By Tim Hepher and Alwyn Scott
(Reuters) - Boeing is in advanced talks with its machinists' union to assemble the company's new 777X jet and build its wings in the Seattle area, several people familiar with the negotiations told Reuters.
Where the jet should be built is one of the most keenly awaited decisions in global aerospace. Workers at Boeing's commercial base in Washington state are competing with non-unionized workers in southern states where wages are lower. Washington state officials are also working on incentives to keep the work local.
Union officials with the International Association of Machinists and Aerospace Workers, which represents workers at Boeing's Washington state factories, confirmed that they are talking with the company. Boeing declined to comment.
Under the proposed deal, final assembly of the 777X would be at Boeing's Everett plant near Seattle, home to all its wide-body production except the 787 Dreamliner, whose assembly is split between Everett and North Charleston, South Carolina.
The plane's expansive wings would be built in the surrounding Puget Sound region, the sources said, asking not to be identified because the talks remain confidential.
Talks are "in the final stages, but are not done yet," one source said, adding that the negotiations, which were initiated quietly around a week ago, were "intense."
The timing of the talks suggests Boeing wants to lock in a labor deal before formally launching the 777X, which is expected at the Dubai Airshow that starts on November 17.
Industry sources say there is pressure on all sides to make concessions. Boeing is keen to control costs on its new 777, as it faces competition from the all-new Airbus A350-1000.
The talks are aimed at a multi-year extension to the existing machinists' contract expiring in 2016, said one source familiar with the talks. Another source said the contract would run until the middle of next decade.
Under the deal being discussed, machinists could receive a bonus payment if an agreement is approved by union membership, one of the sources said. However, Boeing has warned union leaders it will open talks with other potential locations if the discussions break down, the source added.
Boeing has told the union that in the absence of a deal "all bets are off" as to the location of final assembly and wings production, the source said.
A union official confirmed that the talks are taking place and had intensified recently, but declined to be specific.
"There are and have been discussions about the 777X," said Frank Larkin, national spokesman for the machinists. "I'm unaware of any proposed deal at this point and what shape that deal may or may not take."
Designed to carry up to 406 people on some of the world's longest routes, the 777X is due to enter service in 2020 and is expected to be produced well toward the middle of the century.
The U.S. planemaker is expected to launch the latest version of its popular 777 mini-jumbo jet with at least 100 orders from Gulf carriers at the Dubai Airshow this month.
Boeing has signaled recently that it was diversifying beyond the Seattle area where the current 777 was designed and is being built. In an internal memo obtained by Reuters last week, Boeing told employees it would place a significant amount of engineering design work for the 777X in a handful of cities around the United States and overseas.
The dispersal of engineering work was seen as putting pressure on Everett, and Washington state, to prove they could handle the project at low cost compared with other locations.
Washington state also is working on tax cuts and other incentives to help win the 777X work.
"We've been led to believe the incentives are just as important" as the labor deal, said Alex Pietsch, director of the Governor's Office of Aerospace for Washington State.
Incentives include a 16-year extension of tax breaks passed in 2003 and set to expire in 2024, and funds to improve roads and transportation to reduce traffic congestion. Boeing says its drivers cover 8.5 million miles a year in Washington state, or close to the Earth's circumference every day.
Boeing's decision on where to build the plane and its advanced composite wings will have long-term implications for the aerospace industry, including its chain of suppliers.
The location talks also suggest Boeing wants to bring more design and construction under its direct control after costly mistakes from outsourcing much of the 787 Dreamliner.
Rob Stallard, an analyst at RBC Capital Markets, said the moves suggest "a broader trend from Boeing towards more make/less buy in order to control production better, and potentially capture more aftermarket revenue."
After a revamp of its smaller 737, the 777X will be the last major new commercial project on Boeing's drawing board for at least 15 years, and the final choice could determine the location of high-tech composites work for decades to come.
Building the 777X close to the production site for the existing model has advantages in streamlining both existing infrastructure and supply chain logistics, an industry source familiar with Boeing's production methods said.
The 777X will include the longest wing developed by Boeing. The 233-foot wingspan is so large that its wingtips are expected to fold upwards when on the ground, in order to fit in the same airport parking spaces as existing 777s.
Industry sources say the carbon-composite wing alone may cost at least $2 billion to develop and the total development cost for the 350- to 406-seat 777X could exceed $5 billion.
Influential plane lessor Steven Udvar-Hazy, founder of Air Lease Corp, told Reuters in July that it would be important for Boeing to produce the plane "as efficiently as possible" to keep ownership costs down.
Wings for the current generation of 777s are prepared in Boeing's Frederickson plant near Tacoma, Washington, which also has a composites manufacturing centre.
Wings for the 787 Dreamliner are built in Japan, which has also been mentioned as a possible production site for the 777X wings. Sources said Boeing's decision to give Washington workers first shot at building the new wing is unrelated to a major setback the company suffered when long-time customer Japan Airlines rejected the 777X in favor of the A350-1000.
Everett faces competition for the final assembly from South Carolina and Texas among others, according to reports.
(Editing by David Gregorio)