Sept. 5 (Bloomberg) -- Boeing Co.'s extended contract talks with its largest union ended in failure, setting up a walkout at midnight that will halt aircraft production and may further delay the 787 Dreamliner.

``Despite meeting late into the night and throughout the day, continued contract talks with the Boeing company did not address our issues,'' the International Association of Machinists and Aerospace Workers said today on its Web site. The workers rejected the contract two days ago, and leaders agreed to delay the strike until tonight so the two sides could meet with a federal mediator.

The walkout jeopardizes Boeing's customer relations amid unprecedented demand from airlines for newer, more fuel-efficient planes and may keep the 787, Boeing's most successful new plane, from flying this year. A month-long strike would shave 31 cents a share off Boeing's earnings and cost $2.8 billion in lost revenue, estimates New York-based Merrill Lynch & Co. analyst Ronald Epstein.

``The union gamble in this case is significant and immediate,'' said Michel Merluzeau, an aviation consultant at G2 Solutions in Kirkland, Washington. ``Boeing's offer was reasonable, especially considering the current economy and the projected market slowdown.''

The union represents about 27,000 employees in Washington state, Oregon and Kansas who make parts and assemble planes for Chicago-based Boeing, which trails only Airbus SAS in commercial planemaking. Boeing, whose manufacturing hub is in Seattle, will deliver planes that were completed prior to the strike and won't assemble any others during the walkout.

`Too Far Apart'

``We worked hard with the union and mediator,'' said Boeing spokesman Tim Healy. ``We pursued different options, but in the end we were too far apart to reach an agreement. We're open for further discussion, but no talks are scheduled.''

The last time machinists walked off the job, for 28 days in 2005, it reduced Boeing's second-half earnings by $300 million. The union has gone on strike to gain concessions to three of the last six contracts and almost a fourth, when they rejected the 2002 proposal but didn't get the two-thirds approval needed to stop work.

Boeing broke off talks Aug. 28 by issuing a final proposal it called the best in the industry that included an 11 percent pay raise and higher pension payments. The company refused to make changes the union had sought to limit the use of outside contractors for work the machinists have traditionally done. Boeing also demanded that workers pay higher medical co-pays and deductibles.

Union Demands

Emboldened by the planemaker's record profits in recent years, union leaders wanted at least a 13 percent wage increase, even higher pension payments, no changes to health care and the ability to take back some of the work that's being farmed out.

Eighty percent of voters rejected Boeing's offer in the Sept. 3 vote and 87 percent cast ballots in favor of a strike. Employees who had gathered at the Seattle union hall that night were already carrying `On Strike' signs before they knew the voting results, ready to start picketing immediately. They shouted union leaders off the stage when told of the 48-hour contract extension.

The average machinist is 46 years old and makes $26 an hour, or about $54,000 a year. Still, about 2,300 are under the age of 30 and more than 4,000 union members earn less than $30,000, union spokeswoman Connie Kelliher said.

Boeing fell 14 cents to $62.89 at 6:40 p.m. after the regular close of New York Stock Exchange composite trading. The stock has dropped 38 percent since October, when the first of three Dreamliner delays was announced because of parts shortages and incomplete work by suppliers.

Dreamliner Flight Plans

Boeing plans to fly the 787 in November and deliver it in next year's third quarter, at least 14 months later than first planned. A strike of more than a month ``ensures'' that the plane won't be certified by the U.S. Federal Aviation Administration next year, further delaying its entry into service, said Peter Arment, a Greenwich, Connecticut-based analyst with American Technology Research.

Boeing has sold 895 Dreamliners worth about $155 billion, pitching its light weight to airlines as a way to save fuel. Toulouse, France-based Airbus, whose main new-plane program, the A380, takes a different approach by putting 525 passengers on a larger aircraft, has built more jets than Boeing every year since 2003.

To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net

Last Updated: September 5, 2008 20:38 EDT