Boeing’s new CEO faces one-two punch a month after taking over

Little more than a month since Boeing Co.’s new chief executive officer took over with a mandate to pull the planemaker out of crisis, things are moving in the opposite direction.

Kelly Ortberg now faces the dual challenge of negotiating an acceptable labor accord after the company’s first overture was rejected and 33,000 workers in the Seattle area decided to strike. Just hours after they walked out, Boeing’s credit rating risked being cut to junk, a move that would dramatically increase financing costs of the heavily indebted manufacturer.

The strike by members of the International Association of Machinists And Aerospace Workers union adds to the list of challenges already facing the company, from its massive debt load to the troubled defense subsidiary to anemic cash flow. That puts Ortberg on the hot seat as he looks to avoid a prolonged work stoppage during the company’s biggest crisis in recent memory.

“We see Boeing in a particularly weakened position,” Bank of America analyst Ron Epstein said in a client note.

Boeing Machinists across the U.S. West Coast stopped work at midnight on Friday. Hundreds of workers occupied picket lines at the Renton factory outside of Seattle that makes Boeing’s top-selling aircraft, the 737 Max.

Despite a contract Boeing touted as its most generous , Machinists voted 94.6% to reject it, with 96% supporting a strike. Boeing’s offer didn’t compensate for 16 years of stagnated wages, higher out-of-pocket health care costs and the relocation of thousands of union jobs, said Jon Holden, president of IAM District 751, who added the union would get back to the table “as quickly as we can.”

“This has been a long time coming, our members spoke loud and clear tonight,” Holden said to a packed hall of union members and media. “Clearly there were aspects of this agreement that weren’t good enough.” By the time he’d finished speaking, the chants of “strike, strike” were deafening.

Ortberg has taken some important symbolic steps toward reorienting the company around the factory floor and improve relations with employees. He’s buying a house in the Seattle area, making him the first Boeing CEO in two decades to live and work in the metropolitan area nicknamed Jet City. That’s a shift from former leader Dave Calhoun, who worked primarily from his homes in New Hampshire and South Carolina, and also allowed other leaders to work remotely.

The new CEO has been a fixture on the company’s factory floors this week. But his memo imploring workers not to strike, warning that work stoppage would hurt Boeing’s recovery, didn’t sit well with some union members.

“The most recent email that we received from the CEO almost seemed like a threat,” said Chris Solis, one of the striking workers who gathered outside the main entrance to the Renton 737 factory. “They were saying this will not end well, and nobody will win. That’s kind of the whole point of striking is to earn better benefits and pay for all these people.”

The work stoppage adds to the strain from fallout over quality lapses after the near-catastrophe at the start of the year that spurred investigations, a customer revolt and an executive shake-up. Boeing will likely need to make further concessions to move closer to the 40% wage hike the union initially sought, Bank of America’s Epstein said in his note.

The walkout also has the attention of the White House, which said Biden administration officials are in touch with both sides.

“We encourage them to negotiate in good faith – toward an agreement that gives employees the benefits they deserve and makes the company stronger,” White House spokesperson Robyn Patterson said.

The planemaker has less bargaining power than in prior negotiations, RBC Capital Markets analyst Ken Herbert said in a note. He estimates Boeing will burn about $500 million in cash each week that workers remain on picket lines.

“We continue to believe that Boeing has every incentive to negotiate a deal in good faith, and within a short time frame,” Herbert said.

Boeing’s shares closed down 3.7% in New York on Friday. The stock has declined about 38% this year.

In addition to 737s, the company makes 777 and 767 models at its Everett facility to the north and jet components in hulking plants to its south. A strike risks disrupting production at the factories as well as the wider supplier network, leaving a finely tuned manufacturing system out of step and creating more so-called traveled work that’s out of sequence and has been at the heart of Boeing’s recent production woes.

By striking, members bucked the recommendation of their own union leaders that they accept terms that included a 25% guaranteed wage increase over four years.

While that’s the largest such pay hike offered by the planemaker, workers had expected a far greater increase. They were also angered that the terms eliminated an annual bonus.

Boeing has been in a financially difficult situation since the Jan. 5 accident exposed deficiencies at its factories and forced the planemaker to reduce production.

The company has been bleeding cash as a result, and Moody’s Ratings as well as Fitch Ratings both said on Friday that they might cut their ratings to junk.

Boeing workers have vowed to picket at about 30 company sites from California to Moses Lake in Eastern Washington. Because the union is claiming an unfair labor practices strike, a mediator will be assigned by the federal National Labor Relations Board, Holden said.

“It’s been an amazing experience to be a part of this and all the camaraderie,” said Solis, who just celebrated his one-year anniversary at Boeing and was getting his first taste of a strike.

“We’ve heard all sorts of things from different people, but the way that the company is acting just doesn’t seem very fair.”