While The Boeing Company (NYSE:BA)’s 787 Dreamliner was facing a serious technical issue, the company was also facing another threat—labor strife. The later issue threatened to materially delay the company’s 787 dreams. Instead of caving in to the unions to get its new plane back on track, The Boeing Company (NYSE:BA) dug in on a key issue. What issue could possibly be more important than getting the 787 back in the air?
The Boeing Company (NYSE:BA)’s 787 Dreamliner was built from the ground up, using new and better technology than what underpinned aircraft before it. While it may be overkill to say this, but the plane was nothing short of revolutionary when it finally hit the tarmac. The materials it used and the benefits it promised, such as notably reduced fuel consumption, were massive issues for its customers.
Unfortunately, very public production delays were a black eye for The Boeing Company (NYSE:BA) as it worked the “kinks” out of the new plane. Still, the benefits that the new plane would offer were huge and airlines lined up to place orders. There are currently more than 800 such orders.
Nothing New is Flawless
One of the big changes in the plane was the use of high-tech batteries. The lithium-ion batteries used in the plane, which can be a fire hazard, saved weight and improved performance. However, after a fire on a Japan Airlines 787, luckily while it was on the ground, and a battery related issue on an All Nippon Airways flight shortly thereafter, have left the company’s 787s grounded until a fix is found.
Labor Relations
While The Boeing Company (NYSE:BA) clearly has other priorities, fixing the battery problem has to be among the highest on the list. So when its workers took to the ballot box to vote on new contracts, the company was clearly in a weak bargaining position. Boeing offered what some consider fairly generous wage concessions. However, it also included company friendly changes to its pension plans and healthcare coverage for retirees. The unions weren’t happy.
That The Boeing Company (NYSE:BA) is willing to take on these issues when it doesn’t have the upper hand at the bargaining table shows how big they are. Indeed, the company expected to pay $2.8 billion in pension benefits in 2012, with that number steadily increasing to over $3.4 billion by 2016. And that doesn’t include escalating healthcare benefits. Since the majority of the company’s 170,000 or so employees are within the company’s defined benefit plans, this issue is big.
Pensions, the Big Fight
Any company that has been around long enough likely has pension and medical benefit issues hiding in its annual reports. Some are more open about the problems than others, but all will have to face the issue eventually.
AT&T Inc. (NYSE:T), for example, recently announced that it had to take a one-time write off of $10 billion to shore up its employee pension plan. That’s a huge number and while not completely a shock to the stock market, it certainly wasn’t a pleasant event. At the same time, the company also lowered the returns it expects to see from its pension plan’s investments.
Essentially, companies put money aside today and invest it. The goal is to make enough from the investments to pay the obligations when they come due. There are fairly complex rules and regulations surrounding the funding of pension obligations, but suffice it to say that companies don’t have to have all of the money today to pay their obligations of tomorrow. That said, if the bills come due and there isn’t enough money, the company needs to cough up the difference.
Find it in the 10k
It isn’t hard to find information about pension and medical liabilities in a company’s annual report. However, they don’t all disclose the information in the same way. So it might take some digging.
General Electric Company (NYSE:GE) is a great example of the problem and is quite honest about presenting it. For example, the risk factor section in the company’s 2011 10k states, “At the end of 2011, the General Electric Company (NYSE:GE) Pension Plan was underfunded, on a U.S. GAAP basis, by $13.2 billion, and the General Electric Company (NYSE:GE) Supplementary Pension Plan, an unfunded plan, had a projected benefit obligation of $5.2 billion.” Big numbers. Boeing’s pension plan was underfunded by $16.6 billion at that time. Even bigger numbers, found within a discussion of that company’s “liquidity and capital resources.”
Don’t Overlook this Issue
Pension and healthcare obligations years in the future may not seem all that important today, but they can be because of funding requirements. And they will certainly be big issues down the road. Keep an eye on these costs. If The Boeing Company (NYSE:BA) is willing to take a hard line on this issue when it is in the throws of a debilitating problem, it should be important enough for you to take a look, too.
The article The Fight That’s More Important Than The Dreamliner originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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