Boeing's Profitability Challenges Following Labor Strike

The recent labor strike at Boeing is expected to have significant implications for the company's profitability in the coming years. With labor costs destined to rise, earnings are projected to decline.

The strike, which has now reached its eighth week, may be approaching a resolution. Boeing negotiators recently engaged with leaders of the International Association of Machinists (IAM) and proposed a wage increase totaling 38% over the next four years. Additionally, in some calculations, the average wages for machinists could see an increase of up to 44%, surpassing the union's initial demand for a 40% raise. However, this proposal does not include the reinstatement of Boeing's defined benefit plan, which some union members had sought.

As part of the new offer, a one-time ratification bonus of $12,000 has been included, which could potentially bring the strike to an end. Union members are expected to vote on the contract on Monday, which would mark this strike as the fourth longest in Boeing's history at 52 days.

Funding the Wage Increase

In preparation for these labor cost increases, Boeing has recently announced a plan to issue and sell up to 129.4 million new shares of common stock, with an overallotment option included. If the shares are priced at $143 each, this could garner approximately $18.5 billion. Additionally, the company plans to issue up to 115 million depositary shares, which represent preferred stock convertible into common shares, expected to generate about $5.8 billion.

The total cash raised through these efforts could potentially reach $24.3 billion, following Boeing’s initiative to raise about $25 billion over the next three years. The primary aim of this fund, similar to the strategy executed during the COVID-19 pandemic, is to ensure that Boeing remains financially stable until the strike is resolved.

Interestingly, this significant cash influx could facilitate Boeing in meeting the pay demands of the union, potentially leading to an end to the strike.

Projected Financial Impact

However, the news is not entirely optimistic for Boeing and its shareholders. If the IAM ratifies the proposed contract, and similar wage increases are applied to other workers, significant changes are expected in the company’s financial outlook. Current estimates indicate that in 2027, Boeing might earn around $6 billion in net income. However, with a 38% wage hike, this figure could decrease by about $1.3 billion, leaving an estimated profit of $4.7 billion.

When analyzed based on the current share count of 618.2 million, the profit per share would equate to around $7.60 in 2027, which is a dip from the anticipated $8.12. If Boeing successfully converts its newly issued preferred shares into common stock, the total number of outstanding shares could rise to 788.2 million, minimizing profit per share to about $5.96, resulting in a notably higher P/E ratio of 26 times.

Nevertheless, certain uncertainties exist around this financial projection. Boeing may delay converting preferred shares, or it may opt to pay dividends on them instead, impacting share dilution differently. The company could also use the raised capital to alleviate part of its substantial $57.6 billion debt burden, which may, in turn, enhance profitability.

In conclusion, the ongoing labor strike and the subsequent share dilution efforts to sustain financial viability indicate that Boeing’s future profits might be significantly lower than what many investors initially expected.

Boeing, Profitability, Strike