By Doug Cameron
Companies that make parts for Boeing Co. and Airbus SE jets, and
provide airlines with everything from engine spares to window
shades, are shrinking rapidly in the wake of the pandemic-driven
The Precision Castparts unit of Berkshire Hathaway Inc. this
week became the latest supplier to flag huge job cuts as the maker
of aircraft-engine parts said it had shed 10,000 staff -- 30% of
its workforce -- since the start of the year.
Warren Buffett's investment vehicle took a $10 billion
write-down on its 2015 acquisition, highlighting how the crisis
gripping the airline industry is expected to linger. The world's
two biggest plane makers signaled to suppliers that they plan to
lower jet production for several years.
U.S. aerospace manufacturers have already shed more than 100,000
jobs since the start of the year, according to Labor Department
data and regulatory filings, with the pandemic adding to existing
pressures from the sharply reduced production of the still-grounded
Boeing 737 MAX jet. Sector employment had climbed to almost a
million at the end of last year and fell to 925,000 by June 30. Job
cuts have continued to mount in recent weeks.
The biggest supplier on the MAX program, Spirit AeroSystems
Holdings Inc., is cutting 8,000 jobs, around 40% of its commercial
aerospace workforce. General Electric Co. is shedding 13,000 from
its aviation unit, and other big suppliers such as Raytheon
Technologies Corp., Howmet Aerospace Inc. and France's Safran SA
have disclosed cuts in recent weeks.
"We have received more production schedule changes this year
than I think we've seen in the last five years," said Spirit Chief
Financial Officer Mark Suchinski on a recent earnings call.
In addition to the MAX, the supply chain is taking other hits.
The overall production of new jets has declined, and the big drop
in flying -- a third of the global fleet remains grounded -- has
reduced demand for spares and improvements such as new seats. The
reduced workload comes as companies had invested in new equipment
and hiring to support higher jet production and the steady rise in
airline passengers, only for the pandemic to render their business
Boeing sits atop a chain of more than 16,000 suppliers, many
shared with Airbus and defense contractors that produce parts such
as fasteners and circuit boards.
Chicago-based Boeing is forecast to produce around 240 planes
this year, two-thirds lower than in 2019, and has twice this year
reduced the guidance given to suppliers for output of the MAX. It
delivered just four jetliners in July and is producing only a dozen
MAX aircraft a month, down two-thirds from a year ago. Airbus is
cutting production by a third.
"We've got to size the business and take the tough actions,"
Boeing Chief Financial Officer Greg Smith said in an interview last
Before the pandemic, Boeing was supporting smaller suppliers by
ordering more parts than it needed and stockpiling them ahead of a
planned increase in MAX production. That acceleration has failed to
materialize. While Boeing is paying suppliers more quickly, it has
slowed orders. Raytheon won't start shipping parts for new MAX jets
until the second half of next year.
"Production rate downturns are more traumatic than people
think," said Kevin Michaels, managing director of consultant
AeroDynamic Advisory LLC, which works with suppliers. He expects
the new production rates outlined by Boeing and Airbus to start
forcing some smaller suppliers later this year to cut back, or even
exit commercial aerospace in favor of more military work.
Aerospace suppliers typically provide parts and materials for
commercial and defense customers, and the impact of the airlines
crisis has been mitigated in part by the Pentagon. It used federal
stimulus funding to send cash to smaller companies by accelerating
contracts and payments to big defense contractors.
The most immediate financial challenge for suppliers is on the
so-called aftermarket, sales of spares and maintenance services to
airlines that are typically the most profitable business for
aerospace companies. New parts are often sold at cost or at a loss,
with companies recouping their investment on replacement sales over
While flying levels have recovered from their low in April, the
recovery remains sporadic, and carriers have slashed spending on
aftermarket purchases. Global airline traffic remains around 50%
below prepandemic levels, according to data provider OAG Aviation
Worldwide Ltd. United Airlines Holdings Inc. said its maintenance
spending in the June quarter was down more than 70% from a year
That has translated into fewer visits to engine-repair shops as
planes sit idle, while airlines have also canceled or deferred
plans to refresh older planes. Safran, which coproduces engines for
the MAX with GE and is one of the biggest players in the
aftermarket, said its commercial sales fell 66% last quarter.
"We have a concern regarding the future of some of our suppliers
and subcontractors because they are in crisis, too," Safran Chief
Executive Philippe Petitcolin said on an investor call last
France has unveiled an aid package for its aerospace suppliers,
and the looming challenge for U.S. companies has triggered calls
from the Aerospace Industries Association for more federal aid to
stem the job cuts and sustain an industrial base that also supports
A $17 billion Treasury fund originally aimed at providing Boeing
and GE with funds to flow down to smaller suppliers has failed to
attract much interest from the industry, with companies finding the
proposed terms too onerous.
Write to Doug Cameron at firstname.lastname@example.org
(END) Dow Jones Newswires
August 12, 2020 08:14 ET (12:14 GMT)
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