Trump on the New Air Force One

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[Update December 6 17:45 GMT -8: Add to the following these facts. The cost estimate, $3.2 billion, was produced by the Government Accounting Office. It covers two of the airplanes.  And just like that the $4 billion figure quoted by President-elect Trump becomes $1.6 billion per airplane.  A positive bargain.]

[pullquote]“We want Boeing to make money, but not that much money.” – President-elect Trump, audio, December 6, 2016.[/pullquote]

Today President-Elect Donald Trump suggested that the government contract with Boeing for a new Air Force One should be canceled.

Before getting into the details, here’s a response from Iowahawk (@IowaHawkBlog):

IowahawkReAF1

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There are two parts to this story. First, Boeing headquarters are in Seattle. The state of Washington voted for Hillary Clinton in the recent election. Second, Boeing’s Seattle location, home of about half the company’s total employees, is heavily unionized and has experienced frequent strikes. With one tweet, Mr. Trump managed to take a serious swipe at both the state that voted against him and labor unions. While this may seem like a good idea for public relations, it is terrible government policy because it encourages companies to engage in rent-seeking to obtain political favors.

Boeing 787 Dreamliner

Boeing 787 Dreamliner (click for larger image)

But here we are.

The Trump Statement

From Reuters:

U.S. President-elect Donald Trump urged the government on Tuesday to cancel an order with Boeing Co for a revamped Air Force One – one of the most prominent symbols of the U.S. presidency – saying costs were out of control.

It was the latest example of Trump using his podium, often via brief Twitter messages, to rattle companies and foreign countries as he seeks to shake up business as usual in Washington. Trump, who takes office on Jan. 20, took aim at what he called cost overruns even though the plane is only in development stages.

“Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!” Trump said on Twitter. It was not immediately clear what prompted the timing of his complaint. [In fact, the contract is $3 billion.]

Trump, who has vowed to use his skills as a businessman to make good deals that benefit American taxpayers, then made a surprise appearance in the lobby of Trump Tower in New York, where he amplified his comments.

“The plane is totally out of control. I think it’s ridiculous. I think Boeing is doing a little bit of a number. We want Boeing to make a lot of money but not that much money,” he told reporters.

Boeing, which has built planes for U.S. presidents since 1943, has not yet begun building the two replacements for the current Air Force One planes, which are scheduled to be in service by 2024.

Boeing has not yet been awarded the money to build the proposed replacements.

“We are currently under contract for $170 million to help determine the capabilities of these complex military aircraft that serve the unique requirements of the President of the United States,” the company said in a statement.

Let me unpack this for you, in case you don’t get it. Apparently Mr. Trump is already trying to outdo the current president in using his office for revenge. Here’s the first step to understanding.

Electoral Map

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About Boeing

Boeing headquarters is in Seattle, Washington. That’s the big blue blob in the upper left corner of the previous map. And, in addition, there’s the matter of Boeing’s workers. As of November 24, 2016, the company had 151,641 employees. About half of them were located in Washington. A similar percentage were working on commercial aircraft. And five percent of their workers were located in South Carolina. (Excel workbook version of these tables is available on request.)

Boeing Employment

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Workforce and Unions

Boeing workers are represented by the Machinists’ Union IAM District 751. The company’s relationship with the union has been fractious, with the first strike in 1948.

During World War II Boeing was flooded with orders for military aircraft. After the war, as business was decreasing, the company needed to reduce its workforce. This was not greeted with joy by their workforce. From Wikipedia:

April 22, 1948: 15,000 Boeing Union members went on strike. After not being able to reach an agreement with the company the Union declared a strike. [On] September 13, 1948: The Union members that were a part of Lodge 751 reluctantly went back to work. Lodge 751 “represents many men and women throughout Eastern Washington, Oregon and Idaho at various companies in trades such as aluminum workers, metal trades,

From http://www.corp-research.org/boeing

In 1989, while the company was flooded with orders and falling behind in filling them, the Machinists went on strike to pressure the company to make up for the six years without an increase in the base wage.

In January 1993 members of the Seattle Professional Engineering Employees Association (SPEEA, which now stands for Society of Professional Engineering Employees in Aerospace) staged a one-day strike to protest Boeing’s contract offer—the first walkout by the union representing 28,000 technical employees at the company.

In 1995 the Machinists struck Boeing for ten weeks in a contract dispute over health benefits and job-security issues linked to the company’s growing practice of outsourcing. The union managed to beat back management’s most aggressive demands. The company again sought major concessions and then backed down during the 1999 round of negotiations, thereby averting a strike. The following year, however, SPEEA members walked off the job for 40 days.

During the 2002 contract talks, a majority of Machinists union members rejected the company’s offer, seeing it as offering inadequate job security, but the required two-thirds did not vote in favor of a strike. The Machinists did, however, walk out in 2005 in protest of the large number of contract concessions the company was seeking. The strike ended after four weeks, with the company withdrawing its most significant demands regarding employee healthcare costs, but the new pact contained no general wage increase. The Machinists walked out again in 2008 and remained on strike for more than seven weeks until Boeing agreed to put some limits on outsourcing.

In October 2009 Boeing outraged its unionized employees when it announced that plans to open a second assembly line for its 787 Dreamliner jet in South Carolina, where it would likely be run non-union. …

In April 2011 the National Labor Relations Board, at the request of the Machinists, filed a complaint alleging that Boeing’s Dreamliner move to South Carolina represented an illegal form of retaliation against its union workers for past activism. The charge, which sparked a political firestorm, was settled the following November when the union and the company made a deal under which the South Carolina project would proceed but Boeing promised that work on its 737 MAX plane would be performed in the union’s Seattle stronghold.

In November 2013 members of the Machinists union rejected a demand by the company that they give up their traditional pension plan and make other contract concessions as a condition for locating work on the new 777X jetliner in the company’s traditional manufacturing center near Seattle. After the company began shopping the project to other states, many of which were willing to offer generous subsidies, the Machinists voted again and narrowly approved the concessions.

Boeing in South Carolina

Nikki Haley

Nikki Haley (click for larger image)

It takes quite a bit of time to build a 747. Interrupting the workflow is very costly. Faced with an ongoing pattern of strikes, Boeing decided to open an assembly plant in South Carolina, announcing that the new 787 Dreamliner would be assembled there. Former governor Mark Sanford lured the company to his state with a $170 million loan package and a state law that limits union contracts.

[pullquote]“We can’t afford to have a work stoppage every three years,” Jim Albaugh, then the chief executive officer of Boeing Commercial Airplanes, told the Seattle Times.[/pullquote]

Naturally the Machinists’ Union tried to organize the new plant. They faced a formidable obstacle: opposition from the new governor, Nikki Haley. The IAM eventually gave up on their organizing efforts. Boeing later used this plant as leverage in union contract negotiations in 2013, forcing the union to accept a defined-contribution pension plan instead of their long-time defined-benefit system.

Conclusion

And there you have it. Hitting two birds with one stone. And never mind the fact that Boeing is one of the country’s biggest exporters and one of only two global manufacturers of large-scale commercial airframes. After all, the country doesn’t need foreign trade. Oh, wait …

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.