Boeing Strike Could Cause Disruption Across Supplier Network Due to Imminent "Significant Spending Reductions"
Just a week ago, Boeing executives believed they had secured a new labor contract for around 33,000 unionized workers in Washington state. However, on Thursday night, the labor contract offer was rejected by 94.6% of union members, with 96% voting in favor of a strike. The last significant labor action by Boeing took place in 2008 and lasted for eight weeks.
Boeing Announces Hiring Freeze and Reduced Supplier Spending
CNBC reported on Monday that Boeing has announced a hiring freeze on nonessential staff travel and a reduction in supplier spending to conserve cash. This could indicate that the company's executives anticipate the strike could last for several weeks or even longer.
Brian West, Boeing's CFO, informed employees through an internal memo that "significant reductions" in supplier spending are imminent. He stated that purchase orders for 737 Max, 767, and 777 jetliners must be stopped.
In the memo, West wrote, "We are working in good faith to reach a new contract agreement that reflects their feedback and enables operations to resume." He added, "However, our business is in a difficult period. This strike jeopardizes our recovery in a significant way and we must take necessary actions to preserve cash and safeguard our shared future."
Credit Rating Agencies Warn of Downgrade
Credit rating agencies Fitch and Moody's warned on Friday that a downgrade of Boeing's credit rating to junk bond status could be imminent. Standard & Poor's had previously warned that a downgrade was likely if the strike went ahead.
Moody's noted that extended labor disruptions could hinder Boeing's recovery in the commercial airplanes sector, complicating liquidity as $12 billion in debt matures through 2026. The strike could lead to a downgrade if Boeing's liquidity significantly deteriorates or if it fails to generate sufficient free cash flow, which is expected to remain constrained through 2025 due to production challenges and cost pressures.
The last strike by Boeing machinists took place on September 7, 2008. The strike was over job security, outsourcing, pay, and benefits, and resulted in a $1.2 billion hit to the company's net income. The cost of a strike today could be significantly higher.
Impact of Strike on Boeing's Operations
"The strike will impact production and deliveries and operations and will jeopardize our recovery," CEO Brian West told investors at a Morgan Stanley conference on Friday.
Boeing is at risk of losing its prized investment-grade rating, which has been mentioned in every quarterly earnings presentation.
West also stated, "We are also considering the difficult step of temporary furloughs for many employees, managers and executives in the coming weeks."
What's becoming apparent for Boeing is the ripple effects of strikes. This includes a reduction in spending on suppliers. Boeing's website states that there are 11,000 active suppliers worldwide, which could result in layoffs and disruptions across its supplier network.
Using Bloomberg data, here are some of Boeing's top suppliers:
Risk management firm Sayari Labs reported that the most recent Boeing shipments mainly come from India, Turkey, South Korea, Mexico, and China. Suppliers in these regions are likely to be the most affected.
Bottom Line
The potential impact of a prolonged strike on Boeing's supplier network could be significant. If the supplier network were to experience throttling or shutdowns due to a prolonged strike, how long would it take for the supplier network to return to full capacity?
This is a thought-provoking question that needs to be considered. What are your thoughts on this matter? Feel free to share this article with your friends and discuss it. Sign up for the Daily Briefing, which is available every day at 6pm.
Boeing Strike Could Cause Disruption Across Supplier Network Due to Imminent "Significant Spending Reductions"
Just a week ago, Boeing executives believed they had secured a new labor contract for around 33,000 unionized workers in Washington state. However, on Thursday night, the labor contract offer was rejected by 94.6% of union members, with 96% voting in favor of a strike. The last significant labor action by Boeing took place in 2008 and lasted for eight weeks.
