly severe downward drops. No doubt, it's due to the lumpy nature of the plane-development and order cycle in the sector, as well as periodic problems in Boeing's business.

It seems that every 7-10 years see a need for the firm to incorporate recent technology and change design and/or construction practices, which seem to lead to investor concerns and a fall in Boeing's total return.

In this decade, except for the past two years, the company has been on a tear. So this strike would seem to be a key turning point.

One key lesson of the auto makers was that unwise concessions on labor rules, pensions, etc., allowed smooth near term production at an ultimate expense of perhaps fatally wrecking both Ford and GM.

Just on that basis alone, Boeing should probably hang on to its flexibility options, regardless of near term production and market share consequences. There will be other planes and market share battles. But labor union battles have very long term effects.

And the business of designing and producing aircraft is, indeed, becoming more like the automotive industry, not less. More foreign competitors are entering the business. Scale is necessary to afford new technologies, meaning those technologies are released to more competitors faster.

If anything, Boeing will probably face more competition as time passes, not less. From China, India, and even continued improvement from Brazil's aircraft producer.

Since American competitive advantage ultimately rests with intellectual property, innovation and change, it's probably the wrong way to go if Boeing agrees to less flexibility and more union control over its decision-making.

The firm has evidently botched the Dreamliner's outsourcing. Maybe it has learned valuable lessons that it will use to prevent a repeat of the Dreamline fiasco. Maybe not.

But for the sake of Boeing's shareholders, the management of the firm should probably bet that it has, and fight for the right to continue to make those calls.