Spirit AeroSystems said Monday night that Boeing asked it to produce fewer 737 MAX bodies, a story that not only jeopardizes the supplier’s financial health, but also means that the drama about the plane on the ground is far from over for the entire aerospace value chain.
The development underscores how the coronavirus pandemic is making matters worse for the conflict sector.
In early June, Spirit Aero (ticker: SPR) said Boeing (BA) asked the supplier to stop work on more 737 MAX vessels, the industry term for all parts required for a jet. Spirit essentially manufactures the tubes for the MAX jet bodies. News of the order to stop the work sent a shock wave through the aerospace value chain.
Spirit Aero shares fell more than 15% the day after the announcement. Boeing shares fell more than 16%.
At the time, Boeing did not say how many MAX ships it needed. Now Boeing has told Spirit Aero how much it wants this year: 72, compared to the 125 it originally requested.
“Given the substantial reduction in the production plan, Spirit could breach financial covenants under its credit agreement in the fourth quarter of 2020 without an amendment or exemption,” the Sprit AeroSystems filing reads the news. “Spirit is in communication with its lenders regarding this matter, and intends to work with them expeditiously to obtain adequate relief from their covenants.”
Spirit has around $ 3 billion of outstanding long-term debt, with several hundred million dollars of liquidity available on an untapped revolving line of credit. But sometimes, violations of debt covenants can restrict a company’s ability to take advantage of existing lines of credit. Spirit Aero and Boeing were not immediately available to comment on the news.
Spirit Aero has already built 35 MAX ships in 2020, so it only has another 37 to build. The lower volume appears to be a function of two problems: longer delays for recertification, as well as the Covid-induced aerospace slowdown.
The MAX, Boeing’s latest single-aisle aircraft model, has been installed worldwide since mid-March 2019 after two fatal accidents in five months. Boeing hopes to return the plane to commercial service this summer. The recertification process has taken longer than Boeing had originally anticipated, and news on Monday night could also mean more delays.
The 72 ships now required are well below what Spirit Aero would produce in a normal year. Before the pandemic, Boeing manufactured more than 500 MAX aircraft a year. During grounding, however, around 450 MAX aircraft were produced and parked. Boeing has to work on that inventory before its suppliers’ production rates can return to normal.
The pandemic has extended the amount of time it will take to do that. Air travel is way down, dropping roughly 80% year-over-year in the United States last week. Fewer people on planes means fewer planes are required to meet demand.
The pandemic’s impact on commercial air travel is a big reason why Boeing shares have fallen 42% so far this year. Spirit AeroSystems, which generates more than 60% of its Boeing sales, has been further affected, dropping approximately 63%. Stock of aerospace providers Barron’s tracks have dropped approximately 40% to date as well.
More pain seems to be on the way for Spirit Aero investors on Tuesday morning. Spirit Aero shares fell 10% shortly after opening.
The news also has a certain share of airlines. Shares of American Airlines (AAL), for example, fell 4.8%. American has 737 MAX aircraft in its fleet (those aircraft are parked) and more orders.
Interestingly, shares of Southwest Airlines (LUV), another MAX client, were up 0.5%. Boeing’s actions were flat.
The overall market is higher, one reason why Boeing and Southwest stocks don’t respond in the opposite way that investors might expect. The Dow Jones Industrial Average opened 0.8% more, while the S&P 500 also gained ground.
Another reason for counterintuitive trade action is that this is Spirit Aero’s second update on MAX production cuts in recent weeks. Most of the bad news is already reflected in the stock price.
Write to Al Root at [email protected]