What happened
Shares of key Boeing (BA 0.01%) suppliers got a lift Wednesday after the aerospace giant gave a better-than-anticipated forecast for jet production. Commercial aerospace sales are going to take a hit due to the COVID-19 pandemic, but Boeing is going to try to keep making planes at a higher rate than many investors had feared.
Spirit AeroSystems (SPR -0.66%), a former Boeing subsidiary that is responsible for the fuselages of its planes, was up 16% on Wednesday afternoon, while shares of TransDigm Group (TDG -1.00%) and Allegheny Technologies (ATI 0.73%) both climbed more than 10%.
So what
The pandemic has had a chilling effect on travel demand, leading airlines to cut flights, ground planes, and put off growth plans. That in turn has trickled down to the commercial aerospace sector, which had been counting on robust new plane sales to drive future growth.
Spirit shares are off 64% since Feb. 15, and shares of specialty metals producer Allegheny and component maker TransDigm are down 58% and 42%, respectively, as investors prepare for what could be an extended down cycle in commercial aerospace.
Image source: Getty Images.
Boeing's first-quarter results released Wednesday did little to dispel concerns we are headed toward a downturn, with CEO Dave Calhoun saying the pandemic "is affecting every aspect of our business." Boeing is cutting about 10% of its total workforce and revising production plans, but the company is actually more optimistic about future demand than many on Wall Street had expected.
Boeing said it would cut production rates for its 787 Dreamliner to 10 per month in 2020, from 14, and is forecasting seven per month by 2022. It is also reducing production on its 777 line to three per month by 2021. Boeing also hopes to be manufacturing 31 737 MAX planes per month by 2021, assuming the plane is returned to service in the third quarter.
If Boeing sticks to those targets, that would provide steady revenue for its suppliers and will at least allow for the supply chain to start planning for future demand.
Now what
Given the tepid demand expected for the 777, and the slowdown in sales of the once-hot 787, the production cuts for those larger planes could have been much worse. Even when airlines resume buying planes, smaller jets like the 737 are expected to be the focus, meaning an uncertain future for those larger, wide-body jets.
The certainty of that forecast, and Boeing's commitment to supporting its supply chain through the downturn, are reasons for a relief rally. But investors should be warned there will be no quick turnaround, and in a business where higher volumes tend to lead to better margins, programs like the 737 MAX might never be the moneymakers they were once expected to be.
To put the plans for 31 737 MAX aircraft per month into perspective, prior to the plane's March 2019 grounding, Boeing was planning to ramp up to 57 planes per month.
TransDigm, Spirit Aero, and Allegheny are three well-run companies and important parts of the aerospace and defense supply chain. But investors should be cautious buying in, despite Boeing's optimism. Of the three, I prefer TransDigm, due to its track record of software-like margins and exposure to parts of the business that might recover faster than new-plane sales will.
