Buckle up: Boeing 737 shutdown indicates turbulence ahead
Boeing's decision to indefinitely halt production of its controversial 737 MAX will test the resilience of its sprawling global supply chain, not to mention the U.S. economy, tens of thousands of aerospace workers and airlines that are waiting for planes to be delivered.
The big picture: The 737 MAX has been grounded worldwide since March following two crashes that killed 346 people. Investigators have zeroed in on software that played a role in both crashes, but Boeing has yet to deliver a solution that satisfies the Federal Aviation Administration.
Driving the news: Boeing had hoped to continue producing the 737 at a reduced rate until the FAA issued the green light to resume flying. But with the timing of such approval still uncertain, Boeing's board decided Monday to suspend production of its best-selling plane starting in January.
There will be no immediate layoffs, Boeing said, but a local spokesperson for the International Association of Machinists and Aerospace Workers told Axios the union had no idea how workers would be redeployed during the shutdown.
The big question is whether Boeing will tell suppliers to stop producing parts, which would impact thousands more workers at those feeder companies.
- Roughly 80% of the 737's components are produced elsewhere and shipped to Boeing for final assembly.
- Until now, suppliers have continued to ship parts, allowing Boeing to keep its assembly lines running, albeit at a lower rate, in hopes of resuming deliveries as soon the FAA gives its blessing.
- But stockpiling planes around the world has its limits, notes aerospace industry expert Robert Mann. "They've run out of parking, essentially," he tells Axios.
- Wichita, Kansas-based Spirit AeroSystems supplies the plane's fuselage and now aircraft bodies "are sitting like cord wood outside the factory," Mann says.
Details: Suspending production of something as complex as an airplane is no small matter.
- Each fuselage that Spirit Aerosystems makes, for instance, has 450,000 intricate fasteners and takes 33 days to build.
- Even though Boeing has slowed its production rate from 52 planes a month to 42, Spirit had been purchasing materials and gearing up for even higher rates.
- The company is working with Boeing to determine what the freeze will means for its operations, a spokesperson told Forbes.
Yes, but: Boeing, which has already announced $8 billion in charges from the crisis, has been able to soften the blow for Spirit, and perhaps other critical suppliers, up to this point.
- Boeing provided a $123 million cash advance, for example, to Spirit in the third quarter to ease working capital issues.
- Still, Spirit has cut 200 jobs through early retirements and sharpened its focus on cost-cutting.
- "We've run scenarios at all different levels of production. And it really depends on when the MAX goes back into service and how Boeing decides to manage its production schedule," Spirit CEO Thomas Gentile told analysts in October.
What to watch: Airline passenger traffic has slowed this year to a growth rate of about 4 percent, from about 7 percent, due to a variety of economic concerns, which means airlines aren't clamoring to take deliveries, says Richard Aboulafia, an aerospace consultant with Teal Group.
- And if the shutdown lasts more than a few months, Boeing's supply chain could get rusty.
"If you don’t keep suppliers busy in a tight labor market, bad things can happen. Losing people and capabilities could greatly complicate their plans to [increase production rates later]."— Richard Aboulafia, Teal Group
The bottom line: The hardest part about halting production is restarting it.