Planes are an important aspect to the US economy providing billions of dollars to the export market and allowing US carriers to add more routes to carry more passengers. For Boeing, the 737 Max was expected to allow Boeing to be their cash cash for the next decade, but there is something wrong and Boeing has suspended production of the plane. In an article by Eric Johnson and Tim Hepher of Reuters, they decided to look at which companies supply Boeing and are being affected by the suspension of manufacturing.
In Wichita, Kansas, Spirit Aerospace they make the fuselages for Boeing. (Think of the auto companies who put together the parts which are outsourced from somewhere else). Their production was 52 fuselages a month rising to 57. Boeing will try to conserve cash,w but not paying suppliers which means Spirit will have to layoff some of its employees.
Boeing has 680 suppliers which feeds into the 737 Max. At this point, no one is confident when the program will restart which means uncertainty for the suppliers who will deal with the potential loss of talent, access to capital and the ability to start production to what Boeing wants when the plane is a go.
About 80% of Boeing’s closely guarded recurring costs in building the plane (the plane sells for $40 to $50 million but costs somewhere in the $10 million range) involve payments to outside suppliers for parts. These suppliers tend to pay all the upfront costs and get paid within 90 days of delivery to Boeing. What are the smaller, less diversified shops to do?
Linking to dividend paying stocks, big diversified suppliers of systems such as avionics and landing gear such as United Technologies or Honeywell will be relatively insulated because they deal with Boeing and its competitors including Airbus. They also have lucrative after sales parts and repair services. The larger companies have important relationships with Boeing but it is not their own source of revenue. For your investments how dependent are you for one large company?
There are more questions than answers, till the next time – to raising questions.