Ripple effects of Boeing Max mess starting to spread
Acknowledging it will take longer to get the 737 Max back in the air, Boeing plans to suspend production of its marquee jet next month in a decision that could ripple across the entire U.S. economy. The company announced Monday that it would stop building the Max starting sometime in January, with no specific date for when the Renton, Wash., plant will be restarted.
The ramifications are likely to extend beyond the factory floor and across both the aviation and manufacturing sectors. The decision could affect the country’s trade balance.
“This is the country’s biggest single manufactured export product,” said Richard Aboulafia, an aircraft industry analyst at the Teal Group.
Southwest Airlines, which was counting on the Max to update its fleet, pushed back any hope of restoring the plane to service by five weeks, to April. American Airlines did the same last week.
Southwest said Tuesday that it’s trying to minimize travel disruptions and apologized to customers for any inconvenience.
Southwest, which is the nation’s largest 737 Max customer, will be pulling about 300 flights a day from a peak-day schedule in excess of 4,000 flights, the airline said in a news release. Customers who have booked these flights will be notified and reassigned to other planes.
“Taking planes out through April means you’ll miss the Spring Break hump, which is a peak period of flying,” said David Vernon, a senior analyst with Sanford C. Bernstein. “When you think about the revenue implications of missing Spring Break and flying a lower schedule, that’s not great.”
Shares of major manufacturers that supply Boeing with critical elements of the 737 Max fell Tuesday, demonstrating the wide reach of Boeing’s announcement. Spirit
AeroSystems was down nearly 2 percent, while General Electric, which makes the Max engines in a joint venture, was off slightly. Shares in French supplier Safran were down 3.4 percent in Paris.
Meanwhile, shares of Boeing’s main rival, Airbus, were up about 1.8 percent.
The Max is Boeing’s most important jet, but it has been grounded since March after crashes in Indonesia and Ethiopia that killed a total of 346 people. Investigators have found flight-control software designed to stop an aerodynamic stall was a major factor in the crashes, and Boeing is updating the software to make it less aggressive.
But regulators have yet to approve the changes.
The company said it will not lay off any of the factory’s 12,000 workers “at this time,“and many could be diverted to plants elsewhere in the Seattle region. Some also could be assigned to work on the 400 jets that Boeing has built since the Max was grounded in March but couldn’t be delivered.
The FAA told the company last week that it had unrealistic expectations for getting the plane back into service. Boeing has missed several estimates for the plane’s return date.
The agency has not given a specific date for approving the Max’s return, but FAA Administrator Stephen Dickson has said it will be done on the agency’s timetable, not Boeing’s.
The suspension of production likely will ripple through about 900 companies in the U.S. and around the world that supply parts for the Max. For instance, an aircraft parts maker that produces Max fuselages and already has dozens of them in storage is trying to figure out what to do next.
Wichita, Kan.-based Spirit AeroSystems, which is the largest employer in the state’s largest city, said in a statement that it was working with customers to determine what Boeing’s announcement means.
“As decisions are made on how to best mitigate this additional impact, we will communicate any new information to employees and other stakeholders,” Spirit spokesman Keturah Austin said in an email.
He said the company makes 70 percent of the fuselages for the 737 and employs about 13,500 people in Wichita.
Spirit had continued to churn out fuselages even as Boeing slowed production and has 90 of them stored on a ramp adjacent to McConnell AFB as of Friday. Spirit CEO Tom Gentile said in October during the Kansas Economic Outlook Conference that it would take a long time to come back if production were reduced.
The Max program represents about half of Spirit’s revenue, Gentile said.
Even if no employees are laid off at Boeing, ceasing production still will cut into the nation’s economic output because of Boeing’s huge footprint in the manufacturing sector.
Through October, the U.S. aerospace industry’s factory output has fallen 17 percent compared with the same period last year, to $106.4 billion, in part due to previous 737 Max production cuts.
The shutdown probably would hinder the economy in the coming months and could worsen the nation’s trade balance, Aboulafia said.
Boeing is the single biggest component of the Dow Jones industrial average. Commerce Secretary Wilbur Ross in August told CNBC that problems with the 737 Max had been big enough to shave 0.4 percent off the entire U.S. gross domestic product for a period this year.
Ross said he expected an uptick when the problems were fixed, but it’s unclear what the impact might be now that Boeing has announced it will halt the jet’s production.
Boeing said it will determine later when production can resume, based largely on approval from government regulators.
“We believe this decision is least disruptive to maintaining longterm production system and supply chain health,” the company said.
Boeing likely will face some tough negotiations with suppliers about what level of payments it will provide during the production hiatus. The company will want to avoid any layoffs or shutdowns by suppliers that would keep it from quickly restarting production once its safety is approved.
“It’s really in Boeing’s interest to identify who needs payments to keep workers and capabilities in place for when the ramp up eventually happens,” Aboulafia said.
Even before the production halt, airlines were delaying the dates for when they expect the Max to fly passengers.
Last week, American Airlines removed the Max from its schedule until April 7, a month later than previously announced. Southwest Airlines’ pilots union also doesn’t expect the Max to fly until at least April.