Boeing's Contract Negotiations with Union Collapse Amid S&P Warning

Boeing's Credit Rating Under Threat

Boeing is facing a series of challenges as S&P Global Ratings placed the aircraft manufacturer on CreditWatch negative due to the potential of its investment-grade credit rating being downgraded to junk. The situation was further exacerbated when negotiations with its largest union, the International Association of Machinists and Aerospace Workers (IAM), failed to reach a resolution, prolonging a strike that has already lasted for almost a month.

Failed Contract Negotiations

According to a Bloomberg report, Boeing and IAM were unable to agree on a new labor contract, causing the strike to extend into its 27th day. Boeing had proposed a labor contract deal that would have given the over 33,000 IAM members a 30% pay rise over four years. However, IAM is seeking a 40% pay increase over the same period.

Boeing Commercial Airplanes President and CEO Stephanie Pope stated in a memo that the union did not seriously consider their proposals and instead made non-negotiable demands that exceeded what the company could accept while remaining competitive. On the other hand, IAM leaders claimed that the negotiations fell apart when Boeing negotiators refused to increase wages over the contract's lifespan or reinstate the defined benefit pension.

S&P's Warning

In a separate development, S&P announced that Boeing's ratings, including the 'BBB-' issuer credit rating and senior unsecured debt ratings, have been placed on CreditWatch with negative implications. S&P stated that the CreditWatch listing reflects the increased likelihood of a downgrade if the strike continues towards the end of the year, further constraining the company's cash flow generation and if the company fails to raise sufficient capital to meet its upcoming needs without increasing financial leverage.

S&P estimated that the strike is costing Boeing $1 billion per month and expects the target of producing 38 Max jets per month to be delayed until mid-2025. There are also concerns that Boeing will need to raise funds via public equity markets due to its dwindling cash balance.

Boeing's Financial Challenges

Boeing is likely to seek additional funding. S&P anticipates that if the strike continues through the fourth quarter and the company typically uses cash in the first quarter due to seasonal working capital build, Boeing will end 2024 with a cash balance below its $10 billion target. Boeing also has approximately $4 billion of debt maturities due in April 2025. S&P believes the company will need to seek external capital to meet these demands and is open to potentially issuing additional equity. However, the company remains exposed to higher-than-expected cash usage and adjusted debt for the next year or two, which could further delay the expected recovery in its credit measure to levels S&P views as consistent with the rating.

Market Reaction

In the markets, Boeing shares are down 1.6% in premarket trading around the $152 handle, which has served as a multi-year support level since shares crashed from $450-ish to $100 during the March 2019 and December 2020 Max jet crashes. It seems inevitable that Boeing will turn to public markets to strengthen its balance sheet, as the company faces a significant risk of a credit downgrade to junk status if the strike continues.

Bottom Line

Boeing's current situation is complex and challenging. The ongoing strike, coupled with the potential downgrade of its credit rating, places the company in a precarious position. As the company seeks ways to navigate these challenges, it may have to make some tough decisions. What are your thoughts on this situation? Do you think Boeing will be able to overcome these challenges? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.