Greatest Long-Term Threat to Boeing Is the Loss of Talent

Boeing recently decided to move the majority of its defense services and support work out of Seattle. The primary goal was to cut expenses; Seattle is a high-cost area, and the jobs will go to cheaper St. Louis and Oklahoma City. The move also reinforces Boeing's industrial footprint and political presence outside of Washington state.

Boeing Defense, Space & Security (BDS) CEO Chris Chadwick termed the moves "necessary if we are going to differentiate ourselves from competitors and stay ahead of a rapidly changing global defense environment." He is exactly right. The problem is that Boeing Commercial Airplanes (BCA) is positioned very differently from BDS, and yet corporate management is taking a one-size-fits-all approach to labor relations.

BDS is under siege. Not only has the U.S. topline defense budget decreased in the past five years but Boeing's share has been under pressure, too. Production of BDS's most profitable and longest-running platforms—the C-17, F-15 and F/A-18E/F—is scheduled to end in the next few years. They have become victims of defense cuts at home and heavy competition in export markets. The rotorcraft unit is also facing serious cuts during the next five years, with V-22 procurement winding down by the end of the decade.

The two most important new Boeing defense platforms face problems, too. The KC-46 tanker faces hundreds of millions of dollars in cost overruns, much of which will be borne by Boeing, which won the tanker contract with a very aggressive bid. P-8 maritime patrol aircraft procurement in fiscal 2015 was cut by half from last year's plan.

Meanwhile, BDS's competitors are largely based in lower-cost production regions with weaker unions. Given these circumstances, aggressive cost cuts are the correct strategy. But it's also important to remember that when a company takes aggressive action to move jobs and reduce labor costs, it always creates risk. In particular, key skills and experienced workers can be lost, threatening execution and company capabilities.

In the case of Boeing's defense side, this risk is probably worth taking, given the pressure it faces from both market forces and competitors. But BCA is in the exact opposite position of BDS.

BCA's topline market has been growing by 4-5% per year since the dawn of the jet age, with the last 10 years seeing accelerated growth of almost 10% per year. BCA is planning on more growth. It faces exactly one competitor, and high barriers to entry in this industry mean the duopoly will stand for decades. There are no technological shifts that could threaten BCA's market position, which is growing relative to Airbus's. Its labor costs certainly are not lower than Boeing's. Best of all, BCA's product line is in great shape, with a high level of technological leadership. Current or forthcoming products cover all market segments.

In short, BCA's revenue, market share and profits are all set for growth. Yet Boeing corporate's approach to labor at BCA has been more draconian than at BDS.

The past year or so has seen a litany of aggressive labor tactics. A new machinists' contract that cut benefits and pensions nearly resulted in a strike, which was only averted by the narrowest of margins, and even then only by threatening jobs. In March, Boeing eliminated pensions for 68,000 non-union workers. The company then announced it would transfer thousands of engineering jobs out of the Puget Sound area. Just after that, Boeing informed 2,000 engineers that half would be fired soon (the other half, of course, were given a good reason to leave). In September, Boeing Senior Vice President Tim Keating criticized leadership of the Society of Professional Engineering Employees in Aerospace (BCA's engineer union), saying its legal complaints "are not the ingredients for a happy ongoing relationship."

Management's approach will likely have negative consequences for BCA's long-term prospects. First of all, anything that alienates or scatters talent is bad for a company whose competitiveness depends on solid engineering. Second, management should have learned from the series of emergencies that made up the 787 development program. Time and again, engineers and technical workers were asked to go the extra mile. As the 737 MAX, 787-10, 777X and any other new programs go through development and certification, will workers respond the same way when problems emerge? This is an industry that depends heavily on employee enthusiasm for a common goal.

Boeing's strong-arm approach to BCA labor is also a violation of basic market economy principles. BCA is asking more from its workers, not less. Normally, when demand goes up, so does the price. At the very least, it does not go down.

Managing labor for a growth business means attracting and retaining talent. Managing for a retrenching business means a focus on costs. To use a more extreme analogy from a different industry, what works for General Motors is different from what works for Tesla. Boeing management needs to remember the greatest long-term threat to BCA isn't the cost of labor; it's the loss of talent and the erosion of core capabilities.