What happened
In its effort to negotiate its 737 Max order book and avoid cancellations, Boeing (BA -0.76%) has scored a pair of wins in recent days. Those, along with positive sentiment concerning the health of its airline customers, are giving a lift to the entire commercial supply chain on Wednesday.
Shares of Boeing were up 12% as of 2:30 p.m. EDT, while shares of Spirit AeroSystems (SPR -2.34%) climbed 18%, Allegheny Technologies (ATI -1.33%) and Triumph Group (TGI 2.54%) were each up 11%, and shares of TransDigm Group (TDG 3.45%) gained 10%.
So what
Boeing and its supply chain were under pressure well before the pandemic hit. The March 2019 grounding of Boeing's 737 Max after a pair of fatal accidents had created a backlog of built, but undeliverable, jets, causing Boeing to slow and eventually suspend production of the once hot-selling jet.
Boeing hopes to have the 737 Max flying again in the second half of the year, and late last month restarted production at a slow rate. But in recent months new questions have emerged about demand. Airlines have been hit hard by the pandemic, causing an industry that just months ago was focused on buying new planes and expansion to ground aircraft instead.
Image source: Getty Images.
Even when the 737 Max is returned to service, it seems likely the airlines are going to need fewer of them than what they assumed heading into 2020. Boeing has already experienced some cancellations, and is scrambling to work with large customers to keep its order book intact.
The company scored two recent wins in that effort in the last 24 hours. Aircraft leasing firm SMBC Aviation Capital announced overnight that it has deferred, but not cancelled, the delivery of 68 737 Max jets until 2025. And German travel company TUI Group said it has reached a financial agreement with Boeing for compensation due to delayed Max deliveries, allowing the orders to proceed.
Spirit makes the fuselages for the 737 Max; Allegheny, Triumph, and TransDigm all make various components for the airplane, other Boeing jets, and the engines that power them. Boeing is restarting production at a low rate for now; it remains to be seen whether the aerospace giant ever reaches the volumes it once envisioned, but the better the order book holds up, the more future work there will be for Boeing suppliers.
Aerospace companies are also getting a lift on renewed optimism that airline traffic is slowly returning. Investors also got confirmation on Wednesday that billionaire investor Dan Loeb has bought Boeing debt, an apparent indication he thinks the company is stable.
Now what
It appears Boeing's commercial order book will hold up better than some have feared, and the worst-case scenarios envisioned just a few months ago might not materialize. That's good news, and reason enough for stocks that are down 50% or more year to date to rally.
However, investors should be warned there will be no quick rebound. Boeing has eliminated its dividend and is seeking to cut its headcount because it believes it will be years before the airlines, and airplane orders, fully recover. Even as airlines begin to restore service, they're likely to lean heavily on older jets instead of adding to their fleets.
I have high hopes that commercial aerospace will rebound in the years to come, and eventually soar higher, but that will take some time. For now I'd recommend avoiding companies like Boeing and Spirit that are overly reliant on sales of new planes, and look instead to a handful of companies -- like TransDigm -- which have more diversified revenue streams, and generate significant profits from spare-parts sales on existing fleets.
