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From SCDigest's On-Target E-Magazine

- August 12, 2014 -

Supply Chain News: Innovative Labor Pact at Spirit Aerosystems Falling Apart Under Potential Sale of Division, Job Losses

Union Says Contract Bars Selling Off Divisions, New CEO Says Company has to Determine Smart Make or Buy Decisions

SCDigest Editorial Staff

One of the most innovative labor arrangements in US industry is in danger of falling apart, as union workers at Spirit Aerosystems are suing the company for its plans to sell off a major division, which will result in a large number of layoffs from outsourced production.

When Spirit Aerosystems was spun out of Boeing as a separate company in the mid-2000s, then new CEO Jeff Turner was convinced that the traditional approach to labor relation, with its heavily unionized factory workers, wasn't right for them or the company.

Having been through the types of problems that labor strife had brought Boeing in the past, and believing deeply that the dominant model for contracts with the unions was a bad strategy for the highly cyclical aerospace industry and its workers, Taylor challenged the unions to consider a different way - one that to date had paid off big for both sides of the equation.

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However, last week, the company's largest union filed suit, alleging the aerospace supplier had violated the innovative collective bargaining deal with plans to sell a Kansas-based unit and outsource other work.

The complaint, filed by the International Association of Machinists and Aerospace Workers, alleged union representatives were notified by Spirit officials on May 29 that the company intended to sell its fabrication division, which produces specialized aerospace parts for larger assemblies.

Union leaders were told by Spirit the move would lead to 1,200 layoffs, with outsourcing affecting another 200 workers, according to the complaint.

Spirit Aerosystems, headquarter in Wichita, makes systems for both commercial and military aircraft, focused primarily around fuselage sections and pieces of the wing assemblies. It currently has sales of over $5 billion, spread across three factories near Wichita and one in the Southeast area of the US.

Spirit inherited labor contracts with several unions after the spin-off, but soon entered a new round of negotiations as the existing three-year agreement was set to expire.

At a manufacturing conference at MIT in 2012, Turner noted several issues with the status quo. First was that each new negotiation fostered a "win-lose" mentality. Every agreement led to a sense that either the company or the union won that battle, and which side won was usually a reflection of economic conditions for the aerospace industry at the time. In better times, the union tended to win, while the company would usually be seen as prevailing in weaker economic periods.

Second, when the inevitable downturns hit the industry, Turner said the usual pattern of steep layoffs would occur, giving the employees, especially newer ones, little in the way of job stability or security.

"That's no way to run a business, a family, or a nation," Turner said at MIT.

The issue was especially salient for Spirit given its age demographics. The average age of factory employees was already 50 at the time the company was spun out. If there was a large layoff resulting from a major industry downturn, that average age would likely rise to an incredibly 60 years old.

The traditional contract with the unions would be for three-years, and provide guaranteed, substantial wage increases during the course of the contract, on top of a wage that was already well above general manufacturing averages.

With growing complexities and challenges from customers and competitors worldwide, "We just couldn't sustain the business in that environment," Turner said.

When the negotiations for a new contract were beginning a couple of years after the spinoff, Turner said he decided to personally visit the offices of one of the major unions, where national leadership was training local union officials on best practices in negotiating techniques. During this unexpected visit, Turner said he described to union leadership how he viewed the situation, and the risks to the company from the status quo.

At the same time, he listened to the union, and found the biggest fear was simply that the company had no commitment to the workers, and would be happy to jettison them if a better deal - such as offshoring - came along.

That basic dialog set the stage for a new relationship and contract that would ultimately benefit both sides.

(Manufacturing Article Continued Below)

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A Win-Win Deal - for Awhile

The contract ultimately developed and approved by a variety of unions operating in Spirit was of a very different sort.

First, it was for a full 10 years, rather than the traditional three. Second, defined wage hikes were extremely modest, four different 1% hikes over the course of the 10-year contract period.

There was more: Union pay became more variable. Factory workers could earn as much as 10% additional pay - or take home 4-5% less - depending on how well Spirit performed in the market and financially. Critically, that variable pay approach didn't just apply to apply to blue collars factory workers, but management and executives as well, who had a lot more upside but also a lot more downside in terms of compensation.

This approach would allow Spirit to share the rewards from factory floor to executive suite when it was enjoying prosperous times, and also to reduce its losses when the market went the other way. The approach would also motivate blue and white collar employees to focus hard on efficiency, innovation and customer service, which would accrue to their own benefit.

An even greater departure from the traditional approach was how employees would be handled if a downturn was severe enough to cause layoffs under normal conditions. Instead of layoffs, however, the Spirit contract calls for reducing work days for everyone, down to say three days per week of work if needed.

Turner said that while some elements of the unions at first rejected this approach, the concept has now become very popular among union officials and rank and file workers.

The new relationship meant "we can keep the company healthy and the team intact for the long term," Turner said. "We also convinced the workers that we really considered them part of the team, not just a factor of production."

"The company, the union, and individual workers have a mutual commitment that we are going to keep manufacturing in the US," Turner said.

New Vision at the Top

That was then, this is now. Turner retired as CEO in 2013. New CEO Larry Lawson appears to have some very different views. Labor relations had been deteriorating since he took over in early 2013, with hundreds of jobs being cut.

The Machinists union alleged in the suit that the sale of the fabrication division violates a pact it said required Spirit to "maintain major manufacturing operations and union jobs in Wichita as long as the contract is in effect," according to the complaint. The union is seeking an injunction preventing any sale of the fabrication unit or layoffs at the business.

"We certainly understand the obligations in our labor agreements, and believe we are in compliance. Spirit does not comment outside of the legal process regarding pending litigation," said a Spirit company spokesperson. The spokesperson added that spokesman its strategic review was continuing and the company had made no decisions about plant closures or sales.

"We're also looking at the things that we do versus the things that we could buy. And whether those things are core to our business," said Mr. Lawson. "We're attacking that part of the business model."

The company has more than 10,000 white collar and factory workers in the Wichita area.

"The issue here of course is one of trust," said SCDigest editor Dan Gilmore. "If the unions feel the new management is not living up to the agreement they struck in 2010, then when the next round of contract negotiations arises, it will be back to the traditional "win-lose" model that Turner had tried to break."

It seems the few years of innovative labor relations at the company, which could be a model for hundreds of other firms, is simply going away after a few years of success.

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