Boeing 737 MAX freeze divides suppliers into haves and have-nots

Boeing Co's decision to suspend aerospace's biggest production line exposes contrasts in the US-dominated 737 MAX supply chain, severely straining some niche machine shops while giving engine giants time to iron out their own wrinkles.

The 737 MAX production freeze, the latest fallout in a 9-month-old grounding crisis, has already kicked off tough negotiations between Boeing and Spirit AeroSystems, Boeing's largest 737 supplier, one industry source said.

Kansas-based Spirit has staffed its factory with enough workers to maintain a pre-crisis build rate of 52 aircraft per month, rising to 57 aircraft, the person said.

Instead, furloughs in Kansas are likely if Boeing stops paying Spirit to build and store fuselages at those rates to conserve cash, the person said.

"No way can they keep going," a second supply chain source said. Spirit declined comment.

Boeing declined comment on discussions with suppliers.

The fallout depends on how long Boeing's freeze lasts, and how much if any compensation Boeing pays to prop up some of the roughly 680 suppliers that feed its best-selling program.

Payments may not come quickly.

Planemakers rarely signal any intention to help the supply chain in advance, otherwise hundreds of healthy firms would demand compensation immediately, the supply chain source said. Instead, Boeing will assess impacts and may quietly help some companies bridge the gap until production resumes, he said.

Boeing is caught between two conflicting pressures: conserving cash and maintaining its ability to ratchet production upwards once the MAX starts flying again - a goal that lies behind Boeing's decision not to lay off any employees.

"The potential loss of talent, access to capital and incremental risk on the supply chain all create substantial uncertainty about Boeing's ability to increase production levels once the pause ends," Canaccord Genuity analyst Ken Herbert said.

MOM AND POP

About 80 percent of Boeing's closely guarded recurring costs in building the mature 737 - a figure some sources place as low as $10 million per plane, well below the $40-50 million estimated market value - involve payments to outside suppliers for parts.

Big, diversified suppliers of systems like avionics and landing gear - like United Technologies Corp or Honeywell International Inc - will be relatively insulated because their revenue is spread across other Boeing and Airbus programs. Crucially, they can also tap lucrative after-sales parts and repair services.

But providers of materials or structures, ranging from Spirit to a cluster of mom-and-pop machine shops in Washington state, where the 737 MAX is made, will be disproportionately exposed because those parts are sold once and rarely replaced.

One worried US Pacific Northwest supplier quickly called a Boeing contact after headlines predicted output cuts.

"We are already under contract for parts," he said. "We have already bought material, we already have labor into it."

His factory has 16 weeks to deliver a part to the 737 factory in Renton, south of Seattle, and Boeing in turn has 90 days to pay. "All of our costs are up front. We have a lot invested," he said.

The shutdown comes as the world's largest planemaker is urging suppliers to cut prices or give up a greater share of the after-sales market for parts and repairs - the focus of Boeing's own competing services business.

One US-based hardware supplier has watched its Boeing order backlog slide over the past six months, making 2020 sales forecasts difficult.

Engine-makers have a silver lining, however.

CFM International, a joint venture between General Electric Co and France's Safran, makes engines for Boeing and rival Airbus. A slowdown for CFM means extra time to iron out recent snags in the production of new technology.

"That's good news for Airbus," one of the sources said.

Airbus Chief Commercial Officer Christian Scherer said it could take more engines from CFM but was neutral on the choice of engines by airlines. Sources say Airbus now plans on the basis of a 55 percent of A320 engines coming from CFM, rather than an even split between CFM and competitor Pratt & Whitney.