Labour costs likely to be headwind for Boeing over next few years

Pay is likely to be a headwind for Boeing over the next few years as it reintegrates Spirit AeroSystems and labour negotiations push for higher wages, senior analysts from a Bloomberg Intelligence report said. Analysts George Ferguson and Melissa Balzano said that pay could boost between 1.5-2% as a new pay package with the International Association of Machinists (IAM) union could see an increase from $750 million to $1.5bn. ""Our calculation is based on 75% of the median pay for a Boeing employee of $119,873, based on the company's 2024 proxy statement, and gain of almost 20% (which appears very likely) to 40%, which corresponds to media reports of the union's initial ask,"" the report read. Almost 36,000 of Boeing's employees are represented by IAM in its commercial defence arms. The report added: ""We expect an increase for Spirit workers integrated into Boeing on top of recent increases to equalise them with Boeing's pay scales."" It added that the divestment of Spirit's Airbus programmes, which were ""a source of strain and distraction. ""Airbus will receive $529 million to take the businesses, including assets involved in production, confirming our view that the undertaking was a money-losing effort,"" the report assessed. ""Attempts to economise across the business may have hampered quality."" Spirit had likely secured the Airbus programmes in order to diversify its revenue. However, the pandemic had pushed lower rates for the A350 and A320, which had further hurt Spirit's Airbus programmes. The disposals could boost the emphasis on production quality and rate for Boeing products, especially the 737 and 787. If 2025 performs well, Boeing may be able to average 38 737s per month as well as reach low 40s later in the year, according to the analysts. The Federal Aviation Administration (FAA) had capped the 737 production output at 38 per month following the Flight 1282 incident on January 5, 2024. Boeing have yet to reach that level as it homes in on its safety and quality. Spokespersons for Boeing have confirmed the original equipment manufacturer (OEM) is aiming to reach its 38 per month cycle in the second half of this year. The report added that the second half of 2024 is key to Boeing's recovery with it burning through cash in the first half of the year as it contended with the fallout from Flight 1282. The analysts said: ""Boeing used about $4bn in cash in Q1, pushing balances lower to $7bn, likely near the minimum for running the company. Since Q2 rates are likely no better, we expect a similar if not worse cash burn."" Boeing raised around $10bn in cash in the second quarter and it is estimated to end the second quarter with around $13bn in cash. ""If a second-half recovery stumbles, Boeing might find itself raising cash at far higher rates on fears of a protracted recovery,"" the analysts surmised. However, the reacquisition - while estimated to close sometime next year - may facilitate a ""much-needed boost"" to its second half build rates, profit, and cash flow as ""influence at the supplier grows"". Boeing's deal with Spirit is an all-paper deal with an equity value of around $4.7bn, or $37.25 per share, which represents a 30% premium to Spirit’s closing stock price of $28.60 on February 29, 2024, a day before discussions were officially announced.