ILFC gets $5.7bn in financing

Mega-lessor International Lease Finance Corp. (ILFC) obtained a $5.7 billion commercial paper financing via the Federal Reserve Bank Commercial Paper Funding Facility.

This just goes to show what government ownership can do for you, after all.

ILFC, of course, is more than a little important to commercial aviation and to Airbus and Boeing in particular. ILFC has ordered more airliners from the Big Two manufacturers than any other customer–747 from Boeing (7-Series airplanes only) and 609 from Airbus. It is Boeing’s largest customer for the 787, with 74 on order.

ILFC is a subsidiary of insurance giant AIG, which narrowly missed filing for bankruptcy when the US government initially committed to loan $85 billion (with another $37 billion coming later). A Chapter 11 filing by AIG would almost certainly have meant a bankruptcy filing for ILFC, even though its financial condition was never in doubt; subsidiaries are routinely put into Chapter 11 if the parent files in order to protect assets from liens and seizures by creditors.

As a result of AIG’s troubles, the commercial paper market dried up for AIG and ILFC. ILFC had to draw down $6.7 billion from its credit lines to repay CP coming due; at the time, ILFC said this would provide enough liquidity “into” the first quarter of 2009, an alarming statement that suggested liquidity problems might arise by then.

With AIG’s troubles, ILFC’s cost of funds had been rising throughout 2008. Its medium term note interest rate in January was under 3.5%; by September, just before the markets and AIG collapsed, ILFC’s interest rate had risen to nearly 8.5%.

The interest rate obtained for the $5.7 billion CP issued by the Federal Reserve to its new government majority-owned partner: 2.78%.

Airbus and Boeing can breath easier: ILFC’s orders are safe.

The financing was revealed in an SEC 8K filed today.

IAM Vote Saturday

The IAM vote on the Boeing contract offer is Nov. 1, with results expected by around 8 PM PDT. We’ll be on scene and anticipate updating throughout the vote count from about 6:30.

We think there is a chance the contract could be rejected, based on our advance discussions and reading. We think this would be a mistake.

Vote ‘Yes’ on IAM contract; SPEEA talks begin

The IAM union at Boeing votes Saturday (Nov. 1) on the revised contract offer presented by Boeing. It’s time to vote ‘yes,’ and get the union members back to work, production lines going again and Boeing customers their airplanes.

This is a compromise agreement, and like any compromise, not everyone is happy about it. The 751RanknFile blog opposes ratification. There are some valid points on the blog, and an unscientific vote has 53% of the respondents opposing the contract. But the IAM negotiators did get standstills on health care and retirement benefits, two important issues to the union. There were minor improvements on pension payments compared with Boeing’s Best and Final Offer–improvements so minor that we wonder why Boeing didn’t offer this earlier, or why the IAM negotiators thought these were victories, but they are what they are.

The IAM gained job security for the life of the contract for nearly 4,000 jobs, another important issue to the union, and some restrictions on vendor delivery of parts to the factories.

Boeing maintained the right to outsource on the five issues most important to it, while granting the IAM certain rights before work is outsourced from Puget Sound (the Seattle area) to any other Boeing facility. This might be important when Boeing opens a second 787 line. Boeing really has to do this in order to have any hope of accelerating delivery delays of up to three years for the new airliner and to open up delivery slots for new orders. The IAM wants this second line in Everett, the assembly site for the 787. If Boeing wants a second line under the Boeing assembly name during the four years of the life of the contract, it seems that the IAM gets to have a say and/or bid on this work before it goes somewhere else.

Boeing gets a four year contract instead of three years, but does not get the defined contribution pension plan it wants in place of a defined benefit plan.

This is a superficial summary; the full contract proposal should be posted on the Boeing and IAM websites Thursday and we’ll link them when they appear.

Although both sides didn’t get everything they want, it’s time to ratify the contract and get back to work.

We hope the IAM membership agrees.

Meanwhile, over at SPEEA

“Table” negotiations began today between Boeing and SPEEA began. Boeing has several messages dated today (October 29) on its Boeing-SPEEA labor website. SPEEA’s labor website is here.

Update, October 30: Here is the IAM’s 8 page description and recommendation of the new contract offer.

Assessing the settlement

Update, October 30:

Seattle post-Intelligencer: Bill Virgin, an astute business columnist, opines on who won and who lost in the strike settlement.

Update, 5:00 PM: Here is a 17 minute podcast about the settlement with Richard Aboulafia, Scott Hamilton and Addison Schonland.

Update, 1:00 PM: The IAM set the vote to ratify the new contract offer for Saturday, Nov. 1. Voting will be until 6 PM PDT, with results announced later that evening.

Original Post:

Now that the dust has settled a bit and the details of the settlement between the IAM and Boeing are emerging, it’s time to assess the outcome. Inevitably, the question is asked, Who won?

On balance, it looks like the IAM did, but Boeing came away with important victories as well.

From Boeing’s perspective, spokesmen as well as the official Boeing statement hammered home the retention of outsourcing flexibility, the key stumbling block in pre- and post-strike negotiations. The only change in the contract over this issue, Boeing told us, is that the IAM gets consulted and a chance to bid on any work proposed to be shifted from the Puget Sound (Seattle area) to any other Boeing facility. None of the five strategic reasons for outsourcing was eliminated or altered. On balance, we think Boeing prevailed on this issue.

Another point of contention was Boeing’s plan to revise health care benefits for workers and institute an employee contribution plan whereby IAM members would have to pay some share of the premium costs and other costs. The IAM called this a take-away. The parties agreed to keep the present coverage in place, with no employee contribution. It’s hard to call who “won” this one; the employees don’t have to co-pay, but the coverage isn’t quite as good (according to Boeing), and we don’t know whether Boeing is saving any money or not for less coverage but no employee cost-sharing.

A four year contract was crafted in place of the standard three year deal. Both sides “win” on this one; Boeing gets longer labor stability and the union gets an additional 4% raise in the fourth year, for a total of 15% over the life of the contract. Boeing originally offered 11% over three years and the union wanted 13%. Though we dislike the over-used term, “win-win,” this one fits the description.

Boeing slightly sweetened the pension retirement payments, for a “win” for the union.

The question is when does production get back up to pre-strike levels. We addressed this in our post on the tentative settlement, citing Boeing CFO James Bell’s earnings call statement that it could take as long as two months. A Boeing spokesman we spoke with thought Bell said there would be a day-for-day delay (actually that was Boeing CEO Jim McNerney talking about the 787 development and first flight delay). We returned to the transcript of the earnings call and reproduce the relevant conversation below:

JB Groh – D.A. Davidson

But, well let’s say theoretically if it ended after 60 days, can you get up to that rate in two months’ time or –?

James Bell

I don’t know. I really don’t know and I don’t want to speculate but I think that two months is a long period of time, so I would suspect that we could get close to it, if not there, in the two-months period. Hopefully, we can do it in a lot less time.

Boeing, its employees, the customers and the suppliers can breath a sigh of relief…for the moment. With SPEEA negotiations starting tomorrow, we could be in for this all over again. The SPEEA contract expires December 1. If no agreement is reached, look for a strike for; if successful, look for a return to the bargaining table with SPEEA’s hand strengthened, armed then with a walkout planned for January or February.

JP Morgan had this to say: The end of the Boeing strike should provide a short-term boost to the commercial aerospace stocks. We also find the stocks attractive on a long-term basis. However, the plethora of bad news likely to come on the cycle, the aftermarket, margins, and further 787 delays make us more cautious on the intermediate outlook.

Details of IAM-Boeing settlement

October 28:

STATEMENT FROM DBR TOM WROBLEWSKI:

This synopsis reflects the highlights of the issues that you identified: job security, wages, pension and health care. This is just a summary of some highlights, we will be providing additional information.

“Our Union has delivered what few Americans have – economic certainty and quality benefits over the next four years.

We have secured health care benefits with no additional cost shifting. The amount members will pay in deductibles and co-pays by the end of this contract, will have remained constant since 2002.

Preserving a defined benefit pension plan for all members is becoming rare; improving the defined benefit plan is a positive move.

As the financial markets have crumbled, the Union delivered 15% guaranteed pay increases for every member over the life of the agreement. In addition, there are significant lump sum payments in the first three years.

The fight for job security is something we battle every contract, every opportunity and every day. In this round, we won the battle and made some significant gains. In the fight for job security, we won. We will fight again in every contract going forward, as long as companies like Boeing see an advantage in bolstering their bottom line by sacrificing quality for the cheapest labor. At 30,000 feet airline customers want quality.”

JOB SECURITY

Letter of Understanding #2 – Updated Letter of Understanding to protect nearly 2,200 facilities/maintenance employees currently on the payroll for life of the Agreement.

Revisions to Article 21.7 – Expanded the scope of our subcontracting review. Secured the ability to compete for work that moves from one Boeing facility to another Boeing facility.

Improved Letter of Understanding #37 with the following protections.

• Forklift Drivers, MPRF’s, Factory Consumables Handlers, Environmental Control Workers and Shipping/Distribution will not be laid off or removed from their job classification and grade as a result of Materials Delivery and Inventory Process. This revision expanded protection to 2,920 jobs for the life of the Agreement.

• Except for 787 final assembly, vendors are limited to delivering products to designated areas only. From there, bargaining unit employees will track use, disbursement, acquisition, and/or inventory of parts, materials, tools, kits and other goods or products.

• Jointly work with the Company to improve material delivery process and ensure our members grow with the new technology and innovations.

• Parties will explore options for retraining or reassigning bargaining unit employees to equal level jobs when employees are impacted by process and technology changes.

COMPENSATION

General Wage Increases

1^st year – 5%

2^nd year – 3%

3^rd year – 3%

4^th year – 4%

Lump Sum Payments

1^st year – 10% (of previous year’s earnings) or $5,000, whichever is greater

2^nd year – $1,500

3^rd year – $1,500

In addition, the second and third year lump sum can be diverted into VIP to bolster members’ pension savings.

Rate Range Minimums – All rate range minimums increased by $2.28

Progression – Employees in progression on 9/3/08 will receive supplemental wage increase sufficient to bring them to the new rate range minimum or $1 per hour, whichever is greater.

PENSION

Effective 1/1/09 – $81 per year of service

Effective 1/1/12 – $83 per year of service

HEALTH CARE

Boeing retreated from their takeaways and cost shifting in medical and benefits and reverted to the 2005 contract levels. This means the medical cost structure and benefits remain the same through 2012.

RETIREE MEDICAL

Went back to the 2005 language – eliminating language that would have been detrimental to existing retirees currently on retiree medical.

DURATION

Four years, expiring September 8, 2012