Rejection Hurts  

IAM union members rejected Boeing's latest contract proposal yesterday, with a majority of members voting “no” to a deal that would have increased wages by 35% over four years along with other member concessions and incentives. The sticking points? Members want a larger increase and the reinstatement of a defined benefits pension plan, which Boeing management has said is a non-starter. This will prolong the strike by at least another three weeks as the parties sit through a cooling-off period before getting back to the negotiating table, which will firmly run into the US holiday period. Even if the parties get to a deal in late November or early December, production start-up won't take place in earnest until January or February.

Aerospace Supply Chain Implications

Suppliers in the Boeing supply chain come in all shapes and sizes, from Fortune 100 companies to small, privately-owned businesses with a handful of employees. While the big suppliers play a critical role in providing proprietary products like engines, avionics, landing gear, etc., smaller players frequently occupy critical niches in the supply chain that can shut down or pace production volumes.  

Right now, many of those small and mid-size suppliers are assessing whether to lay off employees, given the likelihood of a production re-start being two to three months away.  These decisions will be the ones that ultimately determine the post-strike production ramp up and timeline.

Making Matters Worse: Inventory Overhang

It has been an extremely challenging five-year stretch for aerospace companies following the effects of the COVID-19 pandemic. But through the unusual turmoil, Boeing and its primary fuselage supplier, Spirit AeroSystems, have done a lot, and have spent a tremendous amount of money to keep their supply chains intact. 

In Q3 2018, during peak pre-pandemic production, Boeing had about $62 billion of inventory and delivered 568 commercial aircraft in the first nine months of the year. That equates to $109 million of inventory per aircraft delivered.  

Fast-forward to Q3 2024, and Boeing has $83.3 billion of inventory, and deliveries through the first nine months of the year have included 291 aircraft, resulting in an inventory per delivery of $286 million - a 262% increase.

Spirit AeroSystems experienced similar inventory growth of 288% per ship set delivered in the same periods, with a similar trend to Boeing regarding inventory levels and deliveries.  

Both companies took these actions to help preserve supply chain integrity and solvency, particularly in the middle market.

Unfortunately, it's unclear if either company has the financial capacity to do that again in the current crisis, and all that excess inventory will have to be burned off, which will delay supplier recovery for years to come.  Keep your eyes on the middle market; that's where the real action is going to take place, once the strike is resolved.