With production of Boeing’s 737 MAX halted last month, hundreds of aerospace suppliers in Washington state are struggling to hold on and avoid layoffs, banking on private indications from Boeing that it hopes to restart ordering 737 parts next month.
The smaller suppliers are the most vulnerable. With their income from Boeing slashed, they need to have cash on hand to keep going.
Some that depend on the MAX for the majority of their work and their income have cut workers despite the challenges of re-hiring in a generally hot economy.
They have plenty more to worry about. At the annual Pacific Northwest Aerospace Alliance (PNAA) suppliers conference in Lynnwood this week, attendees expressed concern about the near-term impact of the coronavirus on the airline industry, as well as a sharp, longer-term economic slowdown in China, which in recent years bought 1 out of 4 Boeing jets sold worldwide.
Still, the main topic of conversation was local: the uncertainty over how long the MAX will stay grounded. One supply-chain expert told the group Boeing is unlikely to return to its previous 737 production rate until late next year, which would spell a two-year recession for parts suppliers reliant on that jet.
MAX-related job cuts have already hit hard in Wichita, Kansas, where Spirit AeroSystems, which supplies the jet’s fuselages, has laid off 2,800 people, and layoffs have rippled out to Spirit suppliers.
But in Washington state, Boeing itself has held onto its workers, transferring about 3,000 direct 737 assembly-line employees to work on other programs or on maintenance of the grounded MAXs. And so far, the number of layoffs at its suppliers is also small.
The work at such suppliers is typically very hands-on, so many companies are keen to avoid losing skilled employees.
Jin Prowse, CEO of Prowse Manufacturing Group, which employs 28 in two machine shops in Arlington, said that though the bulk of the work is for 737 parts, she’s holding onto employees. They are working through a backlog of parts orders while using the slowdown to get more efficient by upgrading work processes and systems.
“I don’t want to let employees go. You want to make sure you have good talent and hang onto them,” said Prowse. “We’re taking advantage of this time to get stronger.”
She said Boeing has indicated the 737 shutdown will be about a month. Her company can cope with that, even if production restarts slowly and at lower volume than previous levels.
However, she said, “If it’s longer duration, that will impact shops like ours.”
Some other suppliers have already made job cuts.
Triumph Group in Spokane, which produces floor panels and duct work for the 737, transferred some workers to other programs, including work for Airbus. On Thursday, CEO Daniel Crowley in an earnings call said Triumph hasn’t shut down its 737 work but is maintaining a reduced rate, producing parts for 21 jets per month.
Still, in late January Triumph laid off 22 of its about 290 Spokane employees. A person with knowledge of the plans said Triumph could hire those people back when MAX production restarts.
This week, Senior Aerospace AMT in Arlington, which makes structural parts for airplanes, handed out layoff notices to 72 workers. According to filings with the state, that plant at the end of 2018 employed 728 workers.
An official at the company declined to provide details but said the layoffs were because of the MAX, and the company hopes to hire the workers back later. Separately, Senior, headquartered in the U.K., has suspended plans to sell its aerostructures unit “because of the uncertainty surrounding the 737 MAX,” according to the Wall Street Journal.
About a third of the work at Orion Industries, a small nonprofit with a social mission to train and provide work for disabled people, is making parts for the 737. Avoiding the word “layoff,” Orion vice president Tom Brosius said he has furloughed workers at the plant in Mukilteo and expects to get those employees back to work as soon as Boeing starts ordering parts again.
Even aerospace companies that retrofit equipment for all the earlier model 737s still flying around the world are indirectly affected by the MAX shutdown.
Joe Clark, chairman and founder of Aviation Partners Boeing, which supplies fuel-saving winglets for the earlier 737 model, said demand has temporarily dropped because airlines are so short of capacity they cannot afford to take those 737s out of service to get his winglets fitted.
Likewise, Peter Gundermann, CEO of Astronics, a supplier of avionics and inflight entertainment systems, said in an investor update this week that the ongoing 737 MAX grounding affects his business not only because Astronics isn’t delivering its equipment for new MAXs, but also because the retrofit market to refurbish cabin interiors has slowed with airlines “reluctant to take planes out of service to install the types of products they buy from us.”
MAX recovery will be slow
At the PNAA conference, Kevin Michaels, a supply-chain specialist and managing director at AeroDynamic Advisory, laid out the reality that even after Boeing is cleared to fly the MAX again, production will take a while to restart and will ramp up very slowly.
Michaels projected that new MAXs won’t begin to roll off the Renton assembly lines again until five to six months after it gets clearance from the Federal Aviation Administration (FAA). He anticipates production starting back up in the third quarter and new deliveries resuming in the fourth quarter.
Once the FAA provides permission to fly, Boeing must begin to clear a backlog of some 400 airplanes that have been parked for months.
The main brake on the restart of production in Renton is the need to bring all suppliers back up in rate together, ensuring that all are in step. In addition, Boeing will have to work with its airline customers, who will miss 2020’s peak summer travel season, to deliver the planes on a schedule that meets their needs and ties in with extensive pilot training.
Before the second crash last March, Boeing was building MAXs at a rate of 52 jets per month. Michaels projects a ramp-up in small steps that won’t get Boeing back up to that production rate until late 2022.
That would be a daunting two-year stretch ahead for MAX suppliers with much-reduced income. Survival will require cost-cutting and cash on hand. Yet many of those suppliers have been squeezed continuously by Boeing over several years to reduce their pricing, a process that Michaels said “has sucked a lot of working capital out of the supply chain.”
John Monroe, a former Boeing executive and longtime consultant on aerospace development in the state, said, “The problem is the smaller suppliers don’t have deep pockets,” and some may not make it through.
“When there’s no work, what are their guys going to do?” he said.
At PNAA, news of the spread of the Coronavirus added to fears of a downturn in the industry. In 2003, the SARS virus that also originated in China caused a dramatic fall in air travel in the region for three months, and air traffic took another six months to recover.
The coronavirus appears less deadly than SARS but is spreading faster, with an immediate impact in China. Airbus shut down its A320 assembly plant in Tianjin. And Hong Kong airline Cathay Pacific asked its 27,000 employees to take three weeks of unpaid leave as air travel slumped.
China is now the largest aviation market in the world. Fully a quarter of the 737s built in Renton go to China.
At PNAA, Boeing vice president of marketing Randy Tinseth projected the Asia Pacific region will provide more than 50% of the world’s economic growth over the next 20 years. He showed one slide with that region highlighted in bright orange on a world map. It might as well have been a map of the coronavirus epicenter.
In a keynote address at the conference, aviation analyst Richard Aboulafia tried to be upbeat, assuring his audience that “a downturn is not inevitable.” But he pointed out that even before the coronavirus, China’s economy has slowed dramatically.
Data points such as the 8% percent drop in car sales in China last year suggest economic growth there has fallen much further than the Chinese government admits. Aboulafia said the slump in air traffic growth and airplane orders in China is in part due to the drop in world trade, but also suggests a more macroeconomic problem with China’s heavily debt-driven, centrally controlled economy.
Ron Epstein, industry analyst with Bank of America, said that outlook should temper the hope for a huge Boeing widebody jet order once a trade deal with China is final that would serve to boost the 787 Dreamliner production rate in Everett.
“It’s probably not the big order you are looking for,” he said.
Boeing will cut the 787 rate from 14 jets per month now to 10 per month in early 2021. Epstein projects that demand for larger jets won’t recover until later in the decade and that before then the 787 rate will fall further, to 8 jets per month.
Chinese economic and air traffic growth is a longer-term watch item for local aerospace suppliers. The Coronavirus is a near-term worry. But nothing is more important for the industry than returning the 737 MAX to service.
Epstein said Boeing will recover, but painfully slowly. “From a financial perspective, by 2023 you are back to a more normal environment,” he estimated.