The Beginning of the End or the End of the Beginning?

The first of the proverbial dominoes has fallen as a result of the machinists' strike at Boeing Commercial Airplanes, as Spirit AeroSystems announces that it will furlough 700 employees for 21 days, effectively shutting down its manufacturing operations related to the B767 and B777 programs. Spirit has fully drawn a $350 million bridge loan from Boeing and claims that the manufacturer is out of space to store inventory related to the B767 and B777 programs. Additionally, Spirit has lowered production on B737MAX fuselages to 21 units per month in August, September, and October.

Implications

The aerospace supply chain is characterized by extremely long lead times for many of the components and assemblies that go into a commercial airliner.  It isn't uncommon for a component to take 18 months from an order of raw material until delivery to the customer, so slow-downs or pauses in production like we are seeing at Spirit AeroSystems are avoided except in the most serious of situations. As a result, suppliers of Spirit and Boeing will now cut their raw material orders (and order furloughs or layoffs of their own) in an attempt to preserve liquidity. 

Once the strike is settled, getting the supply chain back up to speed is going to be the really challenging part in this story.  As we saw coming out of the COVID-19 production slow-downs, it is extremely challenging to ramp production back up to previous peak levels. This experience will be the same, and returns to former production levels will likely be measured in quarters and years as opposed to weeks and months. 

Exacerbating the situation for suppliers is an inventory overhang. For example, Spirit is literally out of space to store B767 and B777 assemblies, and the company will need to burn off excess inventory before getting its supply chain back up and running at full rate, delaying the recovery for its suppliers.

Ahead of the Boeing strike, the commercial aerospace industry (particularly in Tiers 2 and 3 in the airframe market) was already characterized by high levels of debt, low liquidity, and marginal profitability. Depending on the duration of the strike, this may represent an existential threat for many suppliers.