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Washington state takes steps to nail down Boeing 777X contract

The Boeing logo is seen at their headquarters in Chicago, April 24, 2013. REUTERS/Jim Young
The Boeing logo is seen at their headquarters in Chicago, April 24, 2013. REUTERS/Jim Young

By Jonathan Kaminsky and Alwyn Scott

OLYMPIA, Wash./ NEW YORK (Reuters) - The Washington state legislature met on Thursday in special session to consider measures to ensure Boeing Co builds its newest jet, the 777X, in the Seattle area.

Washington Governor Jay Inslee, a Democrat, called the session to seek roughly $8 billion in tax breaks, a streamlined permitting process for Boeing and $10 billion in funding for transportation improvements.

For the Seattle area to win the coveted work, Boeing's machinist union also is being asked to approve a long-term labor contract with concessions on pensions and healthcare. Union members are due to vote on the proposal by next Wednesday.

The 777X program would secure thousands of jobs for the state, keep it at the forefront of aircraft technology and trigger construction of 1.5 million square feet of new facilities in the Puget Sound area. It is viewed as crucial to the Seattle area, which is competing with nonunionized workers in southern U.S. states where wages are lower.

"Assembly of that airplane will be the lynchpin of economic growth for the state of Washington for decades to come," Inslee said, speaking before the Washington state House Finance Committee on Thursday.

It remained unclear exactly how much Boeing's decision about where to build the jet really hinges on the labor deal and the state incentives.

The 777X is Boeing's latest jet program, and could be the last major new plane by Boeing for the next 15 years. It is expected to enter service in 2020.

The jet will be built using a metal fuselage similar to the current 777, one of Boeing's best-selling planes, and will add a large new carbon-composite wing and new engines. More than 100 orders for the jet are expected later this month at the Dubai Airshow.

In a letter to Inslee sent on Thursday, the senior vice president of Boeing's government operations, Tim Keating, listed tax incentives and the transportation infrastructure package, along with a labor agreement, as elements "that will ensure our lasting competitiveness in Washington state."

The letter went on to commend the governor for working to "achieve the results that are necessary" to locate 777X production in Washington state.

"That doesn't mean it's a deal-breaker," said Ken Herbert, an aerospace analyst at Canaccord Genuity Inc in San Francisco.

OTHER CONSIDERATIONS

Boeing clearly wants to lock in the labor concessions but might be more flexible on the legislative proposals, Herbert said.

The Chicago-based planemaker has also considered putting the 777X at its South Carolina assembly plant, where it makes some 787 Dreamliners, according to industry sources.

Putting the 777X there was seen by many industry experts as more financially sound for the long haul. But the labor proposal shows determination to control costs and avert strike risk with the 777X in Washington.

Boeing also is under pressure to avoid the technical problems and delays that plagued the Dreamliner, which arrived three years late after production was outsourced around the world.

"It would almost certainly have been more disruptive to move a larger component of the (777X) operations to South Carolina," said Russell Solomon, an analyst at Moody's Investors Service in New York.

So far, investors are not concerned about the tilt toward building the jet in Washington.

Boeing stock is near record highs, and has not fallen significantly since the provisional proposals were announced on Tuesday. The shares were down 0.6 percent at $132.24 on Thursday afternoon on the New York Stock Exchange.

"Investors care about stability, visibility, profitability and risk in the assembly of aircraft," said Rob Stallard, an analyst at RBC Capital Markets. "If the location of final assembly impacts these factors, then they probably care."

The provisional labor agreement with the machinists' union was announced on Tuesday. The eight-year contract includes $10,000 signing bonuses and enhanced pensions for older workers who opt to retire, but would halt further additions to current workers' pensions and set up a different retirement plan funded by the company, the union said.

Inslee's plan includes extending commercial airplane tax incentives until 2040 and widens other exemptions.

Democrats control the legislature's lower house, and Republicans control the Senate. Sentiment in both chambers leans toward passing Boeing-related tax incentives.

But Senate Majority Leader Rodney Tom, a conservative Democrat, cautioned it could take weeks to pass a transportation revenue package that would likely rely on a gasoline tax increase.

It was not immediately clear whether Boeing views swift passage of a transportation package as a prerequisite to locating 777X production in Washington state and building 1.5 million square feet of new facilities in the Puget Sound area.

"It's not do-or-die to get the transportation package done immediately," Tom said.

(Reporting by Jonathan Kaminsky in Olympia, Wash.; editing by Eric M. Johnson, W Simon, Matthew Lewis and Andrew Hay)

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