Investors reacted harshly Monday to news that Boeing will slash production of the 737 MAX, punishing the company’s share price and sending shock waves up and down the aerospace supply chain.
Boeing said Friday after the end of market trading that it would reduce the output of the beleaguered 737 MAX aircraft by around 20 percent, to 42 per month from the current rate of 52 per month, as it struggles with the continued fallout over two fatal 737 MAX crashes.
Boeing’s share price plunged by just over 5% Monday morning, to a low of $371.86, before closing down 4.4% at $374.25, as markets weighed the implications of the cuts for an aircraft program that is expected to account for nearly a third of Boeing’s future revenues.
Monday’s stock-price swoon represented a total loss for investors of nearly $9.4 billion, and cut Boeing’s total market value to $211.4 billion. It was the fifth-largest price decline for Boeing stock in the volatile period since the crash of Lion Air Flight 610 on Oct. 29.
The production cuts won’t mean any layoffs for the 12,000 or so workers at the Renton plant where the 737 MAX is assembled, the company said. But they do add to concerns that Boeing is facing a longer-than-expected delay in getting the grounded MAX aircraft back into the skies — or in meeting its own ambitious production goals.
Before the second crash of a 737 MAX — Ethiopian Airlines Flight 302, on March 10 — Boeing was planning to raise MAX output to 57 a month.
Investors also worry that production cuts will hurt companies that supply Boeing with engines, wings, fuselages and other parts for the 737 MAX. Friday’s decision “will most certainly have an impact on the supply chain, considering many suppliers had been prepping for the rate to climb to 57 [per] month in June 2019,” wrote Robinson Humphrey, an analyst at SunTrust.
Spirit AeroSystems, the Wichita, Kan.-based maker of the 737 fuselage, saw its stock price fall Monday by more than 5%. Other suppliers’ shares also dipped.
One problem, analysts said, is that suppliers may need many months to reduce their own output by the 20% or so reflected by Boeing’s cut.
In fact, some suppliers aren’t cutting production. On Friday, Spirit AeroSystems announced it “will maintain its 737 deliveries to Boeing at the current rate of 52 shipsets per month.”
Spirit said it would store the “accumulated 737 MAX shipsets at its facilities,” and those “shipsets will then be transferred to Boeing to support their production plan.” Spirit said it will also try to minimize impacts to its own workforce by suspending all new hiring and by cutting contractors and overtime.
Neither Spirit nor Boeing would disclose whether Boeing will pay for shipsets that Spirit produces but does not ship. “We will be working directly with our suppliers on their production plan to minimize operational disruption and financial impact of the production rate change,” Boeing spokesman Peter Pedraza said in an email Monday.
Another worry: how the cuts will weigh on Boeing’s own customers, such as carriers and aircraft leasing companies.
Southwest Airlines, which boasts one of the biggest MAX fleets of any carrier, saw its share price fall by nearly 2.5% on Monday. The airline is reportedly contemplating the extra expense of “purchasing or leasing used [Boeing]-737s” to replace its grounded MAX aircraft, noted Savanthi Syth, an industry analyst with Raymond James.
Carriers are likely to demand that Boeing cover any extra costs related to the grounding.
Despite the negative reaction by the market, many analysts say Boeing’s long-term outlook remains positive. A software fix for the MAX flight-control system is said to be imminent. Boeing’s backlog for the MAX still is around 4,600 orders.
Some analysts even think the production cuts might actually help Boeing.
CFM International JV, a joint venture of General Electric and Safran Group that makes the engines for the MAX, was already struggling to meet Boeing’s demand for the new LEAP engines used on the MAX, according to Bernstein Research.
Bernstein speculates that those difficulties help explain why Boeing averaged just 33 aircraft per month from its Renton plant in January and February.
The decision to cut its output, Bernstein wrote, “should help Boeing bring the supply chain fully on track.”
Boeing even got a little good news on Monday.
Early in the day, Reuters reported that China Aircraft Leasing Group Holdings (CALC), had suspended its order for 100 of the MAX aircraft until the resolution of safety concerns. The Reuters report cited an article published Monday by the South China Morning Post that cited a statement by Chen Shuang, CEO of the Hong Kong-listed CALC.
But late Monday, Reuters posted a second story that contradicted the Post article and reported that Shuang had been misquoted. “Our company currently does not have plans to change our Boeing aircraft orders,” a CALC spokeswoman told Reuters.
This story has been updated to include new information from Reuters about an order of 100 MAX aircraft from China Aircraft Leasing Group Holdings that Reuters had originally reported as being suspended.