Oct. 26 (Bloomberg) -- The Jet City may start losing its jets over a labor-union dispute.

Boeing Co., founded in Seattle in 1916 when lumberman Bill Boeing built a wooden float plane on Lake Union, wants a no- strike agreement from machinists before it puts a second assembly line for the 787 Dreamliner in the Puget Sound region where it now assembles commercial jets, people familiar with the situation said. Without a deal, Boeing probably will set up a new line near a factory it bought in South Carolina, said the people, who declined to be identified discussing private talks.

Boeing’s board is weighing the options at a meeting today, the people said. The threat is serious enough that Washington Governor Christine Gregoire made an in-person appeal to Boeing’s commercial-jet chief, and a group of local business leaders including Microsoft Corp. General Counsel Brad Smith sent an open letter urging Boeing to keep the work in-state.

“I probably talk about this issue half a dozen times a day, which for the schedule of a governor is pretty intense,” Gregoire said in an interview.

Local politicians, union leaders and labor experts say the standoff is reminiscent of the auto industry’s labor battles of the 1980s, when carmakers moved production from Michigan to less union-friendly states in the South. Strikes by the International Association of Machinists and Aerospace Workers have shuttered the planemaker’s factories four times in 20 years.

Two Years Late

A decision will be announced within “the next couple of weeks,” Chief Executive Officer Jim McNerney said on an Oct. 21 conference call after Boeing reported a $1.56 billion third- quarter loss, caused partly by the Dreamliner, which is more than two years late. The 787 would be in “better shape” had the machinists not walked out for two months last year, he said.

“I don’t blame this totally on the union, but the mix hasn’t worked well yet,” he said. “So we’ve either got to satisfy ourselves that the mix is different or we’ve got to diversify our labor base.”

Boeing shares fell $1.60, or 3.2 percent, to $48.29 at 4 p.m. in New York Stock Exchange trading. Their 13 percent increase this year trails both the Standard & Poor’s 500 Index, up 18 percent in the same period, and European Aeronautic, Defence & Space Co., the parent of Toulouse, France-based Airbus SAS. EADS gained 19 percent in that time.

Unlike Washington, South Carolina is a right-to-work state, meaning workers there can’t be forced to join a union. The 787’s rear fuselage is already made in North Charleston, where Vought Aircraft Industries had a contract to ship sections to Boeing for final assembly in Everett, Washington. Boeing bought the operations from Vought in July, and workers there rejected their membership in the machinists union last month.

Using Leverage

“It’s an attempt to use the non-union plant as leverage against the unionized workforce,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Massachusetts.

Seattle’s fortunes have long been tied to aerospace. During a Boeing slump in 1971, job cuts so soured the economy that two local realtors put up a billboard that read, “Will the last person leaving Seattle turn out the lights.” The Everett jumbo- jet factory is one of the region’s biggest tourism draws.

Boeing kept its commercial operations in the Seattle area even after moving a few hundred executives to Chicago in 2001 to establish a corporate headquarters closer to U.S. financial centers. The industry supports more than 200,000 jobs and generates $36 billion for Washington state, according to a study prepared for Snohomish County.

‘In Our Blood’

“Commercial aerospace is in our blood,” said Gregoire, who presented the state’s case at a meeting with Boeing commercial-jet chief Jim Albaugh in September. On Oct. 13, business leaders including Microsoft’s Smith and Costco Wholesale Corp. co-founder Jeff Brotman released a letter that said Boeing should keep the work in Washington, “where we have a long track record of demonstrable success together.”

The machinists say the 787 would already be in service if Boeing had given their experienced members a greater role in the program. Boeing is outsourcing more production to suppliers than it has before to make the Dreamliner.

“Issues including jobs, the second 787 line, the replacement airplane for the 737 and bringing our work back in- house where it belongs are just some of the topics being discussed,” IAM District 751 President Tom Wroblewski said in an Oct. 22 statement. Any new proposal would have to be voted on by members, he said.

Auto Workers

A six-year ban on strikes over wages and benefits were among concessions rejected by Ford Motor Co. workers at two factories in Michigan and one in Missouri, United Auto Workers officials said today. Union leaders have supported the no-strike plan, which is similar to one granted to General Motors Co. and Chrysler Group LLC. Voting continues through Oct. 31.

At Boeing, the costs of continuing strikes would outweigh the “modest inefficiencies” and “execution challenges” in setting up an assembly line in North Charleston, McNerney said Oct. 21. Boeing applied for building permits in August that could allow construction to start Nov. 2. A South Carolina plant would be the first Boeing has ever built outside the Puget Sound region.

Unemployment has surged in both states. The jobless rate in South Carolina reached 12.1 percent in June, the highest in Bureau of Labor Statistics records dating to 1982. Washington’s 9.3 percent rate in September was the most since 1984.

Siphoning Jobs

While the second assembly line would only employ 700 to 900 people, it may siphon jobs on future projects “and possibly even some of the work we’re lucky enough to have right now,” said Janea Holmquist, a Washington state senator.

Everett already risks losing work on other planes to a Southern state. Boeing’s 767 would only have orders to last a few years if the U.S. Air Force chooses a rival bid next year for a $35 billion aerial-refueling tanker contract that would be built in Alabama and based on an Airbus aircraft.

Chris Marr, a Washington state senator and former Ford manager, said the state needs to look no farther than Detroit to see what could happen if the dispute isn’t resolved.

“I worked for Ford,” Marr said. “I know all too well what the alternative is.”

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

Last Updated: October 26, 2009 16:07 EDT