Striking differences

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Sep 11th 2008
From The Economist print edition

Both have big order books and similar strategies, but only Boeing is on strike

EPA

Another delay for the 787MANY manufacturers would love to be where Boeing and Airbus are: both have orders stretching years into the future, with exciting new products in demand and vigorous customers in Asia to take up the slack in Europe and America. Both aircraft-makers have been changing their business models to cut costs with much more outsourcing, bring in new risk-sharing partners and get closer to growing markets such as China.

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But here their fortunes diverge: this time Boeing is going down, while Airbus is bouncing back from a prolonged crisis. Boeing has shut down production of commercial jets because of a strike by assembly workers that seems to be as much about job security as about pay and benefits, whereas Airbus is pressing ahead with outsourcing work, this week selling a factory near Bristol to GKN, a British engineering group, and announcing plans to open a factory in Tunisia. Airbus workers accepted a measly pay rise of 1.5% this year and swallowed the loss of 10,000 jobs—but Boeing workers have rejected a pay offer of 11% over three years, plus bonuses.

The reason Airbus is able to press ahead with more outsourcing is that the company has been in a crisis for more than two years, and its workforce knows it. Its flagship double-decker A380 is more than two years behind schedule, and the strength of the euro against the dollar has hit profits hard. This week Louis Gallois, chief executive of Airbus’s parent company, EADS, said that, despite the dollar’s recent rise, the exchange rate still posed a grave danger to Airbus, because its costs are largely in euros, whereas planes are priced in dollars. He announced a further round of cost-saving measures this week to lop off a further

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Airbus’s outsourcing suffered setbacks earlier this year, when the credit crunch scuppered its plans to sell factories to German and French suppliers. But now Mr Gallois and Tom Enders, the boss of Airbus, are pressing ahead, by taking over the project to build a factory in Tunisia which was going to be built by one of Airbus’s big French suppliers, for example. Mr Gallois also said that production of A320s in China was proceeding because of the need to be close to that huge market; that Airbus and EADS would expand their activity in India because of the supply of good engineering talent there; and that production of aircraft parts would increase in the Maghreb to take advantage of low-cost labour on Europe’s doorstep. Factories in Mexico are also a possibility, especially if EADS eventually wins the controversial air-tanker-refuelling contract from America’s defence department. EADS shares rose 9% this week, helped by the stronger dollar and by Mr Gallois’s plans for extra savings.

French workers may hold noisy protests and demonstrations over job cuts, and the country’s railways and other public services are often wracked by strikes. But in the French private sector, strikes are rarer and seldom last long. And it is Boeing, not Airbus, that now has a strike on its hands. The International Association of Machinists and Aerospace Workers is one of America’s most powerful unions. Tom Wroblewski, one of its leaders, said this week that the price of a settlement had gone up since his 27,000 members went on strike. But already Boeing has offered 11% phased over three years, with about another 3% in cost-of-living adjustments and one-off bonuses of up to 6% of annual pay. In addition, the company is proposing an eye-watering 14% increase in pensions.

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That the union has called a strike despite such largesse shows how worried it is about Boeing’s shift towards outsourcing. Boeing greatly expanded its use of outsourcing with the 787, about four-fifths of which is made outside the company, largely in Asia and in Europe, before coming to Seattle for assembly. But this proved unexpectedly difficult to co-ordinate, contributing to mounting delays on the fastest-selling new aircraft ever launched. The 787 was at least 14 months behind schedule even before the strike brought things to a halt, at an estimated cost to Boeing of $100m a day. Boeing has been tweaking its outsourcing model to impose more control on the supply chain. And soaring labour costs at home strengthen the case for more outsourcing in future, despite the problems Boeing has had so far.

The union is worried about a more insidious form of outsourcing, closer to home. A previous agreement allowed Boeing’s suppliers to deliver parts straight onto the factory floor at its Seattle sites. The next step, the union fears, is for contractors to start fitting parts onto planes on the line, displacing well-paid workers. It wants job security, with the payroll headcount linked to the number of orders and production rates. It wants a chance to compete formally with outsourcing contracts in a bid to keep hold of the work. But its aggressive pay demands and strike action would seem to work in the opposite direction.

A federal mediator failed to avert the strike on September 6th and is still hovering in the background, trying to get talks restarted. But the previous machinists’ strike back in 2005 lasted 28 days, and one in the mid-1990s went on for nearly ten weeks. Meanwhile the 787 just gets later and later, and suppliers have started putting their workers on shorter hours.