Boeing Co. is threatening to move assembly of the upgraded 777X jet away from the Seattle area, its commercial production hub for almost a century, after union members rejected a labor agreement that froze pensions.
“All options” for a 777X site will be considered, and no new talks are planned before the current contract expires in 2016, Boeing said today. Machinists voted 67 percent against an eight-year extension that would have cut benefits while keeping 777X work in Washington state’s Puget Sound region.
Shifting 777X manufacturing elsewhere would be a blow to future aircraft production in the Seattle area, where Boeing was founded in 1916. Until adding a factory in South Carolina to build the new 787 Dreamliner, Boeing had made all its civilian jets in the Seattle area, where it has a web of industrial facilities as well as a history of conflict with unions.
“The threat is always there,” said Robert Mann, who heads aviation consultant R.W. Mann and Co. based in Port Washington, New York. “Boeing can’t bridle the unionization and the result is what you see in South Carolina.”
Boeing suffered the labor rebuff on the 777X just days ahead of the Dubai Airshow, where Emirates plans an “enormous” order and other airlines are poised to follow once the expo begins Nov. 17. The jet, an updated version of Boeing’s largest twin-engine model, is due to debut by decade’s end.
“We are very disappointed,” Boeing Commercial Airplanes President Ray Conner said in a statement. “Without the terms of this contract extension, we’re left with no choice but to open the process competitively and pursue all options for the 777X.”
The company hasn’t set a timetable for deciding among those choices, which still include Washington, Doug Alder, a spokesman, said in a phone interview. Boeing has no plans to re-engage in a new round of contract negotiations, he said.
Boeing rose 1.4 percent to $135.09 at the close in New York. That extended the shares’ year-to-date gain to 79 percent, the biggest advance among stocks in the Dow Jones Industrial Average.
For Boeing, “the silver lining is that other locations may prove beneficial to costs over time and enhance future earnings,” Stephen E. Levenson, a Stifel Nicolaus & Co. analyst in New York, said today in a note to clients.
The company signaled its willingness to sever ties with Seattle with the 2001 decision to relocate its corporate headquarters to Chicago. Levenson said management’s commentary about the 777X indicated that “the technology is portable” to create a manufacturing base for the plane elsewhere.
Utah, Alabama and South Carolina are possible locations to host a 777X plant, along with a Boeing factory in Long Beach, California, that’s being shut as the C-17 military transport program winds down, said Levenson, who rates the shares as buy.
Other states also may jump in. Texas Governor Rick Perry sent a Twitter message last week ahead of the union vote saying: “Texas is a right-to-work state w/ low taxes, smart regulations & skilled workers - perfect for @Boeing 777x manu!”
Boeing’s hourly workers earn an average of about $85,000 a year, Chaz Bickers, a spokesman, said in an e-mail.
About 20,000 Boeing employees currently work either directly or indirectly on the 777 jet. The 777X will be larger and feature a redesigned wing and new power plants, as Boeing seeks to offer airlines a roomy, twin-engine alternative to fuel-guzzling jumbo jets at a time when four-engine aircraft, including its own 747-8, are falling from favor.
The vote put the union at odds with state lawmakers, who sped through $8.7 billion in tax breaks to help land 777X production at Boeing’s plant in Everett, Washington. Boeing’s demands for concessions and threats before the balloting to relocate the work sparked backlash among Machinists including “Vote No” rallies and accusations of blackmail.
“Should this program end up outside of Everett, we expect that the Boeing footprint in the Puget Sound region would shrink dramatically over the next ten years,” Douglas Harned, a Sanford C. Bernstein & Co. analyst, wrote in a research note.
Union leaders and rank-and-file Machinists said they weren’t willing to sacrifice retirement pay to ensure the region’s continued role as the company’s commercial manufacturing base. The new terms would have tacked on eight years to the current labor agreement expiring in 2016.
“It’s a slap in the face,” said Mark Schnell, 52, a machinist on the 787 line who joined the planemaker in 1988. “If they get rid of the pension in this contract, the union is eliminated. That’s what the union is here for, for the pension and for the future.”
Boeing needs to lower costs in a cutthroat environment to remain competitive with Toulouse, France-based Airbus SAS, commercial chief Conner wrote in a Nov. 8 letter to employees.
Shifting 777X work out of state “would be disastrous” for the Seattle area, Peter Rachleff, a history professor and labor historian at Macalester College in St. Paul, Minnesota, said by phone. “They can’t do it at the drop of a hat, it will cost them some money and slow them down, and certainly cost them some bad press, but they are probably capable of doing it.”