Two of the nation’s largest retailers and a pair of Democratic mayors are supporting a campaign to roll back California’s landmark criminal justice reform, which has been blamed for a spike in retail theft.

Walmart and Target are the top funders of a proposed ballot measure that aims to undo Proposition 47, a voter-approved law from 2014 that reduced penalties for many lower-level drug and property crimes in the state.

The latest initiative would give prosecutors more power to charge accused thieves as felons and force drug users into treatment with the threat of jail time, said Greg Totten, head of the California District Attorneys Association, which is spearheading the effort.

Also see: ‘Smash-and-grab’ robberies fuel new laws, but critics question the need

The campaign has gained the support of San Francisco Mayor London Breed and San Jose Mayor Matt Mahan, who represent two of the most liberal cities in the US. Their backing reflects a growing frustration felt by the public and city leaders with the consequences of Proposition 47, which some say has emboldened criminals.

Critics point to a recent wave of smash-and-grab robberies at department stores and the prevalence of open-air drug use on city streets as evidence of the law’s shortcomings. In September, Target closed three California locations as well as six stores in other states, citing crime.

More on crime: What recent California crime trends say about what to expect in 2024

Proposition 47 was a “well-intentioned initiative” that has had “significant unintended consequences,” Mahan said at a press conference this week. “A small number of people brazenly commit crimes without fear of accountability. People are so trapped in addiction that they refuse services and subsist in misery on our streets.”

Other large backers of the campaign include a prison-guard union, Macy’s Inc., and businessman and political donor William Oberndorf, who was a major contributor to a 2022 recall effort that ousted San Francisco’s progressive district attorney, Chesa Boudin.

The mayors’ stance puts them at odds with other Democratic leaders in the state, including Gov. Gavin Newsom.

Supporters of Proposition 47, who include civil rights groups, public defenders and some law enforcement officials, credit the decade-old law for slashing incarceration rates, reducing racial disparities in arrests and cutting prison costs. The measure has also funneled funds to effective crime prevention programs, they say.

Retail theft

US retailers say they have suffered an increase in inventory losses, known as shrink, due in part to organized retail crime, which targets both high-end goods and everyday items like toothpaste and baby formula.

Also see: Retail group pulls back on claim organized retail crime accounts for nearly half of inventory loss

According to a study last year by the National Retail Federation, a trade group that includes Walmart and Target, shrink rose to 1.6% of sales in 2022, up from 1.4% the previous year, but in line with the two years before that. That worked out to about $112 billion in lost merchandise, and theft — both external and internal — accounted for almost two-thirds of the total. Shrink also includes losses from damage and administrative error.

Los Angeles and San Francisco topped the list of US metro areas most affected by organized retail crime, followed by Houston and New York, the trade group said. Sacramento, California, also ranked in the top 10.

Also see: Target says organized retail theft too much, will shutter stores in Northern California

The California ballot measure would allow prosecutors to add up separate thefts to surpass the $950 threshold for felony charges. It would also ramp up sentencing for people working as a group to steal goods or for taking more than $50,000 in property. Additionally, the reform would authorize prosecutors to charge drug users with a felony on a third offense, in a move supporters say is meant to force people addicted to drugs into rehabilitation programs.

The initiative needs 546,651 valid signatures to qualify for the November 2024 election. It currently has more than 360,000, according to a statement this week by backers of the effort.

Walmart, which has donated $1 million to the ballot initiative, said it supports policies intended to improve safety for its employees, customers and communities.

A spokesperson for Target, which has given $500,000, declined to comment and referred questions to the California District Attorneys Association.

Mortgage rates inched higher amid signals that the Federal Reserve is likely to keep its policy steady for some time.

The average for a 30-year, fixed loan was 6.64%, up from 6.63% last week, Freddie Mac said in a statement Thursday.

Borrowing costs have been hovering close to 6.6% after falling from a peak of 7.79% in late October. That decline has pushed more buyers into the market, with a gauge of US existing-home contracts rebounding sharply in December and a measure of mortgage applications ticking up in recent weeks.

US Treasury yields have climbed as Federal Reserve policymakers suggested they’re not in a rush to cut interest rates. Chair Jerome Powell said earlier this week that the central bank’s job taming inflation is “not quite done” and consumers may have to wait beyond March for the first reduction.

“The economy and labor market remain strong with wage growth outpacing inflation, which is keeping consumer spending robust,” Sam Khater, Freddie Mac’s chief economist, said in the statement. “Meanwhile, affordability in the housing market is an ongoing issue due to continued high home prices, elevated mortgage rates and low supply of homes on the market, particularly for first-time and low-income homebuyers.”

Orphe Divounguy, senior macroeconomist at Zillow Home Loans, said “although inflation continued to ease at the end of 2023, revisions to employment data suggest the labor market isn’t cooling as fast as previously thought, and wage growth remains well above a level that is consistent with the Federal Reserve’s two percent inflation target.”

The job market is a mixed blessing.

“Although higher wage growth would be encouraging news, it also comes with the risk that consumer price inflation will be difficult to keep around the Federal Reserve’s target,” Divounguy said “However, a deeper dive into the jobs report revealed a less rosy picture: Total hours worked fell, contributing in part to the increase in average hourly earnings. A resilient labor market is good for housing. If layoffs remain low, and core inflation continues to moderate, mortgage rates aren’t expected to rise further. Housing market activity should rebound modestly this spring – meaning more listings coming on the market and more sales.”

Executives at Elon Musk’s SpaceX discriminated against women, joked about sexual harassment and fired workers for raising concerns, seven former employees allege in California civil rights complaints viewed by Bloomberg.

The Hawthorne-based workers, who were fired in 2022 after circulating an open letter critical of Musk’s behavior, argue that the aerospace company’s actions violated the state’s Fair Employment and Housing Act. The law bans sex-based discrimination and retaliation against employees who raise concerns in the workplace. Their claims were detailed in filings with the California Civil Rights Department that were sent to SpaceX last month.

The filings open up a new front in a contentious legal battle between SpaceX and the workers, who are mostly engineers. In November 2022, the ex-employees also brought complaints about the company to the US National Labor Relations Board, saying SpaceX violated federal labor law by firing them. Last month, the NLRB’s prosecutors agreed, accusing SpaceX of illegally retaliating against the workers. In response, the Musk-led company sued the agency.

Related: SpaceX accused of unlawfully firing employees who were critical of Elon Musk

SpaceX said in its suit the NLRB accusations are likely to harm the company’s reputation and its ability to recruit new employees. If the company loses, it might also have to reinstate the workers with backpay. Now, because of the new complaints in California, SpaceX faces the threat of losing to the ex-workers at the state level, too. The California CRD can seek compensatory and punitive damages.

SpaceX, which didn’t respond to inquiries, has denied wrongdoing in the NLRB case. Companies typically have 30 days to respond to California CRD complaints.

Cases filed with the California CRD are investigated by agency staff, who can dismiss them, pursue mediation, choose to sue the company or greenlight workers to file lawsuits themselves. Ex-employees said in interviews that they hope their civil rights complaints will bring more scrutiny to the company’s culture, and show current workers they aren’t alone in their concerns.

Also see: Astrobotic lander burns up in Earth reentry after missing shot at the moon while Japan celebrates success

“Bringing things to light is the first step to actually make it better,” said Paige Holland-Thielen, one of the complainants, in an interview.

The ex-employees’ concerns about SpaceX stretch back to their early days at the company, according to Holland-Thielen. When she was hired in March 2018, she became a “level 1” employee, despite having similar experience to men who were designated senior level engineers, according to her complaint.

Even after getting promoted, Holland-Thielen was excluded from assignments, meetings and decisions because of her gender, she alleges. After she raised concerns with her manager that a male colleague was taking credit for her work, she received a performance review accusing her of being “too emotional” and saying she “should be more humble,” according to her filing.

Also see: Space Force to split 21 launches between SpaceX, United Launch Alliance

“I was left out of so many meetings that I was supposed to be in; I was left out of so many decisions that were my decision to make,” Holland-Thielen said in an interview. “I was forgotten on projects; I was forgotten in planning.”

On one occasion, Holland-Thielen alleges in the complaint, she asked to talk to a manager about “inappropriate behavior” by a colleague. Before she could speak, she said the manager saw downward-pointing data on her computer screen, made a sexual allusion and said, “How can we get it, up, up, up?”

Musk also frequently posted what employees in the filings call inappropriate content on Twitter, the social media platform he now owns and has renamed X, according to the California filings.

The workers allege they couldn’t easily avoid Musk’s posts because he also made important company announcements on the channel. His tweets were regularly disseminated in company venues, such as employee chat groups, according to several of the fired workers’ filings.

“It was very common for people to quote things that Elon had previously said, when it comes to engineering practices or jokes he had made,” said Tom Moline, one of the fired engineers, in an interview. “Basically anything that would make a freshman frat initiate laugh was fair game in large parts of the company.”The workers’ frustrations with SpaceX became public in 2022. That year, Business Insider published an article detailing separate claims that Musk had sexually harassed a SpaceX flight attendant by touching her, exposing himself without her consent and offering her a horse in exchange for a massage.

Musk denied the accusation, and made light of it on Twitter. In May 2022, he wrote to a user, “Fine, if you touch my wiener, you can have a horse.”

Holland-Thielen writes in her filing the company was also internally dismissive of the incident. She alleged that an HR director said something to the effect of, “I’ve never been sexual harassed [sic], I must not be hot enough,” and giggled after describing harassment claims as involving “fifty shades of grey,” a reference to the steamy romance novels. After the publication of the Business Insider article, SpaceX President Gwynne Shotwell sent an email companywide defending Musk.

“Anyone who knows Elon like I do, knows he would never conduct or condone this alleged inappropriate behavior,” Shotwell wrote.

In response, the workers penned the open letter, calling Musk’s behavior “a frequent source of distraction and embarrassment,” which was seen by the Verge and other news outlets. Several employees’ complaints say they were then called into meetings with executives, including Shotwell, and fired.

“They told me that my employment was being terminated because they had determined that I was responsible for conceiving, writing, and distributing the open letter,” Moline alleges in his complaint to the California CRD.

A hearing for their NLRB case is scheduled for early March, but SpaceX has asked a judge to put that proceeding on hold while considering the company’s argument that the agency’s structure violates the constitution’s “separation of powers.” In a January filing seeking a court injunction that would halt the proceedings, the company cited its work for the US government as a reason it shouldn’t be subjected to the burden of a labor board trial.

Being subjected to the NLRB hearing, SpaceX argued, “distracts from its important missions, including launching satellites critical to US defense and intelligence agencies and flying NASA astronauts to space.”

That’s potentially bad news for lenders like Arbor Realty Trust Inc., which focuses on packaging its floating rate loans into commercial real estate CLOs, a financing strategy that boomed in popularity during the pandemic. The share of loans in Arbor’s CLOs that failed to make a scheduled payment more than doubled in the fourth quarter, according to preliminary data compiled by Banco Santander SA. About 16.5% of Arbor’s unpaid loans by value were past due in December, according to the data, about 2.5 times the level for the wider CRE CLO market.

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“Collateral performance in CRE CLOs deteriorated throughout 2023 with stress and delinquency rates rising sharply the final two months of the year,” Mary Beth Fisher, a senior fixed income strategist at Santander, said in a note last month that discussed the overall market. The trend is likely to continue through the middle of 2024, she said.

Paul Elenio, chief financial officer at Arbor Realty, said the firm is currently in a quiet period as it readies to release year-end results later in February.

“As our investors are aware, we have been very consistent and transparent in our messaging over the last several quarters and remain comfortable with our public statements and market guidance,” Elenio said. “We look forward to updating the public with our year-end earnings release.”

Apartment building financers were caught out by the sharp tightening in monetary policy because they often extend so-called bridge loans, which have floating interest rates. Lenders such as Arbor are hit if the borrowers eventually default because they provide the equity portion of the CLOs — the riskiest part of the securitization — while selling on the safer tranches, meaning they are the first to suffer losses if the loans aren’t repaid.

Concerns over commercial real estate reemerged this week after New York Community Bancorp and Japan’s Aozora Bank Ltd. were forced to set aside more money to deal with souring commercial property loans. Broadly put, rising interest rates are translating into lower property values that force investors to take losses, similarly to how rising yields depress bond prices.

Potential Distress

As interest rates plunged when the Federal Reserve responded swiftly to pandemic turmoil, lending to apartment complexes and bundling those loans into CLOs emerged as a popular investment. The dollar value of loans bundled into new CRE CLOs, including apartment buildings, surged from $19 billion in 2019 to $45 billion in 2021, according to data compiled by Bloomberg. The share of loans late to make payments across the vehicles plumbed lows around 1-3% from 2021 to 2023, according to the data compiled by Santander.

That trend came to a halt when borrowing rates began to rise. New supply, slowing revenue growth and higher expenses are also adding to the pain, with the multifamily delinquency rate for commercial mortgage-backed securities expected to double this year to 1.3%, Fitch Ratings forecasts.

More than $20 billion of apartment complexes purchased in the past three years are potentially distressed, according to MSCI Real Assets, a figure that more than triples when including buildings that haven’t changed hands recently.

“Owners who made purchases at record-high prices may have found their assets landing on servicer watchlists as assumptions used to underwrite their acquisitions proved overoptimistic,” the financial data provider said in a report last month.

Blackstone Inc., meanwhile, is weighing adding more multifamily assets amid the emerging problems.

• HOW NIMBY ARE YOU? Ponder common objections to new housing.TAKE OUR QUIZ!

“It’s possible you could see us invest into the weakness in multifamily because we’ve got a long-term constructive view, even if there are some near-term headwinds,” the company’s Chief Operating Officer Jonathan Gray said on a call with analysts last month.

Still, the amount of new potential distress in apartment complex rentals seems to have moderated in recent months, according to the MSCI Real Assets report, as the outlook for borrowing costs improves. Traders expect the Federal Reserve to cut rates by as many as six times this year, a boon for landlords.

Short Sellers

Uniondale, New York-based Arbor has been the target of at least two short seller reports, including one in November by Viceroy Research, which argued that the lender is burdened with distressed loans.

Short interest in the firm stood at almost 31% on Wednesday, according to data compiled by S&P Global. Short sellers borrow stock and sell it, betting they can profit by buying it back at a lower price later.

Arbor had about $7.3 billion of collateralized loan obligations outstanding last year, representing almost half of its capital stack, according to an investor presentation published in May.

The share of the US population living in the West grew steadily over the decades before peaking at about 23.8% in 2019. Since then it flattened and began to decline, reaching 23.6% last year, according to a Bank of America Institute report citing US Census Bureau data.

The South, despite a slight dip in 2020, has continued to grow to its current 38.9% share of the nation’s population. The shares of Americans living in the Northeast and Midwest continued their decades-long slides.

The bank attributes much of the West’s migration woes to unaffordable housing. There’s a close relationship between a metropolitan area’s median mortgage payment and that area’s change of population last year, the bank’s research shows. Mortgage payments in Pacific Coast metropolitan areas all exceed payments in other regions.

Generally, the loss of population “is more of a Pacific story,” since more inland metro areas in the West, including Phoenix and Las Vegas, have grown since 2020, the bank’s report says.

San Francisco is the biggest loser among 26 metro areas, losing a little more than 1% of its population in the year through the fourth quarter of 2023, according to Bank of America internal data. Los Angeles lost about 0.7%.

The big winners were in Texas and Florida, with a notable exception at the very top — Columbus, Ohio led the pack with a 1.1% population gain.

Over the long term, there’s a chance the big cities in the West will be able to lure people back. A large share of the migration between metro areas in the US are single-person households, the bank says, and they probably have greater flexibility to move around.

For now, though, the South appears to be gaining at the West’s expense. Of those who moved from the West to the South, more than 40% had household incomes above $125,000 and around 10% had incomes above $250,000, the bank says.

Adam Neumann and other investors including Dan Loeb’s Third Point are exploring an offer to buy WeWork Inc. out of bankruptcy.

Neumann and his real estate startup, Flow, have been trying to get information from WeWork necessary to formulate a bid since December, according to a letter sent to WeWork’s lawyers seen by Bloomberg News. More recently they’ve worked to put together a bankruptcy financing package for the co-working firm.

The bid would be for the entire company or its assets, according to the letter. It did not include details of how much Neumann, who co-founded WeWork, stood ready to offer for the firm. He stepped down as chief executive officer in 2019 after the company’s initial botched attempt at going public.

Also see: 2023 was an ‘extinction’ level year for startups. Where did all the money go?

In the letter, a lawyer for Neumann said efforts to compose a bid have so far been stymied by a dearth of information from WeWork.

“We write to express our dismay with WeWork’s lack of engagement even to provide information to my clients in what is intended to be a value-maximizing transaction for all stakeholders,” Alex Spiro, an attorney with Quinn Emanuel representing Neumann, wrote.

Third Point has had only preliminary talks with Neumann and his startup about their ideas for WeWork and hasn’t committed to back any deal, the hedge fund said in a statement.

Also see: WeWork to renegotiate nearly all leases, exit ‘unfit’ sites

In an emailed statement, WeWork said it receives expressions of interest from outside parties on a regular basis, which its advisers review “with a view to acting in the best interests of the company.” It added that its current focus on addressing unsustainable rent expenses and restructuring the business “will ensure WeWork is best positioned as an independent, valuable, financially strong and sustainable company long into the future.”

The New York Times earlier reported on the potential bid.

Also see: TailoredSpace brings its flexible coworking space to the suburbs

The letter outlines other ill-fated attempts from Neumann to finance WeWork, including a proposed $1 billion capital raise in late 2022 designed to stabilize the company. Most recently, Neumann provided a formal proposal to give WeWork $200 million in bankruptcy financing, but was still unable to access information needed to put together a bid for the company, according to the letter.

It mirrors the frustration of creditors and landlords, who complained on Monday to the judge overseeing the company’s bankruptcy case about a lack of progress in reviving WeWork since it filed for Chapter 11 in early November. WeWork’s official committee of unsecured creditors said the company hasn’t yet updated its business plan or put forward key details about how the firm will end its time under court supervision.

Currently, WeWork’s bankruptcy plan proposes handing ownership to the company’s most senior debt holders, including those holding its credit line, first-lien notes and second-lien notes, according to court papers. Third-lien noteholders and unsecured creditors are likely to be wiped out.

Before it fell into bankruptcy, WeWork had been trying for years to deliver a turnaround story — one in which the rowdy co-working startup transforms into a stable, profitable public company. After the pandemic, the New York-based firm was bleeding cash with onerous leases. The company listed $19 billion of liabilities and $15 billion of assets in its Chapter 11 filing last year.

The speed of WeWork’s decline was stunning. In 2019, the co-working giant was the biggest private occupier of office space in Manhattan and operated millions of square feet in dozens of countries. A peak valuation of $47 billion made it one of the most prized startups in the US.

Its valuation cratered after the failed attempt to go public in 2019, then the Covid-19 pandemic dealt another blow. Although WeWork’s office locations initially emptied out, demand for flexible work proved somewhat resilient. The company eventually went public in 2021 through a combination with a special purpose acquisition company.

Neumann is still worth an estimated $1.7 billion, according to the Bloomberg Billionaires Index.

–With assistance from Lynn Doan and Steven Church.

Treasury Secretary Janet Yellen said that while losses in commercial real estate are a worry, US regulators are working to ensure that loan-loss reserves and liquidity levels in the financial system are adequate to cope.

A combination of factors “is going to put a lot of stress on the owners of these properties,” Yellen told lawmakers Tuesday in the first of two days of congressional testimony this week. She cited the increase in interest rates, higher vacancy rates thanks to shifting work patterns triggered by the pandemic and a wave of commercial real estate loans coming due this year.

Also see: Commercial property distress rises to 10-year high

“I’m concerned,” she said in responding to a question from Missouri Democrat Emanuel Cleaver. “I believe it’s manageable, although there may be some institutions that are quite stressed by this problem.”

Property owners came under pressure as borrowing costs soared, causing companies including Brookfield Corp. and an office landlord managed by Pimco in Newport Beach funds to default on debt.

Related: Pimco fund walks away from 20 hotels carrying $240 million in debt

Office owners are particularly struggling as higher borrowing costs complicate financing and tenants pull back given layoffs and the rise of remote work.

The Treasury chief said banking supervisors have been focused on the issue, looking to make sure lenders’ reserves and liquidity are adequate to handle the problem.

More on real estate: US offices are half-empty. That could be the next big risk for banks

Yellen on Tuesday appeared before the House Financial Services Committee. She’ll address the Senate Banking Committee on Thursday. Both appearances are intended to give lawmakers a chance to question her on the annual report of the Financial Stability Oversight Council.

–With assistance from Katanga Johnson.

Meta Platforms Inc. will begin labeling more posts that were created using artificial intelligence tools as part of a broader effort to prevent misinformation and deception from spreading on Facebook, Instagram and Threads during a critical election year.

Meta is working with other tech companies to create common technical standards for identifying these kinds of AI-generated posts, including adding invisible watermarking and metadata to images when they are created, the company said on Tuesday. Meta is then building software systems to detect these invisible markers so that it can label AI-created content even if it was made by a competing service.

Also see: Oversight board urges Meta to rethink policy on manipulated media

Nick Clegg, Meta’s president of global affairs, said that in the next several months he expects Meta will be able to detect and label images that were created using tools from several other AI-focused companies, including Alphabet’s Google, OpenAI, Microsoft, Adobe, Midjourney and Shutterstock.

2024 is a busy year for elections, with voters in dozens of countries including the US, India, South Africa and Indonesia heading to the polls. While disinformation has been a challenge for voters and candidates for years, it has been turbocharged by the rise of generative AI tools that can create convincing fake images, text and audio.

Also see: X pauses some Taylor Swift searches as deepfake explicit images spread

“I do not want to claim for one moment that this will cover all our bases or cross all the T’s and dot all the I’s,” Clegg told Bloomberg in an interview. “But a flawed approach should not be an alibi for inaction.”

Meta’s system will initially only be able to detect AI-generated images created by other companies’ tools, not audio or video. Images generated by companies that don’t follow industry standards, or those that have been stripped of markers, will also be missed, although Meta is working on a separate way to automatically detect those.

The advancements in detecting AI deepfakes is a top priority for Clegg as Meta prepares for elections, including in the US. Last month at the World Economic Forum in Davos, Switzerland, Clegg said that creating an industry standard around watermarking was “the most urgent task facing us today.”

Last month, a doctored audio message of US President Joe Biden alarmed disinformation experts, with many warning that AI-generated content could play a pivotal role in the upcoming election if it’s not labeled or removed quickly. Clegg said he’s optimistic that won’t happen given the level of focus on the issue.

More on social media: Meta, TikTok, X and other social media CEOs testify in heated Senate hearing on child exploitation

The presidential candidates’ teams will be on the lookout for deepfakes and “they’re going to shout about it in the press and they’re going to pick up the phone to us,” he said. He added that while Meta does not fact-check original posts created by politicians, it will label AI-generated posts no matter who shares them.

On Monday, Meta’s Oversight Board published a critique of Meta’s manipulated media policy, arguing that it was too narrow and that the company needs to do a better job of labeling posts created by AI instead of trying to remove them. Clegg said he largely agreed with the board’s analysis, and believes the watermarking updates are a step in the right direction.

Also see: Meta’s $197 billion one-day surge is biggest in stock-market history

Eventually, as the web becomes flooded with AI-generated material, the industry will need to tackle the problem from the other side — that is, by labeling legitimate media as well, Clegg said.

“We’ll need to have a society-wide, or certainly industrywide, debate about the other end of the telescope, which is how do you flag for users the veracity or authenticity of non-synthetic content,” he said.

Boeing Co. executives have spent the past month grappling with the aftermath of a near-catastrophe on an airborne 737 Max jet. As the US planemaker works through its latest crisis tied to manufacturing lapses, a new risk looms: a labor rift 10 years in the making.

Boeing’s largest union, the International Association of Machinists and Aerospace Workers, is still smarting over a 2014 deal that sacrificed pensions, locked in minimal raises and tied the hands of activists for a decade. Union leaders will demand a 40% pay raise over three or four years, emboldened by a resurgent US labor movement, a scarcity of qualified aerospace workers and pressure on Boeing to stabilize work in its factories.

Related: Lansner: Boeing wins, we all lose

“Our goal is to negotiate a contract that we as a union leadership and our members can accept,” said Jon Holden, president of IAM District 751, which represents 32,000 Seattle-area Boeing mechanics. “We don’t take going on strike lightly. But we’re willing to do it.”

Holden sees a path to a successful deal with Boeing, he said in an interview. Even so, he’s prepared to follow the lead of auto workers in Detroit, writers and actors in Hollywood, and fellow machinists at Boeing supplier Spirit AeroSystems Holdings Inc. in Kansas. Each emerged from walkouts last year with significant improvements in pay and other contract terms.

A strike would shut down Boeing plants in Washington and Oregon, including assembly lines for its cash-cow 737 jets, crimping output after the current IAM contract expires in September.

With talks set to start on March 8, labor tensions will add to the scrutiny on Boeing Chief Executive Officer Dave Calhoun. He already faces questions from lawmakers and investors over a spate of manufacturing problems — the latest, an issue with holes misdrilled by Spirit — while the Federal Aviation Administration has stepped up its oversight and capped production increases for the 737 until quality improves.

Also see: Boeing steps up quality inspections on 737 Max after blowout

“We remain focused on working with our teams to strengthen quality across our operations,” Boeing said in a statement. “We believe there’s a path to a new contract that addresses the needs and concerns of our people while maintaining our ability to compete in the global market.”

10-year grudge

The tactics Boeing used a decade ago to wrest pension concessions and limit pay increases to less than 1% on average loom large over the coming negotiations — they were still in place when inflation soared post-Covid.

“There’s no loyalty because Boeing wasn’t particularly loyal,” said analyst Richard Aboulafia. “Now the labor markets have shifted radically, and they may stay that way for a long time.”

Also see: Boeing’s mid-flight blowout is latest in series of quality lapses on 737 Max plane

Back then, the aviation titan held crucial leverage over its Seattle-area work force: a hulking new jet program known as the 777X. The company’s commitment to its century-old base was in question after Boeing had begun assembling 787 Dreamliners in South Carolina a year earlier.

To force the IAM into contract talks that included freezing pensions, Boeing threatened to take the 777X program out of the Seattle area, inviting states around the US to compete for the factory.

While local IAM leaders saw a bluff, senior union staff in Washington, DC, took over the talks and backed down. The narrowly approved deal that resulted preserved jobs, but the fixed-pension plan was ended, and pay raises totaled 4% over the next decade.

Also see: Alaska Air passengers sue Boeing over Max 9 door blowout

“The anger that was experienced by our membership throughout that process in 2013 and 2014 is certainly palpable today,” Holden said. “I hear it any time I’m in the factory, and from all across the spectrum.”

As it prepares for the coming talks, Boeing doesn’t have a new plane to use as a bargaining chip, and with unemployment rates near record lows, it can’t threaten to shift manufacturing to the South. The company can ill-afford a work stoppage as it tries to steady its factories and suppliers, and return output to a steady, reliable pace.

The union holds the upper hand, said Ken Herbert, analyst with RBC Capital Markets. “If there’s really a time to strike a deal that works for them, it’s now,” he said. “They’re going to be very, very aggressive.”

Boeing last week declined to give a financial outlook for this year, though it held to a target of generating free cash flow of $10 billion in 2025 or 2026, a goal at risk of being trashed by a prolonged work stoppage.

Also see: Boeing closes C-17 line three months earlier than anticipated

A labor deal could also be costly. Every 10% increase in machinist wages will drag down 2026 free cash flow by an estimated $260 million before price and productivity offsets, according to Sheila Kahyaoglu, an analyst with Jefferies.

There’s further uncertainty with US regulators digging deeper into Boeing’s quality practices after the structural blowout on Alaska Airlines Flight 1282 on Jan. 5. Its suppliers, who are gathered in the Seattle area this week, must also weigh whether to risk a continued ramp-up of production.

The machinists intend to use their leverage to push for more than the usual economic concessions. Holden wants Boeing to reinstate thousands of quality inspections it suspended last decade. And he plans to press executives to commit to making planes in Seattle for decades.

Boeing says it restored the inspections, and has increased the number of quality inspectors in its commercial division by 20% since 2019.

The union also plans to press for the return of defined-benefit pensions, lower out-of-pocket health costs and more flexibility around overtime. The IAM local has been studying the tactics employed last year by the United Auto Workers, including striking at selective locations, Holden said.

“We need jobs for 50 years, not four years,” Holden said.

There’s a link between Boeing’s labor pains and the quality lapses that prompted US regulators and airline customers to send auditors into the planemaker’s factories after the Alaska Airlines accident, said Cliff Collier, a consultant with decades of aerospace manufacturing experience.

Boeing’s recent struggles are rooted in turnover, he said: an influx of inexperienced workers and managers since the pandemic, and labor tactics that led to an earlier exodus of seasoned staff, Collier said.

“People don’t get stupider,” Collier said. “People get overworked, people get pushed to do things they probably shouldn’t do.”

Boeing Co. found more mistakes with holes drilled in the fuselage of its 737 Max jet, a setback that could further slow deliveries on a critical program already restricted by regulators over quality lapses.

The latest manufacturing slip originated with a supplier and will require rework on about 50 undelivered 737 jets to repair the faulty rivet holes, Boeing commercial chief Stan Deal said in a note to staff. While he didn’t identify the contractor, a spokesman for fuselage supplier Spirit AeroSystems Holdings Inc. said it’s aware of the issue and will conduct repairs.

Also see: Boeing cargo plane returns to Miami after takeoff. FAA report indicates ‘softball size hole’ above engine

The extra time required for inspections and repair work could delay near-term plane deliveries, Deal said in his memo, which was seen by Bloomberg News.

“This is the only course of action given our commitment to deliver perfect airplanes every time,” Deal said in his note.

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The defect follows a string of manufacturing lapses at Boeing, including a near-catastrophic panel blowout on an Alaska Airlines 737 Max last month. The Federal Aviation Administration has stepped up scrutiny of Boeing’s manufacturing and supplier systems and has capped 737 production until quality improves.

Boeing shares fell 1.6% in premarket US trading on Monday. They had declined 20% this year through Friday, the worst performance on the Dow Jones Industrial Average. Wichita, Kansas-based Spirit Aero, also slid 1.6%. The shares had fallen 12% since the start of 2024.

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In the latest instance, Deal said a worker at a Boeing supplier flagged that two holes in the plane’s fuselage may not exactly meet specifications. The problem “is not an immediate flight safety issue and all 737s can continue operating safely,” he said.

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Still, he said many employees have expressed frustration at how unfinished work, either by suppliers or within Boeing’s factories, can ripple through aircraft production lines. To address this, Boeing has recently told a major supplier to hold shipments until all work has been properly completed, he said.

“While this delay in shipment will affect our production schedule, it will improve overall quality and stability,” Deal said.