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Washington state takes steps to nail down Boeing 777X contract

An Airbus A380 plane takes off during a demonstration flight at the MAKS International Aviation and Space Salon in Zhukovsky, outside Moscow August 31, 2013. REUTERS/Maxim Shemetov

By Jonathan Kaminsky and Alwyn Scott

OLYMPIA, Wash./ NEW YORK (Reuters) - The Washington state legislature met on Thursday in a special session to consider tax breaks aimed at ensuring Boeing Co (BA) builds its newest jet, the 777X, in the Seattle area.

Washington Governor Jay Inslee, a Democrat, called the session to seek roughly $8 billion in tax incentives along with a streamlined permitting process for Boeing and $10 billion in funding for transportation improvements.

But to win the coveted work for Washington, Boeing's machinists must ratify a long-term labor contract with concessions on pensions and healthcare.

The 777X program would secure thousands of jobs in the state, keep it at the forefront of aircraft technology and trigger construction of 1.5 million square feet (139,355 square meters) of new facilities in the Puget Sound area. It is viewed as crucial to the Seattle area, which is competing with nonunionized workers in southern U.S. states where wages are lower.

"Assembly of that airplane will be the lynchpin of economic growth for the state of Washington for decades to come," Inslee said, speaking before the Washington state House Finance Committee on Thursday.

It remained unclear exactly how much Boeing's decision about where to build the jet really hinges on the labor deal and the state incentives.

A union "letter of understanding" distributed to members says Boeing "agrees to locate" 777X production in Washington if workers approve a new, eight-year labor contract.

The document makes no mention of the deal depending on legislative action, raising the question of whether the airplane maker could be locked into production of its newest jet in Washington state with no new tax incentives or other inducements.

Inslee spokesman David Postman insisted both measures are essential to the deal, characterizing the letter as nonbinding and noting it does not take into account other agreements.

His view was backed up by a statement from the union, forwarded to Reuters by the governor's office.

"Any suggestion that the union thinks Legislative action isn't necessary is simply wrong," said Larry Brown, the machinist union's legislative director, in the statement.

The 777X is Boeing's latest jet program, and could be the last major new plane by Boeing for the next 15 years. It is expected to enter service in 2020.

The jet will be built using a metal fuselage similar to the current 777, one of Boeing's best-selling planes, and will add a large new carbon-composite wing and new engines. More than 100 orders for the jet are expected later this month at the Dubai Airshow.

In a letter to Inslee sent on Thursday, the senior vice president of Boeing's government operations, Tim Keating, listed tax incentives and the transportation infrastructure package, along with a labor agreement, as elements "that will ensure our lasting competitiveness in Washington state."

The letter went on to commend the governor for working to "achieve the results that are necessary" to locate 777X production in Washington state.

"That doesn't mean it's a deal-breaker," if the legislation doesn't pass, said Ken Herbert, an aerospace analyst at Canaccord Genuity Inc in San Francisco.


Boeing clearly wants to lock in the labor concessions but might be more flexible on the legislative proposals, Herbert said.

The Chicago-based planemaker has also considered putting the 777X at its South Carolina assembly plant, where it makes some 787 Dreamliners, according to industry sources.

Putting the 777X there was seen by many industry experts as more financially sound for the long haul. But the labor proposal shows determination to control costs and avert strike risk with the 777X in Washington.

A newspaper in South Carolina reported on Thursday that officials there never seriously considered that their state was in the mix for winning the work.

Boeing also is under pressure to avoid the technical problems and delays that plagued the Dreamliner, which arrived three years late after production was outsourced around the world.

"It would almost certainly have been more disruptive to move a larger component of the (777X) operations to South Carolina," said Russell Solomon, an analyst at Moody's Investors Service in New York.

So far, investors are not concerned about the tilt toward building the jet in Washington.

Boeing stock is near record highs, and has not fallen significantly since the provisional proposals were announced on Tuesday. The shares ended down 1.2 percent at $131.51 on Thursday on the New York Stock Exchange.

"Investors care about stability, visibility, profitability and risk in the assembly of aircraft," said Rob Stallard, an analyst at RBC Capital Markets. "If the location of final assembly impacts these factors, then they probably care."

The provisional labor agreement with the machinists' union was announced on Tuesday. The eight-year contract includes $10,000 signing bonuses and enhanced pensions for older workers who opt to retire, but would halt further additions to current workers' pensions and set up a different retirement plan funded by the company, the union said.

Union members are due to vote on the proposal by next Wednesday.

Inslee's plan includes extending commercial airplane tax incentives passed in 2003 until 2040 and widens other exemptions.

The 2003 tax incentives were for Boeing locating the 787 in Washington, and figure prominently in a trade dispute between Boeing and rival Airbus (EAD.PA), and were ruled unfair by the World Trade Organization (WTO).

Similarly, Washington has criticized Airbus for continuing to take government loans for the A350 aircraft that the United States says were ruled illegal by an earlier WTO case.

Democrats control the state's legislature's lower house, and Republicans control the Senate. Sentiment in both chambers leans toward passing Boeing-related tax incentives.

But state Senate Majority Leader Rodney Tom, a conservative Democrat, cautioned it could take weeks to pass a transportation revenue package that would likely rely on a gasoline tax increase.

It was not immediately clear whether Boeing views swift passage of a transportation package as a prerequisite to locating 777X production in Washington state and building new facilities in the Puget Sound area.

"It's not do-or-die to get the transportation package done immediately," Tom said.

(Reporting by Jonathan Kaminsky in Olympia, Wash.; editing by Eric M. Johnson, W Simon, Matthew Lewis and Andrew Hay)