What happened

Right now, the commercial aerospace sector is tied to the health of the airlines, which in turn is tied to the progress made containing the COVID-19 pandemic. The headlines on the pandemic front of late have had a hint of optimism, pushing airline shares higher and offering some relief to the aerospace sector.

Shares of Boeing (NYSE:BA), TransDigm Group (NYSE:TDG), Raytheon Technologies (NYSE: RTX), and Heico (NYSE:HEI) all soared at the opening Tuesday before giving up some of their gains as the day went on.

So what

Boeing and its supply chain have enjoyed an unprecedented surge in new plane sales over the past decade, fueled by healthier airlines looking to grow in a fuel-efficient manner. That surge was likely on its last legs even before the pandemic struck, but the outbreak and its impact on global travel have effectively brought new plane sales to a halt.

Airlines have been hit hard by the pandemic, with revenue in some cases expected to be down 90% year over year in the second quarter. They're responding by cutting costs as quickly as they can, including grounding jets and cutting capital expenditures. That means fewer sales of planes, components, and spare parts. Boeing has temporarily halted production of planes in South Carolina and Washington State, and many suppliers have also temporarily furloughed employees.

A Boeing 737 on the assembly line.

Image source: Boeing.

The damage is done. The only question now is how severe the downturn is for the airlines, and how long it will last. Boeing has leaned on its massive commercial arm for years to prop up what has been at times an underwhelming defense business, while Heico and TransDigm generate a significant portion of their earnings from supplying components to new plane manufacturers and the aftermarket.

Raytheon Technologies, recently formed from the merger of Raytheon with United Technologies, owns the Pratt & Whitney aviation engine business and Rockwell Collins aircraft interiors.

We still don't know how long the pandemic will last or if the U.S. economy will fall into a deep recession, but equity markets have rallied on Monday and Tuesday on a sense that in key hot spots like New York, the number of new cases is decelerating. As soon as the pandemic is contained, airlines can attempt to rebuild their schedules, and we will have a better feel for what will happen to demand for new planes and spare parts in the quarters to come.

Now what

The first thing to note is that despite two risk-on days, the pandemic is far from over, and headlines about a fresh outbreak or another round of poor economic numbers could send stocks heading in the opposite direction. Even if the shelter-in-place orders are lifted soon, I expect airlines to emerge from this period cautious, and it seems unlikely Boeing's full order book will be intact no matter what happens in the weeks to come.

Low oil prices are also weighing on the sector. Cheap gas eliminates some of the reason airlines buy newer, more-efficient jets, and it makes it easier for airline management teams to defer new airplane purchases.

For long-term thinkers, I don't believe the pandemic will alter the multi-decade trend of more global travel, and Boeing and its supply chain likely have a bright future. But the next few years could be rocky. I'd avoid shares of Boeing no matter how low they get, but a case can be made for investors able to weather near-term turbulence to take a hard look at buying shares of TransDigm, Heico, or Raytheon.