Ford: UAW deal raises yearly costs minimally

AP News
Posted: Oct 20, 2011 6:43 PM
Ford: UAW deal raises yearly costs minimally

A new contract between Ford Motor Co. and the United Auto Workers union will raise the automaker's labor costs by less than 1 percent a year, reaching a company goal of holding costs fairly steady, executives said Thursday.

Ratings agencies took note, and Fitch Ratings upgraded Ford's debt within hours of the company's conference call to discuss the agreement.

The four-year deal will raise costs by $280 million this year and around $80 million per year after that. But it also increases factory efficiency, makes changes in wages and benefits and lets Ford hire more workers at lower wages, the executives told reporters and industry analysts.

Ford's 41,000 union workers approved the contract Wednesday. They won't get annual pay raises, but this year they will get $6,000 signing bonuses, about $3,750 in profit sharing, and another $1,500 for inflation protection.

Fitch upgraded Ford's issuer default rating from "BB" to "BB+," which is the highest non-investment grade rating. Fitch cited Ford's solid profits and debt reduction efforts as well as the new labor contract. The agency said it would consider raising Ford to investment-grade status in the next year or two, an action that would reduce the company's borrowing costs by lowering its interest rates.

"The significant work that Ford has undertaken to reduce its debt obligations, lower its cost structure and increase the competitiveness of its global product offerings (has) meaningfully improved the ability of the company to withstand a future deterioration in the global auto market," Fitch said in a news release.

Chief Financial Officer Lewis Booth anticipated the upgrade on the conference call Thursday morning.

"We think this will be favorably received because of the competitiveness of the settlement," Booth said.

Ford debt's lost its investment-grade rating in 2005, when it was deeply in debt. It borrowed $23 billion in 2006 to get through the recession and fund a huge restructuring. The company had $14 billion in debt as of June 30.

The deal also opens the door to a possible dividend on the company's common shares, although Ford isn't ready to announce anything, Booth said.

Ford could announce a quarterly dividend starting next year when it releases its third-quarter earnings on Wednesday, Barclays Capital analyst Brian Johnson wrote in a note to investors. He estimated a 36-cent-per-share dividend for the year, starting at 8 cents in the first quarter.

Ford also expects to add 5,750 jobs under the agreement, mainly with more shifts at factories that make cars and trucks that are selling well. New hires will get pay raises to $19.28 per hour, but they'll still make far less than longtime unionized workers.

At present, the company has few workers at the lower wage rate. It expects their number to rise to at least 8 percent of the factory work force by 2015. Under the contract, Ford can pay up to 27 percent of its factory workers at the lower rate, but when it reaches that level will depend on how many new jobs are added and how many workers take early retirement offers. Ford hopes to replace retirees with lower-cost new hires. About 23 percent of Ford's factory workers, or around 9,400 employees, are eligible to retire, but Ford doesn't expect that many will leave soon.

Ford said its labor costs will rise this year because it must pay the signing bonuses and profit-sharing based on the company's first-half performance, but the increase will be smaller in the final three years of the contract. The company would not disclose its total labor costs.

John Fleming, Ford's vice president of global manufacturing and labor affairs, said the union agreed to shift changes that will let Ford run its factories for more hours each week, and that's the key to keeping labor cost increases to a minimum.

Currently, most Ford workers are on eight-hour shifts. If a plant runs around the clock on three shifts, there's little time for maintenance, and the company has to pay overtime for weekend work to make more cars if sales are strong. Under the new contract, all factories can go to 10-hour shifts four days per week, so plants run 20 hours per day, seven days per week with three shifts, Fleming said. That means factories are at work more hours, yet there's time for maintenance, and overtime costs are avoided, he said.

"It's all about utilization" of the factories, he said.

Also, the UAW agreed to a team concept where workers respond immediately to fix equipment problems instead of waiting for skilled trades employees such as electricians or pipe fitters to arrive, he said.

Ford shares rose 14 cents to close Thursday at $11.70, and they rose another nickel after hours.