In a surprise move last week, Dirk Lesko, the longtime and well-regarded president of Maine’s General Dynamics Bath Iron Works shipyard, resigned, effective immediately, just as the shipyard agreed to big wage increases.

Lesko’s abrupt departure from the big naval shipbuilder came just as Bath Ironworks and some 4,000 members Local S6 of the International Association of Machinists & Aerospace Workers agreed to an across-the-board pay increase that boosts wages for some pay grades by almost 40 percent.

The big pay increases will likely increase the costs the Navy must pay to procure new destroyers and other large surface combatants.

The pay increase is apparently focused on attracting and retaining new employees—employees that stay at the shipyard long enough to receive training only to be lured away for other high-paying opportunities. While all the union’s 10 pay grades and specialties receive raises in the new wage agreement, junior “Grade 1” workers will see their hourly pay jump from $16.94 an hour (the August 2021 pay rate detailed in the yard’s 2020 agreement) to $23.50. Given that the shipyard was only about halfway through a hard-fought three-year labor contract, this mid-contract pay adjustment is a major concession for General Dynamics, and may well serve as a potential sign of substantive inflationary pressures across the entire company.

Bath Iron Works is one of only two shipyards that build large surface combatants for the U.S. Navy. While the pay increase may help bring much-needed new workers to the yard, the added costs are a blow to the yard’s viability. If a $2.4 billion destroyer takes four years to progress from keel-laying to delivery, a big pay increase risks eating away at the yard’s overall profit margin (As a whole, the three-shipyard General Dynamics Marine Group makes a profit margin of about 8.3%, though Bath Iron Works’ profit margin is likely less at this time).

Right now, Bath Iron Works appears to be relatively healthy, sitting on a large order backlog and years of additional work. But, over the long term—and if the backlog contracts are essentially fixed price, tied to the labor rates detailed in the yard’s 2020 contract—big labor rate hikes will make it far harder for the yard to meet the ambitious performance goals expected by the General Dynamics corporate office. The new compensation agreement may also make the yard harder for the company to sell off.

If Bath’s sole rival in large surface combatant production, a big Huntington Ingalls Industries shipyard in Mississippi, holds the line on labor costs, Bath will have a far harder time winning new government shipbuilding contracts—contracts that often go only to technically “acceptable” bidders that offer the lowest possible cost. The yard may get new work from the government to “keep the yard open,” but the terms won’t be as favorable as they are for Bath’s lower-cost rival on the Gulf Coast.

Contract negotiations aside, Lesko’s departure, coming as it did, was a real surprise. Outside of the increased payout to the shipyard’s workforce, Lesko’s six-year tenure at Bath was a successful rebuilding effort, turning the then-troubled shipyard around. Under Lesko, Bath recovered from the demise of the Zumwalt (DDG-1000) Class destroyer program and found stable footing as the Navy refocused on procuring a third “variant” of the Navy’s mainstream Arleigh Burke (DDG-51) Class destroyer. To get the shipyard back on track, General Dynamics weathered a tough nine-week strike, earning the stability of a hard-won three-year labor contract and regular pay increases—a contract that blew up the day Lesko departed.

What Happened At The Shipyard?

As is usual for General Dynamics, nobody is talking.

For General Dynamics, this abrupt shipyard leadership change is unique. Lesko’s departure—if it wasn’t on his own terms—may fit with industry standards, but, if past General Dynamics leadership spills are any guide, this one was unusually harsh.

In 2019, General Dynamics raised industry eyebrows by sacking Electric Boat President Jeffery Geiger the day he presided over a shipyard expansion ceremony. But Geiger’s ouster, orchestrated and meted out by an angry and fed up General Dynamics corporate office, still sent Geiger packing with all the niceties of a vaguely laudatory press release, best wishes, and a two-week transition. Lesko’s abrupt retirement—after three decades of service—was effective immediately, heralded by only a terse, two-sentence announcement, followed with a flurry of “no comments” and some potentially mean-spirited leaks.

If Lesko didn’t leave on his own, the brutal exit of this shipyard boss is a real change for General Dynamics culture, and suggests that the General Dynamics corporate office is furious with him. When Fred Harris, a legendary General Dynamics shipbuilding boss, stepped down in 2016, the transition took place over the course of about a month and a half. Geiger’s predecessor at Electric Boat, Kevin J. Poitras, also was granted a month and a half to “transition to retirement” in 2013. And when John P. Casey stepped down in 2019, leaving his post as the overall leader of the General Dynamics Marine Systems Business unit, the transition to the new chief executive, the former president of Jet Aviation, Robert E. Smith, took five months.

Lesko’s departure, coming just a day after America’s biggest naval expo, the Sea-Air-Space exposition in Washington, D.C., is a rare corporate misstep—if a new boss was “on deck,” the likely new shipyard leader could have been feted and introduced to Navy leaders during the big conference.

With no confirmation from either Lesko or General Dynamics, theories abound as to why Lesko left. Some suggest a change in naval supervisory personnel sparked the leadership shift, while others with close ties to General Dynamics management suggest Lesko violated corporate policy.

Union communications suggest that the Bath Iron Works management team may have been under some pressure, potentially getting out over their skis in agreeing to labor increases before all the other various General Dynamics executive stakeholders were on board with the new fee structure. The negotiations at the yard were long, and, by early spring, they were intense. According to a timeline from Local S6, the shipyard union expressed concern over pay rates in January. By early March, the shipyard provided the union an alternative compensation scheme and market analysis, which the union reviewed, bringing “several concerns” to management “which we [the union] believe may have caused some turmoil.” In late March, the shipyard provided the union with a draft “Memorandum of Agreement,” without, apparently, an understanding of just how to fund it. The company then backtracked. On April 4, the union accused the shipyard of backsliding on the agreement, and threatened a range of punitive actions.

In the end, General Dynamics seems to have caved, and, by April 7, the “midterm wage adjustment” was signed. Lesko then apparently packed up and left the yard.

What Now For BIW and the GD Marine Systems Group?

Aside from the cost risks detailed above, Lesko’s departure reduces the overall resiliency within the wider General Dynamics Marine Systems Group—a three-shipyard branch of the multi-faceted General Dynamics national security conglomerate.

While shipyard presidents come and go, the loss of such an experienced in-house shipyard executive raises risk within the wider General Dynamics naval shipbuilding portfolio. The last two leaders of the big Connecticut-based General Dynamics Electric Boat submarine-building shipyard came from the company’s surface-ship shipbuilders in Maine and San Diego. The unexplained demise of a seasoned, thirty-year shipbuilder like Lesko also potentially poses a significant competitive risk to the company’s longer-term ambitions in naval shipbuilding—and if Lesko walked out before getting pushed, he may emerge later as a leader at Fincantieri Marine Group or some other shipyard, hungry, armed with insider knowledge, and eager to beat his former employer at it’s own game.

In the final analysis, Lesko is a big loss for General Dynamics. In the “tough stuff, done right” world of shipbuilding, seasoned shipyard executives are “built, not made” over a period of decades. They certainly don’t spring up, overnight.

Questions abound. What are the overall consequences for America’s naval shipbuilding? If something goes wildly wrong at the General Dynamics Electric Boat shipyard over the next few years, who in General Dynamic’s slim bench of standout shipyard talent will be ready to step in and get the company’s increasingly important money-makers—the Virginia and Columbia Class submarine-building programs—back on track? Or, is the company turning instead to their increasingly dominant Gulfstream luxury jet subsidiary for manufacturing and management expertise? And, finally, what will this big pay bump mean for other early career workers in other parts of the sprawling General Dynamics universe?

General Dynamics has an opportunity to discuss these questions when they announce their first-quarter financial results on April 27. We’ll see what they say.