UPDATE 6-Boeing warns Seattle could lose 777X if deal rejected

* Senior union members voice strong opposition to proposed contract

* 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 falling apart on Friday as union members rallied against a take-away labor contract and Boeing said it is not open to further talks.

In an effort to contain the damage, Governor Jay Inslee on acknowledge that machinists had “legitimate” concerns about the proposed contract but warned of dire consequences for rejecting the deal.

“There are 49 governors that will be calling Boeing if in fact this deal doesn’t go through,” Inslee said at a news conference at the Washington state capitol in Olympia.

“We are at risk if we do not move forward on multiple tracks to assure these jobs.”

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

Earlier this week, Inslee set out a bold plan to win the coveted 777X: A new labor agreement that would lock in Boeing’s labor costs and a package of favorable tax incentives and other investments that would create an attractive business case for the 777X in the Seattle area.

Boeing’s latest jet - the 777X, a successor to its most profitable long-haul aircraft - would secure thousands of jobs in the Seattle area, which is competing with nonunionized workers in the U.S. South, where wages are lower.

On Thursday it appeared Boeing had very little leverage over the legislature, because building the jet next to the current 777 assembly would be cheaper and less risky than setting up a new line elsewhere. Leaders of the International Association of Machinists (IAM) stood with Inslee when he announced his vision on Tuesday, signaling support for the labor pact.

Then, at a raucous meeting Thursday night before more than 500 members, IAM President Tom Wroblewski tore up the proposed contract - which includes lower healthcare benefits among other changes - and called it “a piece of crap.” Hours later Boeing said it was ready to look for another location.

“A day ago, I would have said it’s very unlikely Boeing would move the 777X,” said Richard Aboulafia, an analyst at the Teal Group in Fairfax, Virginia. “Now it could easily go off the rails.”

Protest against the contract continued on Friday, as union members rallied in Boeing’s Everett, Washington, factory. Some union members said they were outraged that Boeing Commercial Airplanes Chief Executive Ray Conner sent an email that praised union leaders for negotiating the deal.

The discord spilled out online, too. “Vote no and prepare for a strike in 2016,” said one of hundreds of comments, most of them negative, on the union’s Facebook page.

“Vote hell no!” said another.

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

Workers would be forfeiting “a unique opportunity for stability and security for our team, customers, suppliers, and community for years to come,” he said.


Political leaders said union opposition to the contract only heightened the need for legislative action on tax breaks and other incentives for Boeing.

“This makes it even more urgent,” said Alex Pietsch, chief of the Washington governor’s office of aerospace. “We need to demonstrate the state is firmly standing behind the company and the machinists.”

The state senate appropriations committee was due to hear testimony on the measures in Olympia on Friday, following a similar hearing in the house on Thursday that was broadly in favor of granting about $8 billion in tax breaks to aerospace and funding a $10 billion transportation infrastructure package.

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

Investors, who focus on Boeing’s results from quarter to quarter, took it in stride, sending Boeing shares up 1.5 percent at $133.49 on the New York Stock Exchange.

“It’s not over till it’s over,” said Rob Stallard, an analyst at RBC Capital Markets. “As we’ve seen every time these things happen, there is a lot of rhetoric that doesn’t necessarily help in trying to fathom the final outcome.”

Ken Herbert, an analyst at Canaccord Genuity, said, “I do not think all of the back-and-forth here really worries investors.”


Boeing and the IAM union reached their tentative deal after confidential and exclusive talks that were first reported by Reuters. The deal calls for lower healthcare benefits and a new retirement plan, and a separate draft agreement with state officials would provide for tax and other incentives.

But the unusually large group of machinists that turned out on Thursday night for a noisy open mic meeting at the union hall in Seattle knocked Boeing’s plan.

“It was overwhelmingly against Boeing’s proposal,” said Jonathan Battaglia, a union spokesman, about the meeting.

“Tensions are running very high.”

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

Earlier on Thursday, hundreds of assembly workers marched in the aisles of Boeing’s huge Everett plant, where nearly all its wide-body jets are currently built, and chanted slogans calling for 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 to other potential locations.

“All of our options are still on the table, including those within Boeing and interest we have received from outside,” a Boeing spokesman said in an emailed statement.

“We chose to engage in Puget Sound first, but without full acceptance by the union and legislature, we will be left with no choice but to open up the process competitively and pursue other options for locating the 777X work,” he said.

“And if not ratified per the scheduled vote on Nov. 13, we will begin taking the next steps.”

Industry experts say Washington state faces competition from states including South Carolina, where Boeing assembles some of its 787 Dreamliners, as well as Texas and Utah.

With good infrastructure and hundreds of acres of land available near Boeing’s plant in South Carolina, that region “could easily support the 777X,” said Peter Arment, an analyst at brokerage Sterne Agee. “Economically, it’s an easier decision to move it than not. Opposing this labor deal secures that long-term incremental growth for wide-body production will be outside 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, the longest wings designed for a Boeing jetliner.

The new standoff comes as Boeing prepares to launch the 777X with potentially record orders at the Dubai Airshow. But the discord is not expected to derail those plans, industry sources said.

The head of European airline group IAG said on Friday it was interested in the 777X for Iberia and British Airways.