Manufacturing Problem at Boeing's Supplier Causes Delivery Delays

Aerospace and defense company, Boeing, is expected to face delivery delays due to a fresh manufacturing problem at one of its suppliers, according to Wall Street analysts. Boeing and its supplier, Spirit AeroSystems Holdings, recently revealed an issue related to poor workmanship in one of Boeing's 737 Max models. It is important to note that this quality problem does not pose a flight-safety risk.

As a result of this announcement, Boeing's shares dropped nearly 3%, potentially marking their lowest closing price in a month. Similarly, shares of Spirit AeroSystems plummeted 17%, possibly ending the day at their lowest closing price since November 2020. It's worth mentioning that a previous problem with the 737 Max had emerged in April.

The specific problem encountered this time involves improperly drilled holes for fasteners in the bulkhead of the 737 Max 8 fuselages. This has caused the holes to be larger and misaligned. However, it is essential to note that the Max 9 and Max 10 models have different bulkhead designs and are not affected by this issue.

With airlines worldwide looking for fuel-efficient jets and order books at Boeing and its European competitor, Airbus SE, extending years into the future, the demand for new planes remains high. During the latest Paris air show, order books even reached into the next decade.

Despite the manufacturing problem, Boeing plans to continue production as it ramps up to 38 jets per month. However, Jefferies analyst Sheila Kahyaoglu suggests that delays are likely to persist in the near term, further prolonging the time it takes for the production rate to stabilize at 38 jets per month.

Boeing Faces Challenges with Max 8 Deliveries

Boeing is experiencing setbacks in its delivery schedule for the Max 8 aircraft, resulting in significant financial implications. According to industry expert Kahyaoglu, there could be a one-month delay in deliveries, which is estimated to have an impact of approximately $300 million on the company's free cash flow.

Analysts, including Jason Gursky from Citi, have expressed concerns about Boeing's delivery guidance for the year. Gursky points out that the necessary fixes will likely take several weeks, which adds pressure to Boeing's delivery forecast. He anticipates that further updates regarding this issue will be provided by management at an investor conference in early September.

However, despite these challenges, analysts such as Douglas Harned from Bernstein maintain a positive view on Boeing. Harned believes that even if there are minor reductions in deliveries for 2023, it should not significantly impact their overall perspective. On the other hand, Harned acknowledges that Boeing supplier Spirit AeroSystems needs to address its operational challenges promptly. With additional costs expected, Spirit's margins and free cash flow outlook may face further strain.

Ken Herbert at RBC Capital agrees that the extent of the costs related to these setbacks is still being evaluated. Regardless, he expects them to add more pressure to Spirit's margins.

Boeing's stock has performed well this year, with a gain of 16% compared to a 15% advance for the S&P 500 SPX index. In contrast, Spirit AeroSystems' stock has dropped 35% during the same period.

Overall, as Boeing tackles these obstacles, investors and industry experts closely watch for updates regarding the Max 8 deliveries and the impact on both companies' financial performance.

Additional Reading

• Boeing supplier Spirit Aero’s workers approve new contract