Six months ago, before the COVID-19 pandemic, Boeing (NYSE: BA) announced that it would suspend production of 737 MAX in January. His best-selling aircraft had been grounded since March 2019, after a couple of fatal accidents. Due to Boeing’s decision to continue building the 737 MAX while waiting for regulators to recertify the model, the company had accumulated an inventory of approximately 400 undelivered 737 MAX aircraft and was running out of places to store them.
Since then, demand for planes has plummeted as the COVID-19 pandemic caused global air travel to dry up. However, Boeing restarted production of the 737 MAX in late May, with plans to gradually increase production for the rest of the year.
Given that few (if any) airlines want new planes at the moment, this decision made little sense. However, it didn’t take long for Boeing to come to its senses. The company recently told a major 737 MAX supplier to virtually stop production again.
Boeing and a key supplier manage production
Spirit AeroSystems (NYSE: SPR) It is arguably the largest provider of the 737 MAX program. The company (which split from Boeing in 2005) builds the fuselage for each 737 MAX, along with other components like engine pylons and thrust reversers.
For most of 2019, Spirit AeroSystems built 737 MAX at a rate of 52 per month – even after Boeing cut its own production to 42 per month. However, once Boeing decided to temporarily suspend production of 737 MAX in 2020, it became clear that Spirit would have to reduce its production rate. In early February, the partners agreed that Spirit AeroSystems would deliver 216 737 MAX ships to Boeing during 2020 – an average of just 18 per month. This was part of a broader plan to restart production before an expected mid-year recertification of the 737 MAX.
At the time, most people had no idea that COVID-19 would become a global pandemic. As global air travel plummeted in the following months, it became clear that Boeing’s production plans (and, by extension, Spirit’s production plans) were unrealistic.
This forced companies to renegotiate their production agreement. In early May, Boeing and Spirit AeroSystems agreed that the latter would deliver a total of 125 737 MAX during 2020, including some that had already been delivered.
Production estimates fall again
The International Air Transport Association currently estimates that global passenger air traffic will remain more than 25% below 2019 levels in 2021. With demand depressed to that extent, most airlines have many more aircraft than they do. they will need for the next year. Some companies are still willing to take on new planes for one reason or another, but Boeing has less influence than Airbus for forcing customers to take the plane they have ordered. Delays in delivery mean that many 737 MAX buyers have the right to cancel certain orders.
As a result, Boeing finally realized that its plan for a slow increase in production of 737 MAX this year was still too aggressive in light of demand. Earlier this month, Spirit AeroSystems announced that on June 4, Boeing had ordered work to stop on four 737 MAX ships and avoid starting work on another 16. Spirit said it hoped Boeing would finally tell it to cut 2020 production. on more than 20 ships affected by the June 4 letter.
Indeed, Spirit AeroSystems revealed last week that it will now build just 72 sets of ships for the 737 program in 2020, of which 35 have already been delivered. This implies a significant cut in Boeing’s production plans for the next six months.
Another warning sign
Upon entering this year, Boeing shares traded for more than $ 300. In the “panic” phase of the COVID-19 market sell-off, the stock briefly plummeted below the $ 100 mark, but rallied. strongly in late May and early June. Even after a recent pullback, Boeing shares traded for around $ 170, bringing the company’s market capitalization close to $ 100 billion.
At that price, Boeing is not a good move for investors to buy. The aerospace giant burned $ 4.7 billion of cash in the first quarter, and the burning of cash could accelerate in the short term as Boeing begins to feel the full impact of the pandemic. While the company recently issued $ 25 billion in bonds, giving it plenty of liquidity for the foreseeable future, that new debt has brought its total loans to nearly $ 64 billion.
Looking ahead, Boeing will continue to incur massive costs related to the 737 MAX crashes and subsequent grounding. It also appears that foreign regulators will demand costly design changes. Meanwhile, Boeing may need to increase financial support to critical suppliers to ensure they are still around when it wants to increase production again.
In short, the pain is just beginning for Boeing. Unless the stock price drops significantly or the demand for air travel quickly recovers to levels close to 2019, this is an action investors should avoid.