Acknowledging that it will take longer to get the 737 Max back in the air, Boeing plans to suspend production of its marquee jet next month in a decision that could send ripples across the entire U.S. economy.
The company announced Monday that it would stop building the Max jets starting in January, with no specific date for when the Renton, Washington plant will resume production.
The ramifications are likely to extend beyond the factory floor and across both the aviation and manufacturing sectors. The decision could affect the country's trade balance.
“This is the country’s largest single manufactured export product,” said Richard Aboulafia, an aircraft industry analyst at the Teal Group.
Southwest Airlines, which was counting on the 737 Max to update its fleet, pushed back any hope of restoring the plane to service in five weeks, to April. American Airlines did the same last week.
Southwest said Tuesday that it is trying to minimize travel disruptions and apologized to customers for any inconvenience.
Shares of major manufacturers that supply Boeing with critical elements of the 737 Max fell Tuesday, demonstrating the wide effects of Boeing's announcement. Spirit AeroSystems was down nearly 2% while General Electric, which makes the Max engines in a joint venture, was off slightly. Shares in French supplier Safran were down 3.4% in Paris. Meanwhile, shares of Boeing's main rival Airbus were up about 1.8%.
The 737 Max is Boeing’s most important jet, but it has been grounded since March after crashes in Indonesia and Ethiopia killed a total of 346 people. Investigators have found that flight-control software designed to stop an aerodynamic stall was a major factor in the crashes, and Boeing is updating the software to make it less aggressive. But regulators have yet to approve the changes.
The company said it will not lay off any of the factory's 12,000 workers “at this time," and many could be diverted to plants elsewhere in the Seattle region. Others could be assigned to work on the 400 jets that Boeing has built since the Max was grounded in March but couldn't be delivered.
The FAA told the company last week that it had unrealistic expectations for getting the plane back into service. Boeing has missed several estimates for the plane's return date.
The agency has not given a specific date for approving the jet's return, but FAA Administrator Stephen Dickson has said it will be done on the agency's timetable, not Boeing's.
The suspension of production will likely send a ripple effect through 900 companies in the U.S. and around the world that supply parts for the Max. For instance, an aircraft parts maker that produces Max fuselages already has dozens of them in storage, and is now trying to figure out what to do next.
Kansas-based Spirit AeroSystems, which is the largest employer in the state’s biggest city, Witchita, said in a statement that it was working with customers to determine what Boeing's announcement means.
“As decisions are made on how to best mitigate this additional impact, we will communicate any new information to employees and other stakeholders," Spirit spokesman Keturah Austin said in an email.
He said the company makes 70% of the fuselages for the 737 Max and employs around 13,500 people in Wichita.
Spirit has continued to churn out fuselages even as Boeing slowed production and has 90 of them stored on a ramp adjacent to McConnell Air Force Base as of Friday. Spirit CEO Tom Gentile said in October during the Kansas Economic Outlook Conference that it would take a long time to come back if production were to be reduced.
The Max program represents about half of Spirit’s revenue, Gentile said.
Even if no employees are laid off at Boeing, ceasing production will still cut into the nation's economic output because of Boeing's huge footprint in the manufacturing sector. Through October, the U.S. aerospace industry’s factory output has fallen 17% compared to the same period last year, to $106.4 billion, partly due to previous 737 Max production cuts.
The shutdown will probably hinder the economy in the coming months and could worsen the nation’s trade balance, Aboulafia said.
Boeing said it will determine later when production can resume, based largely on approval from government regulators.
“We believe this decision is least disruptive to maintaining long-term production system and supply chain health,” the company said.
Boeing will likely face some tough negotiations with suppliers about what level of payments it will provide during the production hiatus. The company will want to avoid any layoffs or shutdowns by suppliers in order to quickly restart production once its safety is approved.
“It's really in Boeing’s interest to identify who needs payments to keep workers and capabilities in place for when the ramp-up eventually happens,” Aboulafia said.
Even before the production halt, airlines were delaying the dates for when they expected the Max to fly passengers. Last week, American Airlines removed the Max from its schedule until April 7, a month later than previously announced. Southwest Airlines' pilot's union also does not expect the Max to fly until at least April.
Jeff Windau, an industrial analyst for Edward Jones, said the 400 planes that Boeing has built but cannot deliver were likely a major factor in the decision to halt production. This comes “both in consideration of storage space and how efficiently can you get them delivered once the plane is ready to return to service,” he said.
Boeing has made progress on some FAA requirements to get the Max back in service, Windau said, but he still views the production halt as a negative for the company.
“The flight control system is complex, and there are still unknowns with the timing of regulatory reviews and approvals,” Windau wrote in an email. He also wrote that it may be difficult to restart an idled factory once production ramps back up.
Boeing already is having cash-flow issues. In October, the company reported that free cash flow went from $4.1 billion a year ago to negative $2.9 billion in the third quarter, worse than analysts had expected.
The Chicago-based company also faces about 150 lawsuits from the relatives of crash victims, and it has set up a $100 million fund to aid families.
The 737 Max crisis has helped Boeing's main competitor, Europe's Airbus, which saw deliveries surge 28% during the first half of the year. Boeing deliveries fell 37%.
Airbus declined to comment Tuesday but has said in the past that Boeing's crashes have not affected its sales strategy. Its shares were steady in Paris.
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