Has the 737 crisis humbled the big bully in Boeing?

Boeing was an aerospace industry bully for years, leveraging its position as the pre-eminent US commercial jet maker to squeeze its suppliers, badger its rivals with trade disputes and reportedly lobby for more oversight over the regulatory review of its own planes. Two fatal crashes and a global grounding of its best-selling 737 Max jet have upended the power dynamic. With its latest decisions including a halt to production and the resignation of its chief executive, Dennis Muilenburg, Boeing’s comeuppance is complete. The company announced this week that it would completely shut down production of the Max starting in January. The decision follows a surprisingly indignant and public upbraiding by the Federal Aviation Administration over the company’s unrealistic timeline for the jet’s return and concerns that it was trying to pressure regulators to act more quickly. The Max has been grounded for nine months as regulators review a proposed software fix to a flight-control system and grapple with deeper questions about Boeing’s priorities and flaws in its oversight processes and understanding of pilot reactions. The FAA reportedly may not clear the plane until February at the earliest, and seems increasingly likely to move in tandem with more reticent international regulators rather than lead the charge on approving the Max for flight. Faced with a glut of 400 undeliverable planes, a deepening cash crunch and no clear end in sight to the grounding, the gravity of the damage Boeing has done to its reputation finally seems to be sinking in. It did not help matters that Boeing’s unmanned CST-100 Starliner failed to reach the International Space Station on Friday. One way to read this production cut is that the company is going into self-preservation mode. While undoubtedly a drastic step, pulling the plug on production should help Boeing conserve cash in the near term as it will stop adding to inventory. But it will raise the longer-term financial cost of the Max crisis, put Boeing’s competitive position further at risk and wreak havoc on many of its suppliers. Citing these concerns, both S&P and Moody’s Investors Service lowered Boeing’s credit rating this week. Boeing in April cut 737 production to 42 planes per month, down from a pre-crash pace of 52. Many suppliers would likely have preferred to see another cut versus a complete stop because it becomes much more difficult to ramp up again if their own network of parts and service providers goes cold. Boeing reportedly believed a full-blown halt over a specific time period would offer more certainty for workers and make them less likely to jump ship in a tight labour market. The production cut it announced this week is instead open-ended. In a way, the lack of a fresh timeline shows the FAA’s effort to humble Boeing is working. But that it also makes suppliers – and the broader economy – that much more exposed to the Max crisis at a time when US manufacturing is still soft. Spirit AeroSystems Holdings, which gets more than 50 per cent of its revenue from 737 aircraft components, had been continuing to manufacture airframes at the 52-a-month pace throughout the grounding. Now, it, too, is fully halting production. In the understatement of the year, this suspension “will have an adverse impact on Spirit's business, financial condition, results of operations, and cash flows”, the company said on Friday. Spirit shares fell about 6 per cent this week, while fellow Max suppliers Woodward and Moog dropped about 5 per cent and 2 per cent, respectively. The production halt will reduce first quarter US gross domestic product by about 0.5 percentage point, according to estimates from IHS Markit and JP Morgan Chase. General Electric’s CFM engine joint venture with Safran is the sole provider for the Max and will likely need to rejigger its own production plans. Perversely, that could actually boost GE’s cash flow because new engine shipments tend to be less profitable than spares or maintenance work. The situation also could allow the company to devote more resources to maintaining engines on stored jets so they can be more quickly brought back into service. Boeing’s commitment to prioritise delivering the 400-odd planes in storage over cranking out new ones should help speed associated payments to GE. Meanwhile, GE is reportedly in discussions with Airbus about increasing production of engines for that company's rival to the Max to help maintain its factory capacity. Longer term, however, the company’s elevated exposure to any slippage in the Max backlog or lingering reputational damage is a liability, notes JP Morgan analyst Steve Tusa, who says it is a possibility the plane does not return at all. I believe those suppliers are going to remember all of this the next time they enter contract negotiations with Boeing. Before the two Max plane crashes, Boeing had been pushing for cost cuts in an effort to capture some of its suppliers’ rich profit margins for itself, and had pushed to bring more parts and services work in-house through joint ventures and acquisitions. That all likely ends. In the near term, rather than negotiating with Boeing over cost, its suppliers are more likely going to be negotiating for compensation or some sort of arrangement to smooth out the hits to their business from this binary approach to production. In the long term, Boeing’s efforts to rebuild its reputation must entail a reckoning with persistent allegations that it prioritised profit over safety. How does the company do that while encouraging its suppliers to make the kind of cutbacks and outsourcing decisions that landed it in hot water? Apart from the obvious fact that Boeing will not have cash to spare for acquisitions anytime soon, the Max crisis should prompt regulators to question the wisdom of allowing the company to continue to consolidate more of the aerospace industry within itself. And suppliers would be justified in being more critical of these attempts to raid their market share. The Max crisis was manufactured largely by Boeing itself, rather than its supply chain. As painful as the production cut will be, the suppliers now at least have more leverage.

Has the 737 crisis humbled the big bully in Boeing?

The company leveraged its position as the pre-eminent US plane maker to squeeze its suppliers for years