Boeing asks supplier to cut back production citing pandemic, high inventory

Dive Brief:

Boeing has sent a letter to Spirit AeroSystems asking the supplier to cut back production for the second time, with a finalized schedule that decreases the order size from 125 shipsets to 72 for the remainder of the year, according to a filing with the Securities and Exchange Commission (SEC).
"The simplest read is that airline customers don't need aircraft at this point and more inventory of finished goods is one of the last things Boeing wants as it sits on [about] 450 fully built 737MAX aircraft and another [approximately] 120 737MAX fuselages," reads the note written by UBS analyst Myles Walton.
Boeing said in its June 19 letter to Spirit AeroSystems that the reduction is due to COVID-19’s impact and build up in inventory of Spirit’s B737 products. Spirit said the inventory was "accumulated pursuant to the parties' prior production rate agreements," according to the financial filings.

Dive Insight:

The declining demand for new aircraft in the struggling airline industry is the second blow to Spirit AeroSystems in less than a year. The first came after Boeing's decision to temporarily stop production of the 737 Max after the model was grounded following two deadly crashes that killed a total of 346 people. The 737 Max production accounts for more than 50% of Spirit's annual revenue, the company explained earlier this year.

Boeing's decision to temporarily stop production of the model at the beginning of the year led Spirit AeroSystems to lay off 2,800 employees at its Wichita, Kansas facility. Layoffs have since grown to 3,200 employees, according to the company's most recent earnings.

The most recent production schedule means six aircraft will be built every month in a production system built to handle 57 per month, according to a research note from UBS. Spirit delivered 606 shipsets in 2019, according to a note from Jefferies cited by Reuters.

Spirit AeroSystems CEO Tom Gentile and other executives went to Seattle this week to talk with Boeing about production plans and the possibility of financial assistance from the buyer, according to Reuters. Spirit AeroSystems has also been in talks with its lenders and "intends to work with them expeditiously to obtain appropriate relief from its covenants," it said in financial filings.

"The B737 MAX grounding coupled with the COVID-19 pandemic is a challenging, dynamic and evolving situation for Spirit. During this time, Spirit plans to work with Boeing to manage the B737 production system and supply chain," Spirit AeroSystems said in its SEC filing.

"We continue to take full advantage of this period of reduced production to implement initiatives that are harder to achieve at full run rates in order to improve quality and efficiency," Gentile said during the company's earnings call in May when it still expected to deliver 125 737 MAX shipsets for the year. "These initiatives include optimizing product flows, streamlining our factories, accelerating automation and digitization projects, and completing the transition to our Global Digital Logistics Center."

In April, air passenger demand posted its largest decline on record due to the coronavirus pandemic and the financial impact during the first quarter "reached the level of industry-wide loss recorded for the full year of 2008, during the Global Financial Crisis," according to the International Air Transport Association (IATA). This leaves airlines will less money to invest in new planes.

That same month, when an analyst asked Boeing CEO David Calhoun what percentage of the company's backlog would be canceled, he said the company's new, lower production rates were a result of discussions with customers, but did not provide a number.