Boeing warns Seattle could lose 777X if deal rejected

Reuters

* Senior union members voice strong opposition to proposedcontract

* Boeing will open talks on other sites if contract rejected

* Union to vote on deal to assemble new jet on Nov. 13

* 777X work could end up in nonunionized U.S. South

By Alwyn Scott, Tim Hepher and Jonathan Kaminsky

Nov 8 (Reuters) - A tentative deal to build Boeing Co's newest jet in Washington state appeared to be fallingapart on Friday as union members rallied against a take-awaylabor contract and Boeing said it is not open to further talks.

In an effort to contain the damage, Governor Jay Inslee onacknowledge that machinists had "legitimate" concerns about theproposed contract but warned of dire consequences for rejectingthe deal.

"There are 49 governors that will be calling Boeing if infact this deal doesn't go through," Inslee said at a newsconference at the Washington state capitol in Olympia.

"We are at risk if we do not move forward on multiple tracksto assure these jobs."

Inslee said that he's had no conversations with Boeing abouta backup plan if the union does not ratify the contract.

Earlier this week, Inslee set out a bold plan to win thecoveted 777X: A new labor agreement that would lock in Boeing'slabor costs and a package of favorable tax incentives and otherinvestments that would create an attractive business case forthe 777X in the Seattle area.

Boeing's latest jet - the 777X, a successor to its mostprofitable long-haul aircraft - would secure thousands of jobsin the Seattle area, which is competing with nonunionizedworkers in the U.S. South, where wages are lower.

On Thursday it appeared Boeing had very little leverage overthe legislature, because building the jet next to the current777 assembly would be cheaper and less risky than setting up anew line elsewhere. Leaders of the International Association ofMachinists (IAM) stood with Inslee when he announced his visionon Tuesday, signaling support for the labor pact.

Then, at a raucous meeting Thursday night before more than500 members, IAM President Tom Wroblewski tore up the proposedcontract - which includes lower healthcare benefits among otherchanges - and called it "a piece of crap." Hours later Boeingsaid it was ready to look for another location.

"A day ago, I would have said it's very unlikely Boeingwould move the 777X," said Richard Aboulafia, an analyst at theTeal Group in Fairfax, Virginia. "Now it could easily go off therails."

Protest against the contract continued on Friday, as unionmembers rallied in Boeing's Everett, Washington, factory. Someunion members said they were outraged that Boeing CommercialAirplanes Chief Executive Ray Conner sent an email that praisedunion leaders for negotiating the deal.

The discord spilled out online, too. "Vote no and preparefor a strike in 2016," said one of hundreds of comments, most ofthem negative, on the union's Facebook page.

"Vote hell no!" said another.

Conner distributed another letter on the factory floor onFriday that urged members to consider the contract and what lossof the 777X would mean to the region.

Workers would be forfeiting "a unique opportunity forstability and security for our team, customers, suppliers, andcommunity for years to come," he said.

URGENCY IN OLYMPIA

Political leaders said union opposition to the contract onlyheightened the need for legislative action on tax breaks andother incentives for Boeing.

"This makes it even more urgent," said Alex Pietsch, chiefof the Washington governor's office of aerospace. "We need todemonstrate the state is firmly standing behind the company andthe machinists."

The state senate appropriations committee was due to heartestimony on the measures in Olympia on Friday, following asimilar hearing in the house on Thursday that was broadly infavor of granting about $8 billion in tax breaks to aerospaceand funding a $10 billion transportation infrastructure package.

Analysts reacted cautiously to the union opposition, sayinga deal could still be reached, despite the heated rhetoric.

Investors, who focus on Boeing's results from quarter toquarter, took it in stride, sending Boeing shares up 1.5 percentat $133.49 on the New York Stock Exchange.

"It's not over till it's over," said Rob Stallard, ananalyst at RBC Capital Markets. "As we've seen every time thesethings happen, there is a lot of rhetoric that doesn'tnecessarily help in trying to fathom the final outcome."

Ken Herbert, an analyst at Canaccord Genuity, said, "I donot think all of the back-and-forth here really worriesinvestors."

TENSIONS HIGH

Boeing and the IAM union reached their tentative deal afterconfidential and exclusive talks that were first reported byReuters. The deal calls for lower healthcare benefits and a newretirement plan, and a separate draft agreement with stateofficials would provide for tax and other incentives.

But the unusually large group of machinists that turned outon Thursday night for a noisy open mic meeting at the union hallin Seattle knocked Boeing's plan.

"It was overwhelmingly against Boeing's proposal," saidJonathan Battaglia, a union spokesman, about the meeting.

"Tensions are running very high."

The vote by 31,000 members was still scheduled to go aheadon Wednesday and there are no scheduled talks with Boeing abouta different offer, Battaglia said.

Earlier on Thursday, hundreds of assembly workers marched inthe aisles of Boeing's huge Everett plant, where nearly all itswide-body jets are currently built, and chanted slogans callingfor the contract to be rejected.

"Workers were expressing their opinions," Battaglia said."It's part of the democratic process."

In an emailed statement, Boeing said that barring a "yes"vote from the union on the contract, it would begin talking toother potential locations.

"All of our options are still on the table, including thosewithin Boeing and interest we have received from outside," aBoeing spokesman said in an emailed statement.

"We chose to engage in Puget Sound first, but without fullacceptance by the union and legislature, we will be left with nochoice but to open up the process competitively and pursue otheroptions for locating the 777X work," he said.

"And if not ratified per the scheduled vote on Nov. 13, wewill begin taking the next steps."

Industry experts say Washington state faces competition fromstates including South Carolina, where Boeing assembles some ofits 787 Dreamliners, as well as Texas and Utah.

With good infrastructure and hundreds of acres of landavailable near Boeing's plant in South Carolina, that region "could easily support the 777X," said Peter Arment, an analystat brokerage Sterne Agee. "Economically, it's an easier decisionto move it than not. Opposing this labor deal secures thatlong-term incremental growth for wide-body production will beoutside Seattle and most likely in South Carolina."

Japan, whose heavy industry builds wings for the Dreamliner,is seen as a contender to build the wings for the 777X, thelongest wings designed for a Boeing jetliner.

The new standoff comes as Boeing prepares to launch the 777Xwith potentially record orders at the Dubai Airshow. But thediscord is not expected to derail those plans, industry sourcessaid.

The head of European airline group IAG said onFriday it was interested in the 777X for Iberia and BritishAirways.

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