Boeing-Union Standoff Pits Pensions Against 777X Production Risk

(Bloomberg) -- Boeing Co.’s long-term production plans for its new 777X aircraft and three other jets are at stake in a showdown with its largest union that pits worker pensions against the planemaker’s appetite for risk.

Assembly of the 777X, its composite wing and other major parts would stay at Boeing’s Seattle-area industrial hub if Machinists union members agree to freeze their retirement programs, Doug Alder, a spokesman, said by e-mail. Boeing also would continue making the 737 Max, KC-46 military tanker and P-8 submarine hunter in the Pacific Northwest for a decade.

By rejecting Boeing’s latest contract terms as they vote today, workers would dare the Chicago-based company to shift a jet with $100 billion in orders and commitments to an unproven site in states like California, Texas and Missouri, said Eric Hugel, an analyst at S&P Capital IQ Inc. in New York.

“Boeing’s made it clear: they’re going to get savings one way or the other,” Hugel said in a telephone interview. “What this boils down to: What’s the level of risk that Boeing’s going to end up taking to get those savings in terms of having a less- experienced workforce?”

The 31,000 members of union District 751 are voting on a 777X-related contract offer at the behest of Machinists International President R. Thomas Buffenbarger, who overrode the local leaders’ decision to dismiss the plan without putting it out to rank-and-file members.

SWEETENED TERMS

While Buffenbarger didn’t endorse the Boeing offer, he said it deserved consideration since the terms provided $1 billion more in benefits than an earlier measure turned down in November by 67 percent of union members.

Assembling the twin-aisle jet and its composite wings may generate thousands of jobs, a lure that spurred states including Washington, home of Boeing’s commercial operations, to dangle billions of dollars in incentives to win the factory for the 777X, Boeing’s first model for the 2020s.

“Some may believe this is a ‘fake’ play by the company,” Buffenbarger wrote in a Dec. 26 letter to Boeing Machinists. “Your union, based upon information that indicates otherwise, must take the threat seriously.”

Boeing’s ability to generate cash with existing models such as the 777 and 737 has helped win over investors, sending the shares up 77 percent in the year ended yesterday. The company authorized a $10 billion stock buyback and a 51 percent dividend increase on Dec. 16.

EXECUTION PRESSURE

The company now faces pressure to execute flawlessly on the 777X, especially after bungling development of the 787 Dreamliner, whose 2011 debut was more than three years late, said George Ferguson, senior aerospace analyst with Bloomberg Industries in Skillman, New Jersey.

A decision to shift work away from Washington would leave Boeing a tight schedule in which to construct new facilities and train its workforce, with production due to begin by 2017 and the first plane delivered in 2020.

“If the 777X goes away from Washington, you do have some real risks, and you’ll have a bunch of excess capacity,” Ferguson said in a December phone interview.

Washington aviation boosters worry about the precedent set in a loss of the 777X, for which the state has proposed an incentive package with $8.7 billion in tax breaks. Seattle was Boeing’s headquarters city until the company relocated top executives to Chicago in 2001.

“It’s not just losing one airplane’s production,” JC Hall, chairman of the Pacific Northwest Aerospace Alliance, said by phone. “It could be the start of a Boeing exodus.”

FUTURE SHIFT?

Escalating tensions with Boeing’s largest labor union could prompt the company to opt for out-of-state manufacturing for other jets under development, starting with the largest Dreamliner model, the 787-10, whose production is to be determined this year, Hall said.

Labor peace has proved elusive for Boeing in Washington, where Machinists halted assembly lines with strikes in 2005 and 2008. After Machinists turned aside the initial contract offer, which also would have eliminated pensions, Boeing sweetened the terms by offering a total of $15,000 per member in bonuses and retaining a seniority system that allowed workers to reach the top of the pay scale within six years.

“From Boeing’s point of view, it does make the most sense to site 777 assembly and wing here,” said Leon Grunberg, a professor of sociology at the University of Puget Sound in Tacoma, Washington, and co-author of “Turbulence: Boeing and the State of American Workers and Managers.”

“But they may be willing to go against their short- and medium-term interests” to weaken the union’s leverage, Grunberg said. “Long-term, they don’t want to be held hostage to these every three- or four-year negotiations.”