The Boeing Company (BA -0.24%) workers represented by the International Association of Machinists in Washington State have overwhelmingly voted to reject a contract that Boeing representatives called essential in keeping production of the company's largest passenger jet in the Puget Sound. The proposal was for a contract covering 2016-2024, and would have seen Boeing commit to keeping 777 production and manufacturing jobs local in exchange for employees giving up guaranteed pensions. The machinists' union, which went on strike in 2008, rejected the deal by 67%, leaving the future of 777 production, and Boeing's presence in Washington, in doubt.
The 777 has been built in Everett, Wash., since the planes' creation, but Boeing has been shopping locations to produce the newest redesign, the 777X. The company has suggested Texas, California, and South Carolina, where Boeing already has a 787 Dreamliner assembly line in Charleston, as possible alternatives to Washington. The wings, which along with the engines are the most important part of the redesign, could be constructed in Japan, where carbon composite wings for the 787 were assembled. Building the 777X, or even a major part of it, would mean tens of thousands of jobs for the region that wins production of the plane.
Boeing claimed that keeping production in the Puget Sound area would require a generous tax package from the state, which it received, and swift passage of a contract with the union. Boeing used a carrot and stick approach to get the union to sign on, with the carrot being a $10,000 signing bonus for each employee and the stick being the implicit threat that it would begin moving jobs out of state if the union didn't vote on and approve the contract right away. Part of Boeing's interest in pushing the issue now may be that the machinists are still under an existing contract, meaning they cannot legally go on strike until 2016. That weakens the unions' hand at the negotiating table, yet the union is clearly willing to call Boeing's bluff.
To be sure, Washington is not out of consideration for the 777X, and there's a lot recommending the region. Not only has the state government passed nearly $9 billion in tax breaks for Boeing, the largest state-level subsidy in history, but the company's recent experience with outsourcing production has been rocky. The 787 Dreamliner was over three years late for a variety of reasons, but a major one was the difficulty Boeing had in integrating subassemblies built all over the world, from Italy to Japan. And Boeing's 787 manufacturing facility in South Carolina, the company's only major assembly site outside of Washington, has failed to meet projected production rates for the Dreamliner, requiring the Washington production lines to pick up the slack.
All this means that while the machinists' union vote means that building the 777X in Washington is no longer a sure thing, the workers might just have been right to hold out for a better deal. It may well be cheaper for Boeing to offer a sweeter contract to its Washington employees than to risk production delays by outsourcing the 777X to less experienced facilities. It is important for Boeing to get away from the antiquated defined benefit pension program and shift employees onto defined contribution programs like 401(k)s, but Boeing needs to get its most qualified and veteran workforce on board with this change. The 777X may be the company's best-selling jet ever, with its initial launch already expected to be worth nearly $90 billion. The two sides still have a couple years to come to an agreement, and with the incredible market opportunity ahead for the 777X, there should be plenty of room for Boeing's management and employees to come to an equitable arrangement.
