Boeing, suppliers slip as Wall Street counts MAX halt costs

Boeing, suppliers slip as Wall Street counts MAX halt costs

Shares of Boeing Co and its global suppliers fell further on Tuesday as analysts began to tally the cost of the U.S. planemaker's decision to suspend production of 737 MAX jets in January, its biggest assembly-line halt in more than two decades.

Boeing 737 Max aircraft sit on the tarmac at the Renton Municipal Airport in Renton
Boeing 737 Max aircraft sit on the tarmac at the Renton Municipal Airport in Renton, Washington, U.S. December 16, 2019. REUTERS/Lindsey Wasson

REUTERS: Shares of Boeing Co and its global suppliers fell further on Tuesday as analysts began to tally the cost of the U.S. planemaker's decision to suspend production of 737 MAX jets in January, its biggest assembly-line halt in more than two decades.

Analysts estimated Boeing could continue to burn around US$1 billion a month despite the halt in work on what was previously its best-selling plane, and investors worried layoffs, lost work and logistical costs would ripple through its supply chain.

The 737 MAX has been grounded since March after two crashes in Indonesia and Ethiopia killed 346 people within five months, costing the manufacturer more than US$9 billion so far.

"Each supplier will likely be missing about 200 deliveries versus original plans, with about 80per cent of the shortfall coming in 2020 and the remainder in 2021," Melius Research analyst Carter Copeland wrote in a note.

Britain's Senior Plc , which makes parts including airframes and engine build-up tubes for the MAX, was one of the first suppliers to comment on the suspension, saying it was working closely with the U.S. planemaker to assess the impact of a production shutdown on its 2020 sales.

The fallout extended to carriers, with Southwest Airlines Co extending cancellations of MAX flights by another five weeks through April 13, due to the continued uncertainty around the timing of the aircraft's return to service.

The U.S. planemaker's shares fell more than 1per cent in early trading, while its top supplier, Spirit AeroSystems Holdings Inc , slumped nearly 3per cent to US$75.65.

Analysts say the U.S.-based Spirit, which makes the MAX's fuselage, draws more than 50per cent of its annual sales from the plane.

"We assume (Spirit) will elect to stop production and furlough employees at a cost of US$0.40 (per share) per month of the stoppage," Copeland said.

Spirit said it was working with Boeing to determine the financial implication of the production halt.

"We believe the suspension will likely last a minimum of 3-6 months but would not be surprised if it lasted longer," said SunTrust Robinson Humphrey analyst Michael Ciarmoli.

Shares of Senior, whose aerospace unit counts Boeing as its biggest customer with 15per cent of the division's sales, fell more than 10per cent. Those in France's Safran SA , which makes engines for the MAX in a joint venture with General Electric Co , dipped 1.5per cent.

Safran has warned that if the aircraft's grounding lasts until the end of the year, its cash conversion could dip below its targeted 50-55per cent range of recurring operating income.

Unlike most suppliers, it is paid mostly once the airplanes are delivered to the buyer.

GE has estimated the MAX grounding would reduce its cash flow by US$1.4 billion in 2019. Its shares were down marginally at US$11.16.

Canaccord Genuity analyst Ken Herbert said there will be "some step-down in production across the supply chain", but he believes that Boeing will continue to absorb much of the financial impact and will keep its supply chain relatively supported.

United Technologies Corp , which makes landing systems, avionics and interior lighting for the MAX, and Arconic Inc that supplies aluminum sheet and plate for the airplane dipped about 1per cent.

Shares of other suppliers such as wing flaps maker Ducommun Inc , composite materials supplier Hexcel Corp , and aircraft exterior lighting provider Astronics Corp were down 0.5per cent to 4per cent. The three companies get about 10per cent to 15per cent of their annual sales from Boeing, according to analysts.

Other smaller suppliers, including Melrose Industries , whose GKN business has a contract to supply windows for the passenger cabin of the 737 MAX, and Meggitt , which makes parts including fire protection system for the MAX engine and auxiliary power unit, fell more than 1per cent in Europe.

(Reporting by Rachit Vats, Ankit Ajmera and Yadarisa Shabong in Bengaluru and Sudip Kar-Gupta in Paris; Editing by Louise Heavens, Saumyadeb Chakrabarty and Sriraj Kalluvila)

Source: Reuters

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