Washington faces a credit downgrade, higher borrowing costs and the loss of jobs and tax revenue should Boeing Co. (BA:US) decide to move production of its new 777X jetliner to another state.
California and Missouri are among the contenders that submitted bids at the request of the Chicago-based aerospace company. They are offering incentives to lure production away from Everett, near Seattle, after Boeing’s talks with union leaders reached an impasse. Washington approved $8.7 billion in tax breaks for Boeing.
“This is the place where the best commercial airplanes in the world have been built for nearly 100 years, so to have this new airplane, which is clearly going to be a blockbuster in terms of sales, not built here is dramatic,” said Alex Pietsch, Washington’s aerospace director.
Washington’s bid for the 777X may hinge on a Jan. 3 vote by union machinists on whether to accept a contract extension rejected by union officials that would freeze pensions and eventually replace them with a 401(k)-style retirement plan.
The twin-aisle jet offers 12 percent lower fuel consumption than comparable Airbus SAS models, along with larger windows and a wider cabin, according to the Boeing’s website. Production of the 777X is to begin in 2017.
Boeing has narrowed its search for a 777X site after reviewing proposals from 22 states competing to secure thousands of highly skilled jobs. The company expects to make a final decision early next year.
The company’s production line for the 777, the earlier version of the twin-engine model, is in Everett, a city of 105,000. With more than 30,000 workers at the plant, “a drawdown or transfer of those workers would have a ripple effect,” said Pat McClain, Everett’s executive director for governmental affairs.
If Boeing selects a new location, it would be a “credit negative” for Washington state and the Puget Sound region, according to a Nov. 21 report by Moody’s Investors Service. “The regional economy would lose a potential engine of growth and the local and state government would forgo potential tax revenues.”
Washington has a bond grade one below the top from both Moody’s and Standard & Poor’s. Its state and local debt have beaten the $3.7 trillion muni market this year. Washington has lost 1.8 percent this year while the market is down 2.6 percent.
Losing 777X production “will raise the cost of capital -- could be several hundred million dollars,” James McIntire, Washington state treasurer, said in an Economic and Revenue Forecast Council meeting in Olympia on Nov. 20.
Boeing employed about 12,100 workers for the 777 in 2012, and another 7,600 jobs were connected to the aircraft’s production, according to a November report on the state’s aerospace industry prepared by Community Attributes Inc., a Seattle-based research firm. The 777 program produced $133.1 million in tax revenue for the state in 2012.
Boeing is the single largest private employer in Washington state, with 84,442 workers as of August, according to the report. The state had 94,200 aerospace employees in 2012, including about 72,900 with Boeing, the report said. Boeing paid an estimated $7.2 billion in wages that year, according to the report.
“It’s not just losing one airplane’s production, it could be the start of a Boeing exodus,” said JC Hall, chairman of the Redmond, Washington-based Pacific Northwest Aerospace Alliance, an industry group.
Placing 777X production elsewhere could jeopardize the future of the Everett plant, said Adam Bruckner, professor in the William E. Boeing Department of Aeronautics & Astronautics at the University of Washington in Seattle.
“It’s becoming the centerpiece, it’s the large airplane that Boeing makes that everyone seems to want,” he said. “Without the 777X, what is the next major airplane?”
In Everett, residents said they’re concerned the economy will suffer if 777X production moves.
At the High Flying Espresso coffee kiosk (motto: “We do the brew, you fly through”), most of the customers are Boeing employees.
“If they move the manufacturing somewhere else, the employees will move with it, which would mean we’d definitely take a hit,” said Sara Yeldell, 24, who makes drinks there.
At Happy Tummy restaurant in an office park near the plant, customer Jake McMillion, 21, contemplated the impact on his employer, which supplies drywall to Boeing contractors.
“It keeps the whole economy running here,” he said as he ate chicken teriyaki.
The 777X orders and commitments total more than $100 billion at list prices with commitments since September from Germany’s Deutsche Lufthansa AG (LHA), Asia’s Cathay Pacific Airways Ltd. (293), and Persian Gulf carriers Emirates, Etihad Airways PJSC and Qatar Airways Ltd. Emirates, the largest international carrier, last month ordered 150 777X planes worth $76 billion, with an option to buy 50 more. It’s also the No. 1 operator of the original 777.
“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, who co-wrote “Turbulence: Boeing and the State of American Workers and Managers.”
“In the past there has been brinkmanship -- waiting until the last minute and then seeing who buckles,” he said of the company and machinist union. “Locals have seen Boeing start out tough and then, in the end, give them a better deal.”
Boeing last week began telling states competing for a share of the 777X jet production whether they are still in the running to land the new aircraft, Doug Alder, a Boeing spokesman, said in an e-mail.
Washington lawmakers in November approved $8.7 billion in tax breaks to help land 777X production at Boeing’s Everett plant.
Pietsch, the state’s aerospace director, declined to say whether additional incentives were part of its proposal to Boeing, citing a non-disclosure agreement.
“We probably will have an unmatched package of incentives,” Washington Governor Jay Inslee said Dec. 24 on Bloomberg Television. “We’re going to be very competitive for this airplane. We like to compete. We like to win.”
-- With assistance from Julie Johnsson in Chicago and Bonnie Rochman in Everett, Washington. Editors: Justin Blum, Steven Komarow
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