Boeing 737 output cut echoes across aviation industry

Bloomberg

Boeing Co’s plan to cut its 737 jetliner production by 19 percent this year is expected to have negative spillover effects across the aerospace industry, from parts suppliers to engine makers and even airlines.
The planemaker said it would cut output to 42 airplanes a month by mid-April, as the company fights global criticism about the safety of its 737 Max jets after two tragic crashes that ultimately led to a grounding of the aircraft.
“The move to cut production to 42/month is surprising and will most certainly have an impact on the supply chain, considering many suppliers had been prepping for the rate to climb to 57/month in June 2019,” SunTrust Robinson Humphrey analyst Michael Ciarmoli said.
The analyst said Boeing’s suppliers cannot dial down production overnight, and changes to aircraft production rates usually take 12-18 months to flow through the supply chain. “Accordingly we believe suppliers will not be able to accommodate any Boeing request,” Ciarmoli said. Several companies, including Spirit AeroSystems Holdings Inc and Allegheny Technologies Inc, have said they will maintain their current production schedules.
The S&P Aerospace and Defense Select Industry Index sank as much as 1.5 percent, with Spirit AeroSystems and Triumph Group Inc. among the top decliners.
Spirit, which is one of the top Boeing suppliers, said it would maintain its 737 deliveries to Boeing at the current rate of 52 ship-sets per month, but that did not dissuade Wall Street analysts from sounding the alarm.
Canaccord Genuity analyst Ken Herbert downgraded Spirit to hold from buy, saying the production cut would add incremental margin and free cash flow pressure in 2019. “Considering the grounding looks to likely stretch into second half of 2019, the move back up from 52/month for Boeing in 2019 will be a challenge, considering the number of Max aircraft it will have in inventory,” the analyst said. Spirit shares have fallen 13 percent since the Ethiopian Airlines crash, while Boeing is down 11 percent.
The company’s aerospace unit has a large exposure to the Max programme, and according to Wolfe Research, Boeing accounted for 31 percent of sales for Collins Aero last year, spread across commercial and military segments.