Striking Boeing workers have leverage to force significant changes

(Bloomberg Opinion) — It’s hard to overstate the damage a machinists’ strike could do to Boeing Co. and, more importantly, the planemaker’s fragile supply chain. Suppliers have already been hit hard by the grounding of its 737 MAX and 787 planes and the pandemic. Boeing was just beginning to get back to building planes in an orderly fashion and keeping its supplier base working, which is crucial to its financial health and the production of high-quality parts. The overwhelming support for the strike — 96% of Seattle’s 33,000 machinists union members voted to take to the streets — is an ominous sign for Boeing. The strike could last for weeks, and Boeing will have to pay a high price it can’t afford to keep its workers happy. The company is burning through $12.6 billion in cash and has a massive $58 billion in debt, raising concerns it could erode its investment-grade ratings. Rating agency Moody’s said on Friday that it had reviewed the company’s rating for possible downgrade to junk status.

Unfortunately, Boeing’s new CEO, Kelly Ortberg, is reaping the harvest of what was sown a decade ago, when the company thought it would be wise to tighten the screws on union workers by threatening to move more production to a non-union facility in South Carolina. That 10-year extension, reached in 2014, froze pension benefits, among other things, sowing the seeds of this thorny conflict.

The union now has the upper hand, as Boeing desperately needs to boost plane production to help heal its supply chain and stem losses. The company has offered a 25% across-the-board pay raise over four years and a $3,000 bonus for approving a new contract. Workers wanted a 40% raise and annual performance bonuses.

How does Boeing pay without ruining its finances? Here’s a bizarre suggestion for both sides of the negotiating table: tie an additional premium to any future stock buybacks.

The rationale behind this suggestion is that Boeing’s aggressive negotiating tactics a decade ago coincided with the company’s eagerness to maximize shareholder returns through massive stock buybacks. The union has an opportunity to ensure that management doesn’t do another massive buyback in the future (although it’s hard to imagine the company has the free cash flow to do so now). Between 2014 and 2018, Boeing bought back $38 billion worth of stock. Those buybacks had the desired effect of boosting the stock price. But the boost was temporary, and if investors didn’t sell their shares during that period of high prices, they lost out. That cash, which Boeing could certainly use now, simply went up in smoke after two deadly 737 MAX crashes and quality issues revealed during the pandemic sent the stock plummeting.

Now Boeing is a symbol of those who oppose stock buybacks as a financial engineering tool used to mask large stock payouts to CEOs. The company has clearly lost focus on making high-quality planes and has instead taken steps like outsourcing more production to boost its cash profits.

Wall Street, of course, loves stock buybacks. Big investment banks often participate in buybacks, and the boost in earnings per share that comes from reducing the number of shares outstanding fits a short-term mentality that emphasizes next-quarter goals over long-term strategy. Corporate executives also love this financial tool. Without buybacks, large stock-based compensation packages would drive up share counts, creating a headwind for earnings per share and making it harder to defend large stock bonuses.

Wall Street, on the other hand, isn’t a big fan of dividends. These payments are taxed at a higher rate than capital gains from selling stock. Dividends also block the use of cash, since cutting that payment generates negative publicity. Stock buybacks give a company much more flexibility in how much and when to return cash to investors. It’s easy to overlook small investors who rely on dividend payments for real cash they can spend.

Boeing’s story might have been very different if the company had a lot of cash to invest in the business, to fend off rival Airbus SE, which is now eating Boeing’s lunch, or to provide shelter on a rainy day. Well, Boeing just made it through the monsoon season without so much as a rain suit.

The union should set a precedent and demand that its employees receive a bonus tied to a percentage of stock buybacks. It can’t be a small percentage, like the 1 percent tax on stock buybacks that went into effect at the beginning of 2023. This small obstacle hasn’t stopped the stock buyback craze.

It would have to be a large percentage, say 5% or 10%, to discourage Boeing executives from spending more cash when the good times return, if they ever do. If management simply can’t wean itself off the steroids of stock buybacks, at least employees will share in the largesse.

Yes, this idea is a bit far-fetched. The union probably won’t want to waste its newfound bargaining power on something that doesn’t provide an immediate paycheck. Boeing management would object at all costs, because it would tie its hands to one of Wall Street’s favorite financial tools. Still, workers are in a rare position to think outside the box and make important changes at the company.