Boeing, Suppliers Plunge on Stop-And-Go 737 Max Comeback

The nose of a Boeing 737 Max plane sits during production at the company's manufacturing facility in Renton, Wash. (David Ryder/Bloomberg News)

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Shares of Boeing Co. and its largest suppliers sank June 11 after the planemaker pared output plans for its beleaguered 737 Max just two weeks after restarting work in its Seattle-area factory.

A resurgence in Covid-19 cases in some regions of the U.S. has added to concerns that airlines face a prolonged recovery that will make it difficult for Boeing to meet delivery targets for its 737 Max, a crucial source of cash. The Chicago-based planemaker is already backtracking from an early May agreement with Spirit AeroSystems Holdings Inc. to deliver 125 Max frames this year.

Boeing fell as much as 12%, its biggest drop since April 1, while Spirit AeroSystems declined as much as 16%. Shares of other suppliers including Hexcel Corp., Triumph Group Inc. and Raytheon Technologies Corp. also fell.

Spirit, which manufactures about 70% of the aircraft, announced late June 10 that it will probably deliver about 20 fewer fuselages this year after Boeing asked it to pause production on the single-aisle jet. The Max will probably be produced at a reduced rate through 2023, said Sheila Kahyaoglu, an analyst with Jefferies, in a report to clients June 11.

“Could this finally represent the bottom? That’s the positive spin,” Citi analyst Jon Raviv said in a note. “The negative is that it’s hard to be confident in a bottom when Boeing asks a major supplier to start and stop within the course of a couple weeks.”

Production fits and starts suggest Boeing’s customer commitments are quickly shifting, Raviv said. Key competitor Airbus SE also faces planning woes. Raviv noted that the French company this week said that while it ruled out deeper cuts in jet production, plans may be subject to change and it would revisit the question later in the month.

“From our perspective, the gradual restart of 737 MAX production is progressing smoothly as we focus on quality and safety, as well as the health of our employees,” Bernard Choi, a Boeing spokesman, said by email. “As we shared in our first quarter earnings release, the impact of COVID-19 on our industry has resulted in a slower production rate ramp-up on the 737 program. To reflect the slower ramp and align our supply inventories, we’re working closely with our suppliers to adjust delivery schedules and rate profiles as appropriate.”

While Raviv expects Spirit shares to underperform on the setback and renewed liquidity concerns, he stands behind his bullish view on the stock.

“We already knew 2020 was a lost cause. Missing 20+ deliveries and lower production makes it more lost,” Raviv said. However, he said Spirit can still generate cash at a lower production rate and pointed out that a pause isn’t a hard reverse.

While Boeing is progressing toward hosting U.S. regulators on a flight to test the jet’s upgraded systems, Spirit presents a cleaner story, Raviv said, as it is unhampered by a heavy debt load, required customer compensation, and having to rebuild relationships with both customers and regulators.

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