Boeing: Machinists' Union Contract Terms Rational, Spirit Takeover in 2025; Fair Value Up $1 to $219

Boeing announced a tentative agreement with the machinists' union representing some 33,000 of its employees, including wage increases averaging 33% over the life of the contract. Union members will vote on whether to ratify the contract on Sept. 12, and we think they likely will. By our analysis, and recent comments by Boeing CFO Brian West about what proportion of an airplane's cost comes from labor, the new contract should add over $600 million to Boeing's commercial aviation costs by 2027. In the context of $75 billion of annual commercial revenue in that time frame, the overall impact is muted—it would lower commercial aerospace margins by some 800 basis points, as only about 15% of the cost of an airplane is labor, and by our estimate, 40% of that is represented by the machinists' union. The terms seem rational to us, especially in light of how much the parties' relative bargaining positions have changed since this contract was last hammered out in 2008. All else equal, the company's new cost structure lowered our fair value estimate by $3.