Every year it seems like Boeing (NYSE: BA) runs into more trouble. Some problems -- such as the tragic 737 MAX accidents -- are self-inflicted. Others, like the COVID-19 pandemic, are out of its control. Today, it is dealing with a problem that is a mix of both: a union strike. Some 33,000 machinist workers are striking for better wages and benefits in Washington state, calling for large raises over the next few years.
Boeing and its new management team have not matched the union demands, causing a pause in production at its factories and a huge cash burn that is draining the company's finances. Here's why this strike is a bad sign for Boeing's business and puts more strain on an already stretched balance sheet.
Union demands and the income statement
The Boeing machinist union is seeking a 40% increase in pay over the next four years along with the reinstatement of a defined benefit retirement pension. Management offered a 30% increase in pay but no pension, but the union did not accept it. For weeks, the company and union have been at an impasse, and it doesn't look like it will resolve anytime soon.
Management is in a tough spot with these negotiations. It is losing a boatload of money during the strike with the factory not operating, with some analysts estimating it could be burning $1 billion in cash a week due to its high fixed costs. On the other hand, if it accepts this pay bump for the union and any other benefits, there is not much room on its income statement to make it happen while generating a profit.
Even in highly profitable years before its 737 MAX issues, Boeing had a gross margin under 20%. That figure hasn't risen above 10% since the pandemic, making it difficult for Boeing to turn a profit. If labor costs rise by 40% over four years, that will put even more pressure on its gross margin, which only covers the variable costs of operating the business. This doesn't include corporate overhead, marketing, or research and development costs.
Boeing's operating margin has been negative ever since the pandemic, meaning it lost money for many years straight, even before this strike. Add in some substantial wage increases, and it is hard to see how Boeing will generate a profit anytime soon.
New CEO and a teetering balance sheet
Dealing with all this is Kelly Ortberg, the new CEO of Boeing who started his job back in August. Ortberg began on the right foot by visiting the Boeing factory and living close to the manufacturing operations in the Seattle area. However, now he is dealing with a huge strike and a bleeding income statement.
This unprofitability and potential cost increase could be a major hit to Boeing's balance sheet. The company has over $50 billion in debt and barely over $10 billion in cash, which may run out soon if it can't make a deal with the union. Even if it makes a deal with the union, this cash drain will continue due to the higher labor costs that will come with it. No wonder there are reports that Boeing is in talks to do a common stock deal worth around $10 billion.
BA Gross Profit Margin data by YCharts
What will happen to the stock?
Boeing stock is off 66% from all-time highs and has a market cap of just $92 billion. The company needs to get back to generating positive free cash flow. Given its position with the union and slim margins, the only way to do this is to raise the prices on its planes and increase its unit volume production.
There are problems with both of these ideas. First, unit volumes will struggle to increase because of the (rightful) strict regulations from the federal government. You can't have Boeing planes falling out of the sky again. Second, Boeing has long-term deals with airlines for planes at set prices. No airline is going to willingly revise these deals and sacrifice their costs to help out Boeing. These aren't charities.
This puts Boeing in a challenging position. Unless it can perform a miraculous turnaround, the company will continue to struggle and burn tons of cash. Avoid buying the dip on this stock until further notice.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
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