Boeing keeps new jet at Pacific Northwest plants

Boeing announced Wednesday it will continue to build the next generation of the 737 jet at this union-represented plant in Renton, Wash.

NEW YORK (CNNMoney) -- Boeing and its machinists' union have reached a deal to build the next generation of its workhorse 737 jet at union-represented plants in the Pacific Northwest.

In return for the decision that will keep thousands of its members in Washington and Oregon on the job, the International Association of Machinists is giving the jet maker an early contract extension.

The deal will keep labor peace between Boeing and its major union through at least 2016, assuming rank-and-file factory workers at Boeing ratify the unexpected deal. The current pact had another year set to run, but Boeing asked for the early deal before it made the decision on where to build the new aircraft.

Shares of Boeing (BA, Fortune 500) were up 4% in afternoon trading, although much of that gain came before the 2 p.m. ET announcement.

The company had held out the possibility that it would shift the production of the new aircraft, to be known as the 737 MAX, either overseas or to a nonunion plant.

Earlier this year, Boeing opened a plant in South Carolina. The plant's 1,000 nonunion workers are building about 30% of the company's fleet of new 787 Dreamliners for a fraction of what unionized workers in Washington State receive.

The National Labor Relations Board is charging the decision to shift work to the nonunion plant was illegal retaliation by Boeing against the union for past strikes.

The company and union kept talks on a new contract secret until Wednesday's announcement. Typically, the contract talks would not have started until next summer at the earliest.

"To make a big public splash this time would have undermined what we were doing and would have gone against the reasons why we agreed to meet with the company in the first place," said a letter that the union sent to rank-and-file members Wednesday. "We now know this was the right decision."

The company said the economics of the labor deal provided the business case to keep the production of the plane at the unionized plants.

"If our employees ratify a new agreement, building the 737 MAX in Renton (Wash.) will secure a long and prosperous future there, as well as at other sites in the Puget Sound area and in Portland, Ore., where 737 parts are built," said Jim Albaugh, CEO of Boeing's commercial airplanes unit.

Boeing has already received more than 700 commitments from customers for the 737 MAX, which is due to enter service in 2017, replacing the current 737.

Earlier this month, Indonesian carrier Lion Air placed the largest order in Boeing history, agreeing to buy 201 of the 737 MAX along with 29 of the current 737 model for a total of $22 billion.

American Airlines (AMR, Fortune 500) has also committed to move ahead with its order for 200 of the 737 class jets despite its filing for bankruptcy protection on Thursday.