Boeing's strike and its shrinking cash pile

Boeing's troubles have turned into a crisis of cash. Some 33,000 machinists in the International Association of Machinists (IAM) have walked out, halting production of its flagship 737 Max. With $58 billion of net debt already on its books, the strike brings Boeing close to insolvency.

A bad year gets worse

The walkout caps a dismal year. In January a door plug blew out of a 737 Max 9 flown by Alaska Airlines, and the Federal Aviation Administration barred Boeing from raising 737 output while it examined the company's quality control. Boeing has burned cash in every quarter since, changed chief executive in August, when Kelly Ortberg took over, and has not reported an annual profit since 2018. The machinists overwhelmingly rejected a contract offering a 25 per cent pay rise over four years and walked out in the early hours of 13 September.

The strike lands on a company already battered on several fronts. In July Boeing agreed to plead guilty to a federal fraud charge linked to the two fatal 737 Max crashes of 2018 and 2019, and its Starliner spacecraft returned to Earth without the two astronauts it had carried to the International Space Station, after NASA judged it too risky to fly them home. Each episode has added to the costs and to the doubts about management.

Why the machinists dug in

The union's anger has deep roots. In 2014, under pressure from Boeing's threat to build a new jet elsewhere, the machinists narrowly accepted a contract extension that froze their traditional pension, and wages have since lagged the rising cost of living in the Seattle area. The union opened this year's talks seeking far more than Boeing offered, including a much larger pay rise and the return of the pension. Members who have watched the company pay out billions in share buybacks in the years before the crashes were in no mood to accept a deal their own negotiators had recommended.

Where the cash goes

The strike hits Boeing where it earns its money. Airlines pay the bulk of an aircraft's price on delivery, and the machinists build the 737 in Renton and the 767 and 777 in Everett. With those lines idle, deliveries stop while salaries for non-striking staff, supplier bills and interest keep running. The 787 is assembled in South Carolina by non-union workers and can keep going, but it cannot carry the company alone.

The pain spreads down the supply chain. Spirit AeroSystems, which makes 737 fuselages and which Boeing agreed in July to buy back, depends on Boeing's payments to stay afloat. Parts will pile up in yards and warehouses. Suppliers already weakened by the pandemic and by this year's production limits have little room to absorb another pause.

Staring at a junk rating

All three big credit rating agencies have put Boeing's debt on negative watch. They warn that a long strike would drain its liquidity and lead to a downgrade to speculative, or 'junk', status. A junk rating would force investment-grade bond funds to sell, shut Boeing out of the top tier of the commercial paper market and raise its borrowing costs sharply. Management will very likely have to raise billions in new equity, diluting shareholders.

The margin for error is thin, because Boeing's ratings already sit one notch above junk at all three agencies. Its bonds are held widely in investment-grade indices, so a downgrade would push a large volume of debt onto the smaller high-yield market at once. The forced selling would come just as Boeing needed to borrow.

An equity raise is the obvious defence, and its cost falls on existing shareholders. Selling new shares, or bonds that convert into shares, would shore up the balance sheet and reassure the rating agencies, but at today's depressed share price it would dilute current holders heavily. Boeing spent tens of billions of dollars buying back its own stock in the years before the 737 Max crashes, at far higher prices, and would now be reissuing shares cheaply to repair the damage.

What happened in 2008

The precedent is not encouraging. The machinists last struck in 2008 and stayed out for nearly two months, and Boeing was in far better financial shape then. A walkout of similar length now would cost billions in lost deliveries at a company that was burning cash before the strike began.

Why Boeing may avoid the worst

There are reasons the agencies might hold off. Boeing has an order backlog of more than 5,000 commercial aircraft, which guarantees revenue once production resumes, and it is one of only two makers of large passenger jets as well as a major American defence contractor. Rating agencies tend to give some benefit of the doubt to companies with that kind of franchise. That patience will wear thin if the strike runs for weeks and cash keeps draining.

The winners are few. Airlines waiting for new 737s, from Southwest to Ryanair, face further delays and must keep older, thirstier planes flying longer. Airbus can gain little in the short run because its own factories are struggling with parts shortages, while lessors that own jets already flying may be able to charge more for them. The losers are Boeing's shareholders, its weakest suppliers and the machinists themselves, who forgo pay each week they stay out.

The signals to watch are the length of the strike, any new offer from Mr Ortberg, and the rating agencies' next statements. The machinists' strike has left Boeing close to losing its investment-grade rating. Shareholders should expect a large, dilutive share sale, probably before the year is out. If the walkout runs past October, expect the equity raise to be larger and the pay settlement richer than anything offered so far, with shareholders paying for both.