Halt To Boeing 737 Output Would Stress Supply Chain, Chiefly Spirit And Aerostructures Makers

As the grounding of the 737 MAX has stretched on since the second of two deadly crashes in March, Boeing has sought to keep the production line moving and disruptions as minimal as possible to the intricate web of smaller companies it relies on to supply roughly 80% of the components that make up its best-selling plane. However, with the plane’s return to service receding into 2020, Boeing is reportedly considering a production halt or slowdown.

That could pose the greatest peril for its aerostructures suppliers, chiefly Spirit AeroSystems, which makes the fuselage for the 737 MAX, analysts say.

It’s the largest portion of the plane, but it’s one-off work, with none of the highly profitable maintenance and repair sales that suppliers of other components enjoy. And smaller aerostructures suppliers have been left financially stressed as they tooled up to prepare to raise production of the 737 MAX while Boeing stretched out payment terms to 90 to 120 days, says Kevin Michaels, a consultant with Aerodynamic Advisory.

If it’s more than a one-month production pause, “Boeing and Spirit would need to be prepared to intervene to make sure small, vulnerable suppliers are there on the other side of this,” he says.

Boeing has been burning through $5.5 billion a quarter as it has built roughly 400 737 MAX aircraft it can’t deliver because of the worldwide grounding of the plane, and its balance sheet can no longer sustain that rate of spending, Bank of America/Merrill Lynch analyst Ronald Epstein said in a research note Monday.

The darkening skies for airlines also are likely a factor in Boeing’s deliberations on throttling back output. Airlines placed thousands of orders for new airplanes while passenger numbers were expanding briskly this decade, peaking at 7.6% growth in 2017. This year passenger growth has slowed sharply, to a rate of 3.4% in October, and airlines aren’t likely to go out of their way to help Boeing expedite delivery of new planes next year for fearing of adding unnecessary capacity, says Richard Aboulafia, an aerospace consultant with Teal Group.

Boeing had been planning to ramp up 737 production this year from 52 planes a month to 57. Instead, in April it reduced output to 42 a month, but it had Spirit continue to build 52 fuselages a month, in what may have been a concession to its sensitive condition.

A slowdown in production would be better for its aerostructures suppliers than a long freeze, says Michaels, and would likely be better for its supply chain overall, says Aboulafia.

“Think of it as a standing start versus a running start,” he says. “That puts enormous pressure on their supply chain and makes it hard to get back to 42 a month, let alone 52 or 57.”

The layoffs that would accompany a production halt would be a key complicating factor, especially given the tight labor market in the U.S., he says.

General Electric and Safran, which produce the LEAP engines on the MAX through their joint venture CFM International, could be forced to adjust production rates. Engine component makers could most likely handle a short production pause, but it remains the most stressed part of the supply chain, Michaels said, amid teething problems for the LEAP and Pratt & Whitney’s geared turbofan. GE and Safran might need to help out some that are dependent on the LEAP, he says.

Interiors suppliers stand to be hurt a little more than other sectors by a production halt, he says, due to the lower share of aftermarket work in their revenues, he says. Collins, Recaro, Safran and Hexcel are among the interiors suppliers on the MAX.

Boeing warned in its October earnings report that it might halt or slow production if it was unable to win approval this year from safety regulators for revisions to the 737 MAX flight controls and related training changes.

The company’s board is expected to announce a decision later Monday after concluding two days of meetings or Tuesday morning.

Boeing shares were off 4% to $328.00 in midafternoon trading. Spirit shares fell 2.3% to $78.35.