Where Will Boeing Build its New 777X Now?

Boeing Co (NYSE:BA) workers' rejection of a new labor deal has sent the U.S. planemaker in search of alternative sites to build its newest jet and could mark the beginning of the end for wide-body aircraft manufacturing in the Seattle area.

The vote by machinists late on Wednesday revealed strong opposition to the deal that Boeing said it needed to commit to building its 777X jet in Washington, with no indication whether fresh talks would take place.

The Seattle plant builds the current 777, but the 777X is seen as crucial to Boeing's future as the successor to its most profitable long-haul aircraft. The 777X is expected to be launched at next week's Dubai Airshow with the announcement of more than 100 orders.

Boeing Chief Executive Jim McNerney declined to say in a TV interview on Wednesday whether the vote was a take-it-or-leave-it deal. "There are options for us to look at and we will evaluate them and decide," he told an NBC affiliate in Seattle.

"I'm not prepared to say we're moving in one direction or another. Where and how we build it (the 777X) will be decided in the next few months."

The International Association of Machinists (IAM) could present a counter offer, but union leaders in Seattle said that the 67 percent "no" vote by a heavy turnout of members makes it tough to hammer out a new proposal agreeable to both sides.

With a "slam-dunk 'no', it'll be hard to get people excited about a new deal," said one person close to the process.

State officials in Washington said they would keep fighting for the work. "We intend to compete, and that's what we've got to focus on," Governor Jay Inslee said at a news conference in Olympia, Washington.

Boeing said in a statement after the vote that it was disappointed and would shop the work to other states. The company has operations in about 40 states, but among its most likely options are North Charleston in South Carolina and Long Beach in California.

SURPRISE REJECTION

Inslee, who last week led a successful five-day legislative effort to pass $8.7 billion in tax incentives and other measures to aid Boeing and the state's aerospace industry, urged the machinists and Boeing to talk to each other, though he does not expect that to happen within the next day or so.

The rejection surprised observers from Wall Street to Tokyo, where many had expected the union to back a plan that would have replaced their pension with a second savings-contribution plan and raised healthcare costs in exchange for Boeing locating the 777X factory in Washington state, sustaining an estimated 20,000 jobs for a generation.

"It was a no? Really?" said a Japanese government official who helps to oversee Japan's aerospace industry.

The Washington workforce is well-trained in building the current 777 jetliner, which is 90 percent hand-built. The factory and tooling are in place, with suppliers geared toward delivering to the plant.

"The door isn't shut on Washington," Canaccord Genuity analyst Ken Herbert said in San Francisco, adding that the agreed tax package means that Boeing and the union could return to the bargaining table.

Deutsche Bank analyst Myles Walton agreed that Boeing could still strike a deal with Washington, given the logistical challenges of starting afresh at a new facility in another state.

"We'd expect more rhetoric than we'd have otherwise hoped between the company and labor in the coming months, but still see a deal with Washington as the lowest risk even if on paper other locations have potentially lower costs," he wrote in a research note.

"One of CEO Jim McNerney's key initiatives is to de-risk product development and leaving Washington would certainly be a challenge to that goal."

But RBC Capital Markets analyst Robert Stallard said that since Boeing's South Carolina plant had performed "pretty well" in building 787 Dreamliners, there would be "less concern about the risk of setting up a new plant elsewhere in the U.S."

Boeing shares were up 1 percent at $134.53 on Thursday morning on the New York Stock Exchange.

POSSIBLE ALTERNATIVES

The company already builds 787 Dreamliners in North Charleston, South Carolina, and is investing $1 billion to expand its engineering capability.

Long Beach, California, meanwhile, is home to production of Boeing's C-17 military transport plane, which is due to stop in 2015 because of faltering sales. Boeing plans to lay off 3,000 workers involved in the 30-year-old program.

Other options include the Japanese port city of Nagoya, where Mitsubishi Heavy Industries Ltd <7011.T> builds carbon-composite wings for the Dreamliner. Mitsubishi has told Boeing that the plant could be expanded to produce wings for the 777X.

Wednesday's vote also revealed discord within the IAM's District 751, representing 31,000 Boeing workers in Washington and Oregon, which could inhibit its ability to enter new talks.

District President Tom Wroblewski appeared to support the deal when it was announced last week, then criticized it at a rowdy union meeting last Thursday.

His initial stance was at least partly dictated by the union's national leaders, according to three people familiar with the situation, and cost the leadership credibility with members. Many of the members present when the vote was announced jeered when union leaders took the stage.

"That's not a reaction our leadership should be getting," said Wilson Ferguson, vice president of District 751.

Asked if more talks were possible, he said: "We have a contract until 2016; we'll continue building airplanes until then."