What happened
Shares of Boeing (NYSE:BA) fell 7% on Thursday morning after a key supplier to the aerospace giant said it was pausing work on components for Boeing's 737 Max, raising fresh questions about production plans for the plane.
So what
Boeing and commercial aerospace suppliers have been under pressure due to COVID-19, which has caused airlines to retrench and has raised doubts about future aircraft sales. But Boeing was struggling even before the pandemic, with the 737 Max grounded in March 2019 after a pair of fatal crashes.
Image source: Getty Images.
Boeing has been working to get the 737 Max recertified to fly, and hopes to conduct a key test flight in late June, but even if it can resume deliveries in the third quarter it is going to take time for Boeing to work through the large inventory of built but not delivered planes sitting on its lot.
Late Wednesday, Spirit AeroSystems (NYSE:SPR), a one-time Boeing subsidiary that makes the fuselages for the 737 Max, said it has been directed by Boeing to pause work on four 737 Max frames and avoid starting production on 16 additional frames to be delivered in 2020 until otherwise directed.
Spirit said it believes there will be reduction to its previously announced production plan of 125 737 Max planes in 2020. The company isn't sure how big the reduction will be but is expecting it will be more than 20 planes.
Now what
The news likely caught Boeing investors off guard because most of the headlines on the 737 Max in recent weeks have been encouraging. But it is important to note that even if the plane does get airborne again in the months to come, demand is going to be weak. Boeing needs to walk a fine line between keeping its assembly lines running and its suppliers healthy and working down its inventory instead of adding to it.
The guidance to Spirit also raises fresh questions about Boeing's longer-term production goals. Prior to last year's grounding, Boeing had originally hoped to make as many as 57 737 Max planes per month, but it is now targeting a monthly production rate of 31 planes in 2021.
All in, the news is a harsh reminder that even if the outlooks for airlines and the 737 Max are improving, we are still at a weakened state. With Boeing shares up more than 50% since the beginning of May, investors are heeding that reminder and heading for the sidelines.
