By Tim Hepher and Alwyn Scott
(Reuters) - Boeing <BA.N> 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, with workers at Boeing's commercial base in the state of Washington facing competition from lower-cost, non-unionized states in the South.
The confidential, behind-the-scenes talks on location are being conducted between Boeing and the International Association of Machinists and Aerospace Workers, which represents workers at Boeing's Washington state factories.
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 expanded 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 of the sources 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 keep costs on its new 777 as low as possible as it faces competition from the all-new Airbus <EAD.PA> 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 the talks result in an agreement approved by the IAM membership, one of the sources said. However, Boeing has warned union leaders that 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.
An official for the union declined to comment.
In Europe, a spokesman for Boeing declined to comment.
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 towards the middle of the century.
The U.S. planemaker is expected to launch the latest version of its popular 777 mini-jumbo with at least 100 orders from Gulf carriers at the Dubai Airshow this month.
The discussions with the machinists union come despite recent signs that Boeing was diversifying beyond the Seattle area where the current 777 was designed and is being built.
In an internal memo last week, Boeing told employees it would place a significant amount of engineering design work for its new 777X in a handful of cities around the U.S. and overseas <ID:L1N0IK1GO>.
The dispersal of engineering work was seen as putting pressure on Everrett, and Washington state, to prove they could handle the project at low cost compared with other locations.
Industry sources say South Carolina has a chance of winning the coveted assembly deal.
But Washington state continues to work on tax cuts and other incentives that also are vital to winning 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.
The incentives include a 16-year extension of a set of tax breaks passed in 2003 and set to expire in 2024, and funding to improve roads and transportation to reduce traffic congestion in the state. Boeing says its drivers cover 8.5 million miles a year in Washington state, or close to the Earth's circumference every day.
"The time they spend in traffic is significant," Pietsch said.
Analysts say the 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.
As well, the location talks suggest Boeing's wants to bring more design and construction under its direct control after costly mistakes from outsourcing much of the 787 Dreamliner.
"We think we could also be seeing a broader trend from Boeing towards more make/less buy in order to control production better, and potentially capture more aftermarket revenue," Rob Stallard, an analyst at RBC Capital Markets, said in a note to clients on Monday.
After a revamp of its smaller 737, the 777X will be the last major new commercial project on Boeing's drawing board for the next 15 years or more, 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 with a 233-foot wingspan - 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 be over $5 billion.
Influential plane lessor Steven Udvar-Hazy, founder of Air Lease Corp <AL.N>, 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 center.
Wings for the 787 Dreamliner are built in Japan, which has also been mentioned as a possible production site for the 777X wings. Everett faces competition for the final assembly from South Carolina and Texas among others, according to reports.
Boeing recently suffered a major setback when long-time Boeing customer Japan Airlines rejected the 777X in favor of the A350-1000, but sources say the decision to give Washington workers first shot at building the new wing is not related.
(Editing by David Gregorio)