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:: November 2013 Letter ::

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Dear Fellow Manufacturing Site Geography Students,

Dr. McCoy had Star Trek’s best catchphrase: Dammit Jim! I’m a doctor, not a bricklayer (or another occupation). I’ve been channeling the beloved doctor these days in discussions about Boeing’s 777X production line debate and the related union contract fracas. Dammit, I’m an industry analyst, not a psychologist. That’s really what it comes down to. From an industry and economics standpoint, the line will stay in Puget Sound. But then there’s the mysteries of the human psyche.

For those living in a cave, the story thus far: Boeing put an aggressive offer to the IAM751 involving large concessions on pension, wages, and overall terms and conditions. In exchange, Boeing would guarantee 777X production in Washington. Union leadership at first seemed to embrace the plan, then found itself dealing with angry machinists who voted a resounding No. After the vote, Boeing said it was looking at alternative sites and that negotiations with the union were on hold. Three alternative sites were quickly identified by the company, and later in the month an RfP was sent out to 15 different US sites.

From a strict industry/business/economics/common sense standpoint, the alternatives are seriously inferior. Washington State offers big advantages, including:

Geography. Puget Sound’s port facilities are the best from an Asian aerostructures supplier standpoint. Assuming Japanese heavy industries, and possibly Korean and Chinese aerospace companies play some kind of 777X role, it’s good to have sea shipment as an option. In fact, if the wings are built in Japan, there’s no other option, since the wings will be too large for air shipment. An inland site, or a port on the east coast, would increase transport costs or diminish outsource options.

Experience. If 777X were a clean sheet design, a new facility and a new work force might be feasible. But as a major derivative, having an experienced workforce from day one would reduce manufacturing costs and program risk. Moving to a new site would disrupt the production learning curve.

Infrastructure. There’s more relevant infrastructure in Everett than anywhere else, of course.

State government support. Just before the union vote, Washington State passed an $8.7 billion tax break for Boeing, just to show good faith or something. Washington has a pattern of generosity that might be tough for other states to beat, particularly since the Washington state government can be generous with taxes on a much wider variety of Boeing products.

Customer concern. At the Dubai Air Show 777X Emirates CEO Tim Clark, the plane’s launch customer and biggest 777 user, told the Wall Street Journal, “All we said to [Boeing] was, ‘Please don’t do to 777X what you did to the [787]…Don’t do that to us.” Co-launch customer Qatar Airways’ Akbar Al Baker said, “Frankly, we would rather everything was built in one place, and I think Boeing from the 787 experience have learned a lesson.” Clearly, airlines pay attention to program risk. Boeing has already lost key customers, most recently Japan Airlines, to the A350XWB, in large part because it has been dragging its feet on launching the 777X. Adding risk to the program by moving the line might not convince other customers to order Airbuses instead of 777Xs. But it might well convince them to hedge against 777X program risk by also ordering A350XWBs. [Incidentally, a strange headline that I read at Dubai: Boeing 777X Won’t Be Built In UAE (Gulf News, November 17).]

Further labor disruption risk mitigation The current contract with IAM751 expires in 2016. If no accommodation is reached on the 777X line, bitter feelings will worsen, and a strike will loom in a few years. As everyone recalls, these things tend to last 1-2 months and cost Boeing about 10% of yearly revenue, not all of which can be made good.

As for alternative sites, it’s quite telling that Long Beach, CA is put forth as a leading contender. Let’s examine the mindset behind this cranial flatulence: Everyone knows that greater Los Angeles is perfect for new large heavy manufacturing facilities. Unions in California are friendly, and the local government is very pro-business. There’s an enormous pool of Cold War era talent, much of which has yet to celebrate their 80th birthday. All that Long Beach real estate we own has no value on the market anyway. And if we need to expand, we can just push into downtown Long Beach!

The only alternative site that makes any sense is Charleston (which was curiously absent from Boeing’s initial short list of alternative sites). But while Boeing is quickly building up a pool of workers there, it is also ramping up labor requirements associated with that second 787 line and the 737 MAX nacelle work, and any other nacelle work it locates there too. The pool of local qualified workers might not be that large, and importing workers from other states quickly gets expensive. Charleston, of course, also lacks a Pacific port.

Back to Psych-landia. Boeing’s line decision isn’t driven by any of the factors described above. Instead, management would really like to be out of what it sees as a toxic relationship. And Boeing management isn’t totally wrong. To put it another way, the union isn’t blameless. The IAM’s weird International/751 Local conflict makes Byzantium look like Zurich. And nothing reinforces Boeing management’s preconceived notions of militant union Bolshevism like an angry mob led by a guy ripping up an offer and calling it a “piece of crap.” No matter who’s right, the appearance is dismal.

Nevertheless, Boeing management needs a reality check. Final assembly labor costs are a small fraction of the total cost of building a jet. Giving workers some of what they want would have a negligible impact on competitiveness, particularly since it would reduce costs and mitigate risks associated with moving the line. If management won’t compromise, that has less to do with economics and more to do with personal distaste.

Bottom line: As an industry analyst, I’d state the odds as 89%-10%-1%. That is, there’s an 89% chance of the line staying in Washington, a 10% chance of Charleston, and 1% that it goes elsewhere. But with the psychology of fear and loathing driving any part of the decision, numbers like these are largely meaningless. And I’m not a psychologist….

…I’m an aircraft industry analyst. And on that subject, November Teal Aircraft reports include Dassault’s Falcon, Korea’s KT-1/FA-50, ARJ21, King Air, NH90, Lynx, AW129, and the TBM850. Have a great Thanksgiving.

Yours, ‘Til Washington DC Finally Gets An Aircraft Line,
Richard Aboulafia
 

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