As investors are likely aware, Boeing (BA), the American aircraft manufacturing giant, has faced a series of major setbacks in the past five years including production delays and catastrophic accidents involving its aircraft. The latest challenge comes in the form of ongoing labor strikes involving over 30,000 machinists, which may cost the company billions of dollars. I am bearish on the prospects for Boeing as I believe the company faces a long and difficult path to recovery.
Boeing’s Sweetened Offer Fails to Entice Workers
The ongoing strikes have deteriorated my expectations for a meaningful Boeing recovery this year. The International Association of Machinists and Aerospace Workers (IAM), the largest union at Boeing, supported an employee strike on September 13 when more than 30,000 workers demanded a 40% pay hike and improved job security. Although the union and Boeing agreed to a 25% pay hike and improved job security by building the next Boeing aircraft in Everett, striking workers were reluctant to accept this offer.
To sweeten the deal, Boeing announced what was called a “final” offer to striking workers, including a 30% pay hike over four years, the reinstatement of a performance bonus, and a doubling of the ratification bonus to $6,000. However, the IAM rejected this offer in a Facebook post yesterday claiming that it had not been negotiated with the union before being presented to striking workers. The union also confirmed that this offer will not be presented for voting as it fails to address key points raised by workers. The IAM also highlighted that Boeing’s deadline to accept this offer (11:59 PM on Friday, September 27) does not leave sufficient time to conduct a member vote.
The Strike Will Worsen Boeing’s Financial Position
Boeing’s poor financial position is one of the main reasons behind my bearish stance on the company, and the ongoing strikes will surely only exacerbate the financial challenges. According to Reuters, Boeing is losing an estimated $100 million per day as a result of these strikes. Therefore, the company may have lost more than $1.1 billion in the 11 days of the strike. Even more concerning, the company does not seem to be getting closer to reaching a deal with the striking workers. The incremental cost of any ratified new labor agreement also looks to exceed $1 billion annually, based on the most recent offer.
Boeing is a highly indebted company with more than $52 billion in long-term debt. The ongoing strikes will have a direct negative impact on free cash flows as the company is foregoing a substantial amount of revenue every day. Boeing’s liquidity position therefore risks further deterioration if the company fails to convince striking workers to vote for a revised deal. Considering the company’s deteriorating financial position, Moody’s has placed all of Boeing’s credit ratings under review, which suggests a downgrade is likely if the labor issues are not resolved promptly. Fitch Ratings also warned that Boeing is at risk of a credit downgrade if the strike extends into the future.
Boeing has historically earned approximately 60% of the sale price of an aircraft upon delivery. Given the work stoppages resulting from the ongoing strike, it is reasonable to assume that Boeing will fail to meet its delivery deadlines in the coming months. This will have a direct and meaningful impact on the company’s revenues and cash flows.
Production Delays Seem Unavoidable Amid Worker Strikes
In addition to Boeing’s poor financial health, I have been discouraged by Boeing’s continued inability to meet production targets over the past five years. The ongoing labor strikes make it even more difficult for the company to mount a comeback in the foreseeable future. Since 2019, Boeing has faced several production delays resulting from the grounding of the 737 Max fleet. The ongoing worker strikes have brought the production at Renton and Everett facilities to a complete standstill, significantly risking the company’s delivery schedule.
Boeing, anticipating these production delays, has already made requests to suppliers that they suspend shipments of components used in production. Even when the labor disputes are resolved, the company may struggle to rebuild its relationship with those same suppliers, given the financial strain the situation has caused. Boeing has already announced furloughs for thousands of workers as part of its strategy to save costs during the strike.
The labor strikes have also attracted regulatory scrutiny, with the Federal Aviation Administration placing its investigators at Boeing’s production facilities to monitor new developments during the strike. This increased regulatory scrutiny is likely to put a drag on Boeing’s production even after the work stoppage is resolved.
Is Boeing a Buy, According to Wall Street Analysts?
Unsurprisingly, Wall Street analysts are focused on the financial impact of the ongoing labor strikes. Jefferies analyst Sheila Kahyaoglu slashed her Boeing price target from $270 to $240 on September 23 as she expects the strikes to continue through mid-October. Bank of America analyst Ronald Epstein believes Boeing will eventually have to raise wages close to the 40% level demanded by striking workers. If this expectation materializes, the minimum average hourly rate paid by Boeing to its workers will substantially increase in the next four years, resulting in a major increase to operating costs.
UBS analysts also painted a gloomy picture last week claiming that Boeing will lose approximately $4 billion in cash if the strike lasts for a month or two. In the worst-case scenario where the strikes last through the end of the year, Boeing might burn $8 billion.
Based on the ratings of 21 Wall Street analysts, the average Boeing price target is $210.79, which implies more than 35% potential upside from the current market price. Analysts currently have 15 Buy, four Hold, and two Sell ratings on BA.
Although current analyst ratings reveal meaningful upside potential, I believe the ongoing strikes, production delays, safety issues, and regulatory intervention will lead to negative earnings revisions in the next few quarters. In return, these negative earnings revisions are likely to result in analysts slashing their price targets for Boeing, in my view.
Takeaway
Boeing’s struggles continue with the company now facing a labor strike representing approximately 23% of its workforce. Boeing is reportedly losing more than $100 million a day because of these strikes, and the company does not seem to be nearing a deal with striking workers. Boeing’s existing production challenges are likely to be exacerbated by these strikes, and increased regulatory scrutiny is not helping the company either. Boeing’s expected recovery is unlikely to occur in the foreseeable future as a result of these strikes.
