Boeing (NYSE:BA) said late Thursday that it intends to resume commercial airplane production in the Puget Sound region next week, and reiterated its call for the U.S. government to support the commercial aerospace supply chain.
The announcements provided a lift to shares of Boeing and its suppliers. Boeing climbed 11% on Friday morning, while shares of Triumph Group (NYSE:TGI) were up 26%, shares of Spirit AeroSystems (NYSE:SPR) and TransDigm Group (NYSE:TDG) were up more than 10%, and shares of both Heico (NYSE:HEI) and General Electric (NYSE:GE) climbed more than 5% each.
The COVID-19 pandemic, and the travel slump that has followed, have brought to a sudden halt a decadelong surge in new plane orders. Airlines that three months ago couldn't get their hands on new planes fast enough are suddenly grounding aircraft and taking an ax to growth plans.
That's hit Boeing and its suppliers hard. The aerospace giant, facing hundreds of canceled orders, has suspended its dividend, cut costs, and temporarily halted manufacturing in the Seattle area to deal with the virus and slow production.
But in a statement late Thursday, Boeing said it was ready to get back to business, with employees working on most of its planes expected to return as early as April 20 and workers on the 787 Dreamliner program expected to be on the job by April 23. Boeing is doing a staggered return to try to reduce the risk of supply disruptions and to make sure there is an orderly return to work.
In a letter to employees, Boeing CEO Dave Calhoun praised the U.S. government's actions to provide funding to the airlines and reiterated his call for the aerospace supply chain to receive a liquidity injection as well.
"Our industry will need the government's support, which will be critical to ensuring access to credit markets and likely take the form of loans versus outright grants," Calhoun wrote. "For every dollar Boeing spends, approximately 70 cents goes directly to our suppliers. Our team continues to focus on the best ways to keep liquidity flowing through our business and to our supply chain until our customers are buying airplanes again."
His comments are welcome news to investors in the supply chain, and in particular to Triumph and Spirit. Triumph came into the crisis as an underperformer trying to streamline, and can ill afford a prolonged slowdown. Spirit, a onetime Boeing subsidiary, counts on its former parent for the bulk of its revenue.
TransDigm and Heico are also major suppliers to Boeing commercial, but both have other businesses to fall back on. GE is a conglomerate, but its aviation business (in particular its airline engines) was one of the few parts of its portfolio that was performing well coming into the year.
Friday's gains are a welcome relief, but investors should be warned that the situation is hardly resolved, and there is likely to be more turbulence on the horizon. I'm expecting Boeing to cut its commercial production rates as soon as this month, which will have a trickle-down effect on the supply chain.
At best, we are probably talking about a multiyear recovery since airlines will likely be conservative when it comes to expansion at least into 2021. It's in Boeing's best interest to keep its suppliers solvent, and the aerospace giant should provide at least some protection against liquidity issues, but it could be a while before these stocks are ready to soar again.