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BA to Build 777X in Washington

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The aerospace behemoth The Boeing Co. (BA - Free Report) successfully resolved a crucial labor conflict by signing a deal with the members of the International Association of Machinists and Aerospace Workers last Friday, Jan 3, 2014, related to its new 777X aircraft production.

With a 51% vote, the workers grudgingly approved of an eight-year contract extension that assures production of Boeing’s 777X aircraft in the Puget Sound area. This new agreement, which is effective through 2024, is in addition to the existing contract running through 2016. The move secured over 10,000 jobs in Washington State at the cost of workers’ pensions.

In Nov 2013, Boeing workers had rejected a similar contract by a 67% vote as it included several concessions, comprising a pension freeze and a modest raise. However, the aerospace and defense major started receiving offers from other states to assemble the 777X along with billions of dollars in subsidies.

Washington did its bit to secure the contract -- the state legislature approved $8.7 billion in tax breaks for Boeing through 2040 for Boeing’s 777X assembly in the state. Under pressure the machinists' union also conceded in order to keep state-of-the-art Boeing manufacturing jobs in the state.

In its recent contract revision, Boeing added a $5,000 one-time payment to each worker, in Jan 2020, on top of the $10,000 signing bonus it had earlier agreed upon ratification. Most importantly, the company approved to maintain the present six-year progression it takes for new employees to reach full pay. As per the previous deal, it would have taken at least 16 years. Boeing also ensured that the workers will not have an opportunity to strike until 2024, when the new contract expires.

The vote ensured that Boeing will be able to maintain its manufacturing operations at its commercial hub. As a result Bowing will not only avoid the risk of building new facilities and training a workforce for 777X production elsewhere but also considerably control costs. The company has plans of starting 777X production in 2017 with initial delivery targeted for 2020.

Boeing introduced its new 777X variant, fuel efficient, twin-engine jetliner during the Dubai Airshow. The Boeing 777-9X holding 400 seats is considered to be the largest and most competent twin-engine commercial jet in the world. The jet’s fuel consumption is cut by as much as 12% along with having 10% lower operating costs.

Despite the many technical glitches plaguing the much-hyped Dreamliner, the company remains well on track with its robust backlog and deliveries. Again, sequestration and budget cuts notwithstanding, its defense segment also maintained a solid performance and fetched $7 billion in fresh new orders during the third quarter.

In 2013, Boeing notched 88 net orders for the 777, comprising 8.2% of total net orders. We believe a growing order book for the newly introduced aircraft showcases the confidence that airliners have in this twin-engine jetliner, which will boost Boeing's revenues in its commercial airplane business.

Boeing currently has a Zacks Rank #3 (Hold). Better-ranked stocks from the sector include General Dynamics Corp. (GD - Free Report) , Lockheed Martin Corp. (LMT - Free Report) and Northrop Grumman Corp. (NOC - Free Report) , all with a  Zacks Rank #2 (Buy).

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