West Michigan-based suppliers of aerospace giant Boeing Co. continue to weigh their ability to bear higher costs during the company’s temporary suspension of production.
The production halt comes after a prolonged worldwide grounding since March of Boeing’s fleet of 737 MAX jets, following the second of two crashes that killed a total of 346 people in 2018 and 2019.
After the global grounding, Boeing continued to build the 737 MAX — the fastest-selling airplane in company history — for 10 months in the hope of fulfilling a multi-year order backlog. However, the company eventually accumulated hundreds of grounded jets and the production of the plane came to a complete stop in mid-January.
Boeing is compensating airlines that have lost sales as a result of the grounding with a mixture of cash payments and discounts on future sales, but the Chicago-based company’s U.S.-dominated supply chain has mostly been left without a lifeline.
“It’s mind-boggling how much money is tied up in that supply chain,” said David Nolletti, an aerospace industry turnaround manager and director at financial and operational consulting firm Conway Mackenzie LLC.
The lack of cash flow throughout the supply chain is resulting in some layoffs, but most local suppliers are mitigating the temporary shutdown by diverting labor elsewhere within their organizations and hoping that production resumes before their resources run out.
Following nearly two decades of growth in the sector, West Michigan has a burgeoning aerospace and defense industry with more than 9,000 jobs at around 330 companies, according to Grand Rapids-based economic development group The Right Place Inc.
“We’ve seen suppliers continually invest in expanding capacity and new capacity for new manufacturing technologies,” Nolletti told MiBiz. “They’ve grown and grown and grown, and in a lot of cases, the private companies have taken on a fair bit of debt to finance that growth.”
Costs associated with the grounding of the 737 MAX are likely to surpass $18 billion, according to an announcement made during Boeing’s quarterly earnings report.
“There are really only two large commercial aircraft manufacturers in the world, Boeing and Airbus, so when one of them has a problem, the entire industry feels it,” Nolletti said. “Every state in the country has members of the Boeing supply chain in it. That’s why, from a national perspective, this is a big deal.”
Deferred production costs also grew by $2.6 billion, dipping into the aircraft’s long-term profit potential. As well, Boeing failed to sell any commercial planes last month.
On a call with analysts last month, Arconic Inc. — which employs more than 2,000 people in Whitehall, north of Muskegon, where it manufactures cast components for jet engines — said it expected to lose $400 million in sales because of the Boeing crisis and could cut jobs this year as a result.
“If we’re clear that production is going to become much more healthy in 2021, then that’s going to affect our views about labor,” Arconic CEO John Plant said in the call.
Arconic is considering a mix of cuts, extended vacations and changes in shift patterns, according to Plant, who said it has been difficult to switch workers to other products.
“Most companies can’t afford to keep excess employees,” Noletti said. “Here, people are going to be hesitant to let people go and they’re going to try and maintain the workforce as best they can, but they’ll only be able to do that for so long.”
Aerospace supplier GE Aviation Systems LLC, which employs about 1,000 people in West Michigan, supplies engines for the 737 MAX and also produces navigation systems for the jet out of the company’s Grand Rapids-based operations.
“We are partnering with our customers and suppliers to mitigate the impact of the temporary shutdown of the 737 MAX while protecting the company’s ability to accelerate production as needed in the future,” a company spokesperson told MiBiz.
To do so, GE Aviation is attempting to avoid layoffs by shifting employees to other programs and reducing overtime and the use of contractors.
Fort Collins, Colo.-based Woodward Inc., which operates a plant in Zeeland that manufactures fuel injector nozzles and components for afterburner applications, also took action to try to avoid disrupting its workforce.
“We’ve adjusted that contract temporary labor. We’ve dramatically taken down overtime that we were running. We’ve redeployed skilled labor into other parts of our business to preserve that skilled labor,” Woodward Chairman and CEO Tom Gendron said in a Feb. 3 conference call with brokerage analysts to discuss quarterly results.
“We’ve gone after all discretionary expenses, discretionary spending, and we were attacking productivity and we are working hand in hand with our supply base to also have them be able to handle the temporary downturn and then the recovery in the ramp,” Gendron said. “It’s a challenging environment, because you’re going to go down, but then you’re going to come back up, and the type of product we make does require very skilled labor and a lot of special machinery and specialty activity from our supply base that we need to retain.”
Nolletti at Conway Mackenzie said once production of the embattled 737 MAX restarts, many suppliers may face a range of new challenges beyond just labor.
“To me, managing the downside like the initial shock of losing the work is relatively easy,” Nolletti said. “Most companies survive the downturn and then really struggle to ramp back up because they don’t have the cash to do it. That’s what companies need to think through.”
Boeing reportedly said it will restart production before the planes are recertified, which is likely to be a complex process involving the Federal Aviation Administration (FAA) and other global regulators.
“Given the high profile nature of the problems with the MAX, each one of those agencies is going to want their own tests and to make sure they’re satisfied,” Nolletti said. “There are a lot of moving pieces to restart production that aren’t manufacturing related.”
Boeing estimates it will get clearance to fly the jet around midyear, according to a recent statement.
Last week, Boeing pilots were spotted flying the 737 MAX and testing new software, the latest indication the company may be getting close to an initial recertification flight, according to reports.
“Return to service is a pretty complex equation to solve for,” Nolletti said. “It’s as easy as just starting up the line again and it’s not just the FAA approving it. I think there are a lot of constituencies that have to feel comfortable with (the jet) before (Boeing can) just start production but also ramp back up to where it was at 52 a month.”
EDITOR’S NOTE: This story has been changed to correct the spelling of David Nolletti’s last name.