Spirit AeroSystems said late Monday that Boeing asked it to produce fewer 737 MAX bodies, news that not only imperils the supplier’s financial health, but also means the drama over the grounded jet is far from over for the entire aerospace value chain.
The development underscores how the coronavirus pandemic is making matters worse for the embattled sector.
Earlier in June, Spirit Aero (ticker: SPR) said Boeing (BA) asked the supplier to halt work on more 737 MAX shipsets—the industry term for all the parts required for one jet. Spirit, essentially makes the tubes for MAX jet bodies. News of the halt-work order sent a shock wave through the aerospace value chain.
Spirit Aero shares dropped more than 15% the trading day after than announcement. Boeing shares fell more than 16%.
At the time, Boeing didn’t say how many MAX shipsets it needed. Now Boeing has told Spirit Aero how many it wants this year: 72, compared with the 125 it originally requested.
“Given the substantial production plan reduction, Spirit could breach the financial covenants under its credit agreement in the fourth quarter of 2020 without an amendment or waiver,” reads the Sprit AeroSystems filing disclosing the news. “Spirit is in communication with its lenders regarding this matter, and intends to work with them expeditiously to obtain appropriate relief from its covenants.”
Spirit has about $3 billion of long-term debt outstanding, with several hundred million dollars of liquidity available in an untapped revolving line of credit. But sometimes,violations of debt covenants can restrict a company’s ability to tap existing lines of credit. Spirit Aero and Boeing, weren’t immediately available for comment on the news.
Spirit Aero has already made 35 MAX shipsets in 2020, so it only has another 37 to manufacture. The lower volume appears to be a function of two issues: longer delays for recertification as well as the Covid-induced aerospace downturn.
The MAX—Boeing’s newest model single aisle jet—has been grounded world-wide since mid-March 2019 following two deadly crashes inside of five months. Boeing hopes to return the plane to commercial service this summer. The recertification process has taken longer than Boeing initially envisioned, and Monday evening’s news might also mean more delays are coming.
The 72 shipsets now required are far below what Spirit Aero would produce in a normal year. Before the pandemic, Boeing was making more than 500 MAX jets a year. During the grounding, however, about 450 MAX jets were produced and parked. Boeing has to work through that inventory before production rates for its suppliers can return to normal.
The pandemic has extended the amount of time it will take to do that. Air travel is way down, falling about 80% year over year in the U.S. this past week. Fewer people on planes means fewer jets are required to meet demand.
The pandemic’s impact on commercial air travel is a big reason why Boeing shares are down 42% year to date. Spirit AeroSystems, which generates more than 60% of its sales from Boeing, has been hit even harder, falling about 63%. Aerospace supplier stocks Barron’s tracks are down about 40% year to date as well.
More pain appears to be on the way for Spirit Aero investors Tuesday morning. Spirit Aero shares were down about 10% shortly after the open.
The news has some airline share down as well. American Airlines (AAL) stock, for instance, was down 4.8%. American has 737 MAX jets in its fleet—those jets are parked—and more on order.
Curiously, stock in Southwest Airlines (LUV)—another MAX customer—was up 0.5%. Boeing shares were flat.
The broader market is higher, one reason Boeing and Southwest shares aren’t responding in the opposite way investors might expect. The Dow Jones Industrial Average opened about 0.8% higher, while the S&P 500 gained ground as well.
Another reason for the counterintuitive trading action is that this is the second update from Spirit Aero about MAX production cuts in the past couple of weeks. Most of the bad news is already reflected in the stock price.
Write to Al Root at allen.root@dowjones.com
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A Key Boeing Supplier Drops on More Bad News About 737 MAX - Barron's
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