Boeing strike's silver lining: Suppliers can untangle 787 problems

If investors are hoping for a silver lining in the Machinists strike against Boeing, it's this: Suppliers will have time to untangle problems that have delayed the company's long-awaited 787 jetliner. But some analysts worry a lengthy work stoppage could overshadow any advantage by threatening Boeing's goal of a 787 test flight before year end.

"It's like the flowers wrapped around the lead pipe — they look pretty but it's going to hurt nonetheless," said Scott Hamilton, an analyst with Leeham Cos. "The longer this (strike) goes on, the bigger the ripple effect is going to be, and the more Boeing customers are going to be unhappy."

The effect on suppliers who make most of the 787's parts will depend on the strike's duration, analysts say. Some suppliers may start to feel economic repercussions if the strike drags on for more than 30 days, while the introduction of the 787 — delayed three times already — could be pushed back further.

Paul Nisbet, an analyst with JSA Research, said he believes the strike could last as long as 30 to 60 days. That would delay schedules for all of Boeing's planes, but particularly the 787, he said.

The last two strikes by the International Association of Machinists and Aerospace Workers at Boeing's commercial aircraft operations in the Seattle area lasted 24 days in 2005 and 69 days in 1995. The latter was the longest since a 140-day strike in 1948.

"It would give these suppliers the time to really get their act together so they can be ready to really ramp up as soon as Boeing gets caught up with the ones they've already done," Nisbet said.

In a note to investors, analyst Howard Rubel of Jefferies & Co. wrote: "Subcontractors that have been behind on the 787 should be able to continue to work through their bottlenecks and to some degree aircraft that are not in Seattle should become more ready to be shipped than before."

Though analysts have said the strike could cost Boeing upward of $100 million a day in deferred revenue, analyst Harry Nourse of Banc of America Securities said "the medium-term financial impact of a strike should be small" because Boeing's customer contracts tend to have clauses excluding penalties for late delivery arising from labor disputes.

But Tim Healy, a spokesman for Chicago-based Boeing, said the strike was "terrible" for the company's customers. They are "really disappointed and there's nothing that would make up for that," he said.

"While it's possible that it may give some suppliers a chance to catch up ... the advantage is so far outweighed by the disadvantage," he added. "We've already delayed the 787 and this is a further delay. It's just not something we ever would have wanted to have happened."

According to Richard Aboulafia, vice president and analyst for the Teal Group in Fairfax, Va., the strike offers an opportunity to make supply chain improvements, but that's not the same as test flying a new plane.

"This is a critical phase in the program, and to have aircraft that aren't ready, it's painful," he said.

In July, Boeing said 58 airline customers had placed 896 orders for the much-anticipated 787. The company's total backlog of all airplane orders had risen to a record $346 billion.

Some suppliers have taken measures to mitigate the possible effects of the strike. Spirit AeroSystems, which makes 787 parts such as flight decks and parts of the forward fuselage, said Monday it plans to cut production on some Boeing products. It also withdrew its 2008 financial guidance issued July 31 and plans to update it after the strike ends.

Spirit, a former Boeing operation, said it would reduce the workweek for employees working on affected products. The company cut its workweek during a Boeing strike three years ago, avoiding a shutdown in production and an employee layoff.

Vought Aircraft Industries, which makes aft fuselage sections for the 787, has contingency plans to deal with the work interruption, according to Lynne Warne, a company spokeswoman. It will continue to build parts for the plane, but will store them at its facilities until Boeing asks for them to be shipped, she said.

"We're pretty caught up," she said, adding that Boeing had slowed its 787 production to finish planes already in the pipeline.

Rockwell Collins, which makes pilot controls, displays and other equipment for the 787, has been trying to determine the possible impact of the strike, said Pam Tvrdy, a spokeswoman for the company. "We're really in the assessment phase," she said.

For its part, Boeing is working with suppliers on an individual basis to make arrangements for them to continue making parts and shipping them to Boeing, or to store them at the production site for now, said Boeing's Healy.

Boeing's union machinists — including 27,000 electricians, painters, mechanics and other production workers in Washington state, Oregon and Kansas — walked off the job Saturday after contract negotiations with the company faltered.

The move comes amid what some analysts call a revolutionary undertaking by the company. The 787 will be the world's first large commercial airplane made mostly of carbon-fiber composites, which are lighter and more durable than aluminum and don't corrode like metals. Boeing says it will be cheaper to maintain and offer greater fuel efficiency and more passenger comforts than comparable planes flying today.

But Boeing has taken an unprecedented approach by assembling the jet from components manufactured largely by other companies, and it has run into multiple snags related to outsourcing problems involving contractors in numerous countries.

The company makes 30 percent of the plane's parts and buys the remaining 70 percent from outside suppliers spanning the globe, from Japan to the U.S. The parts breakdown for other Boeing planes is comparable, though it was closer to 50-50 earlier this decade, according to the company.

The union says the 787 strategy is the root of its delay.

"They should have kept that work in Seattle," said Tom Buffenbarger, Machinists union president. "The idea that they could build these components at all these different companies all over the world and have it all snap together, Boeing should be able to see now that just didn't work."

Hamilton, the Leeham Cos. analyst, added that the 787 was already "slipping on its own merits," regardless of the strike, because "a lot of these systems are new and unique to the 787, and it just takes time to sort those out."