This week’s bankruptcy filing by TECT Aerospace laid bare an extreme case of the financial pressure many Boeing suppliers in Washington state are suffering.
TECT attributed its collapse to “catastrophic financial losses stemming from the suspension of 737 MAX production followed by the impact of COVID‐19 on industry production rates.”
Is this a harbinger of more bankruptcies and distressed asset sales to come in the sector?
“I think there’s more to come,” said Bill Alderman, President of Alderman & Co., an investment bank specializing in aerospace merger and acquisition transactions.
“If the United States federal government does not provide more liquidity to the supply chain and if there’s not a large ramp-up in production of aircraft in the immediate near term, which I think none of us expect, then more TECTs have to happen,” he said.
In contrast, Emily Wittman, CEO of the Aerospace Futures Alliance, which lobbies for the industry in Washington state, is optimistic that the second round of federal support passed last month will see most aerospace suppliers through to a recovery.
“I’m hoping that TECT will be one of the last names that we hear with a large layoff,” Wittman said. “There’s a sense that at this point, if you’re able to access
a second PPP loan, or the parallel support program for U.S. aerospace manufacturing, that companies that have survived up until this point will be here when the market recovers.”
Boeing props up a supplier
TECT, headquartered in Wichita, produces complex aerostructure components and assemblies used in flight controls, fuselages, interiors, doors, wings, landing gear, struts and nacelles, and cockpits.
In January, TECT abruptly shut down a facility in Kent. With the bankruptcy, two additional production facilities in Kansas and one in Everett that directly supply Boeing and its major tier-one suppliers are on the chopping block. TECT is seeking to sell all three.
In the meantime, those three plants are continuing to operate, propped up by funding from Boeing to ensure they continue to supply parts.
“We don’t anticipate any disruption to our production,” said Boeing spokesperson Jessica Kowal.
The holding companies that comprise TECT also have plants in Nashville, Tenn., the U.K. and Mexico that are unaffected by the bankruptcy.
The situation at TECT was made much worse by Boeing’s intense pressure, for several years before the crisis, to cut pricing on parts.
Boeing had demanded 10% to 15% price cuts each year from all its suppliers, promising they would make it up on volume as jet production rates soared. Many suppliers borrowed heavily to invest in new equipment to meet the expected increases in production.
With their margins slashed and debt increased, the MAX grounding and then the broader production cuts due to the pandemic delivered a stunning financial blow.
Documents in the Chapter 11 case, filed in Delaware, show the company was already near the maximum borrowing under its bank loan agreement by the time Boeing suspended MAX production in December 2019. That halt slashed TECT’s revenue, more than a third of which was for MAX parts.
The pandemic downturn then reduced demand for most of its other parts. The final nail in the coffin was the decision in late December 2020 by major Boeing tier-one supplier Spirit AeroSystems of Wichita, Kan., to terminate its contract with TECT.
Through August 2020, Boeing had supported TECT with advances totaling more than $17 million. In February, as bankruptcy loomed, Boeing took further action to stave off TECT’s collapse and closure, taking over TECT’s bank loan agreement, on which TECT owes $41.9 million.
Boeing has since provided TECT a further $13 million to keep the doors open.
TECT’s total debt is almost $98 million, with as much as $59 million of that owed to Boeing.
Boeing’s imperative now is to help find a buyer for the Everett and Kansas plants to minimize the loss of value and continue production.
The industry under stress
The same pressures that brought down TECT have produced layoffs and closures at other Washington state aerospace suppliers.
Last year, Safran Cabin announced 314 layoffs at its airplane interiors plant in Bellingham and 85 more at its facilities in Marysville and Newport.
Hexcel, which produces composite parts, announced 128 layoffs in Burlington and 160 in Kent.
And Triumph this year announced it will close its Spokane plant making airplane floor panels and ducting, with a permanent loss of 136 jobs.
The just-enacted American Rescue Plan Act of 2021 offers at least some companies a hand up.
It extends payroll support for small businesses and airline workers through the end of September and also includes $3 billion for payroll support grants that will cover up to 25% of the workforce for small aerospace manufacturers.
That, plus the uptick in domestic air travel as more people get vaccinated and confidence begins to return, has fed some optimism that the expected aviation recovery may come faster than previously thought, said Robin Toth, director of aerospace in Gov. Jay Inslee’s office.
“The airlines are bringing back furloughed pilots, flight attendants and maintenance people. American is doing that, as well as Southwest, JetBlue,
Alaska, Delta,” said Toth. “That means that there will continue to be a need for aircraft and maintenance, repair and overhaul — so that’s very helpful.”
However, Alderman said, “the federal government can’t prop up the economy forever.”
Unlike Boeing, which loaned money to TECT until it became clear repayment wasn’t likely, the government gave many firms free money and forgave the loans.
With U.S. domestic leisure travel seeming set to come back, Alderman said he expects a quick return to airline-related demand for jet fuel, ramp services and component overhauls.
But international and business travel is unlikely to see a similarly fast recovery, so he doesn’t think demand for Boeing’s widebody jets will return soon.
“Due to the actions of our federal government, the collapse of the industry was postponed,” Alderman said. But what happens after September?
In the year ahead, the state of the aerospace manufacturing industry here will remain precarious.
“Is the federal government going to give out more free money that doesn’t have to be repaid? And is the market going to recover extremely quickly?” Alderman asked. “If both of those are no, then there has to be a lot more stress coming into the supply chain.”