Boeing Bonus Onus Will Land On Customers Escalator Clauses Mean Airline Companies Will Face Higher Costs When They Buy Airplanes

Boeing’s customers will pay all of the bonus and other contract increases given to Machinists in the workers’ new four-year contract because of “escalator clauses” the aircraft manufacturer traditionally has included in its sales contracts.

The escalator clauses are built into sales contracts because of the lag between purchase and actual construction and delivery of the airplanes. It protects Boeing from rising costs that happen during that period.

Machinist union members voted Wednesday to end their 68-day strike.

While the new labor contract proposal represents concessions by Boeing from its previous contract offers, the escalator clauses mean that Boeing’s customers - airlines and aircraft leasing firms - will be obliged to cover the costs of the pay and benefit sweeteners in the first two years and share them in later years.

Earlier this year, under customer pressure, Boeing broke with tradition and agreed to absorb half of the first 3 percent of any increases in labor or material costs, but only for planes delivered in 1997 and 1998.

As a result, it has added incentive to get production going as quickly as possible and ramp up output beyond previous expectations next year. That could mean that a Boeing production surge will start right away. Boeing was expected to deliver 235 planes this year, but because of the strike is expected to deliver only 202.

It was expected to deliver 210 next year. But analysts now believe that figure will rise at least to 240 planes, in part to make up for lost production this year and in part to enable Boeing to pass along all the increased labor costs on as many planes as possible before the revised escalator clause goes into effect in 1997.

Those in the airline industry, many of whom were impatient to receive backlogged planes, are aware of the escalator provisions. “What Boeing gave to the union, they didn’t really give to the union,” said one insider. “Their customers gave to the union.”

In response to customer complaints about rising sticker prices, Boeing earlier this year agreed to adjust its cost escalation clause, acknowledged Boeing spokesman Russ Young.

Boeing notified customers that it would absorb half of any increased materials and labor costs, up to a 3 percent limit. But the company made the offer good only for airplanes delivered in 1997 and 1998, Young said.

Boeing can be expected to accelerate production, not necessarily to avoid absorbing the extra costs but just to catch up with as many of its missed 1995 deliveries as it can in 1996, perhaps producing as many as 240 jets for the year.

That portends a production-rate increase - and possibly job expansion - that could get under way sometime in 1996, about a year sooner than many industry observers thought.

“I think they will ramp it up next year,” said Jack Modzelewski, analyst at PaineWebber.

“I think the company is seeing ‘97, ‘98 and ‘99 as four years of up production, so there’s really no reason to delay it.”

In addition to a 10 percent bonus, to be paid on Dec. 22, the new contract grants a four-year package of bonuses and wage-and-benefit adjustments that include a scaling back of healthbenefit cuts the company had sought in its original offer.