The commercial airline industry is extremely competitive. Market liberalization in Europe and Asia has enabled low-cost airlines to gain significant market shares, placing downward pressure on airfares. American air carriers face aggressive foreign competitors which offer competitive products and have access to most of the same customers and suppliers. With government support, Airbus has historically invested heavily to create a family of products to compete with American offerings. Regional jet makers Embraer and Bombardier, coming from the less than 100-seat commercial jet market, continue to develop larger and more capable airplanes. Competitors from Russia, China, and Japan are developing commercially viable jets. Many of these competitors have historically enjoyed access to government-provided financial support that reduces commercial risks associated with airplane development activities and enables airplanes to be brought to market more quickly than otherwise possible, resulting in intense pressures on pricing and other competitive factors. While productivity gains boosted profit margins, Boeing took more aggressive measures. Boeing operates facilities in the Puget Sound region. It also maintains operations in Oregon, Utah, California, and Florida. In 2013, Boeing announced the transfer of some 4,300 engineering jobs to California, Alabama, Missouri, and South Carolina. A long-negotiated agreement between Boeing and certain of its skilled employees facilitated Boeing’s move across state lines by incorporating provisions to help members affected by Boeing’s move. In return, Boeing reduced pension commitments to new employees. The Society of Professional Engineering Employees in Aerospace (SPEEA) was the last major employee group to retain a traditional pension; however, SPEEA agreed to switch new hires from the traditional pension to a defined-contribution plan, but retained the current pension for existing employees.

Assume that you are a senior production manager and will be assisting contract attorneys resolving a contract dispute with the skilled machinists’ union. You are assigned to advise attorneys whether to accept or reject a proposal that has been made. Your firm, like Boeing, is a commercial airline that holds defense industry contracts, in addition to servicing thousands of commercial customers daily. Certain groups of employees are currently demanding a number of costly concessions that would increase labor costs over time. However, an agreement with these groups would facilitate expansion across state lines into an area that will allow your firm to capture significant economies of scale and scope. Analyze tradeoffs of obtaining inputs through spot exchange, contracts, and vertical integration, and assess whether transactions costs or other considerations are important to consider. Evaluate circumstances in which economies of scale or scope, or other characteristics of production covered in Chapters 5 and 6, may justify an increase in moving costs of $290 million spread over the next five years. Your retirement analyst reports that your firm will obtain a decrease in pension liabilities of $441 million dollars spread in equal increments over the next ten years if you accept an increase in current wages of $372 million dollars spread over the next eight years. Apply present value analysis to assess how the level of the interest rate affects a decision to accept this set of concessions. Based on the results of these three analyses, prepare a short briefing document for circulation among the firm’s attorneys on factors that you believe would justify accepting or rejecting these concessions. You may also suggest alternatives to this settlement. As you respond to other’s comments, evaluate the strength of their arguments and offer additional information that you think may be of use in making their case for or against the proposed settlement. Responses should be 200–400 words.

As a senior manager assisting contract attorneys:

Accept or reject a long-term financial commitment—your retirement analyst reports that your firm will obtain a decrease in pension liabilities of $441 million dollars spread in equal increments over the next ten years if you accept an increase in current wages of $372 million dollars spread over the next eight years. These will be accompanied by an increase in moving costs of $290 million, spread over the next five years, which will allow the firm to access significant economies of scale and scope.
Brief classmates on factors that justify the acceptance or rejection of these concessions as if you are presenting to other executive team members.
Identify transaction costs or other important considerations.
Suggest any alternatives to this settlement that you believe should be considered.