fbpx

Integrated Tool Purchasing from Select Partners available now!

How will Boeing’s suspension of 737 Max production impact Machinists? (Updated after Q4 2019 Conference Call on 1/29/2020)

Now that the US’ largest aerospace company has stopped production of its biggest selling aircraft altogether, it’s important to evaluate just how big an impact this could have on machinists and the US manufacturing sector.

January 29, 2020
This morning new Boeing CEO Dave Calhoun and Chief Financial Officer Greg Smith hosted Boeing’s Q4 2019 conference call. But rather than the usual emphasis on percentage gains or decelerating profits, the call focused on something far graver: the company’s future, the ability for it and its supply chain to remain financially sound despite the grievous injury to its star player and bestselling narrow-body plane, the 737 Max.

Potential Impact of 737 MAX Production Halt on US Machinists

Before we discuss the call itself, it is important to know what exactly is at stake.

Boeing is the largest US aerospace company, and aerospace is one of the largest manufacturing subsectors.

Just how many suppliers and how many dollars are tied to 737 Max production? Is the entire production line at risk, and for how long? We’ll start there and work our way through Mr. Calhoun and Smith’s statements, so you gain a better idea of what to expect in 2020 as well as potential actions aerospace suppliers can take to control the damage.

How We Came Here: Brief recap of 737 MAX production halt

After Lion Air Flight 610 crashed on October 29, 2018, investigators suspected that the MAX’s new Maneuvering Characteristics Augmentation System (MCAS) might be to blame, possibly due to the fact that flight manuals and crew training had not included MCAS preparation. But even after a flight recovery procedure was sent to 737 MAX crews around the world, on March 10, 2019 another flight, Ethiopian Airlines Flight 302, also malfunctioned and crashed even while pilots were attempting to perform the recommended procedure.

The next day aviation administrations around the world began to ground the MAX, and Boeing stopped delivering the planes to customers. Production continued as normal, however, as the company continued to believe/insist that the MAX would soon be safe to fly and pass regulatory approval to get back in the air.

As 2019 came to an end without a clear path to approval, Boeing was forced to make some difficult decisions. For one, it ousted former CEO Dennis Muilenburg for mishandling the crisis. And second, it slowed production. Then it halted production altogether in January 2020, pending regulatory approval. New CEO Dave Calhoun restated the estimate for approval in the Q4 quarterly earnings call: “As we mentioned last week, we’re currently estimating that the ungrounding of the 737 max will begin mid 2020.”

With production halted how many aerospace employees are affected, and what percentage of US machinists?

“…the 737 MAX accounts for more than 75% of Boeing’s airplane production…16.2% of total US end-use aerospace market…”

Until December 2019, Boeing was producing 52 737 MAX planes per month. At this rate the plane was by far Boeing’s most popular model, with the other big-name 787 being produced at a rate of just 10 or 12 per month. Boeing built and delivered 806 planes total in 2018 meaning the 737 MAX accounts for more than 75% of Boeing’s airplane production.

Each plane is hugely expensive, retailing at between $99.7 – $135 million, so 52 planes per month adds up to approximately $76.1 Billion annually. That isn’t quite Apple’s annual revenues, but it is 16.2% of the total US end-use aerospace market ($471 Billion total, according to AIA 2018). That means approximately 3 out of 20 aerospace FTEs work on 737 MAX parts, about 262,000 workers. The total impact is spread out among more workers than that who only work part-time on 737 MAX production, but you can see how this impact has the potential to negatively impact machine shops across the country.

However, the company’s actions and words give us reason to be optimistic that we will make it through. Let’s look at how Boeing is planning to deal with the fallout.

How much of that 16.2% aerospace will be destroyed in 2020 based on statements made in the Q4 2019 Earnings Call?

Boeing knows better than anyone what is at stake. They are aware that production does not stop or start quickly. If they were to stop paying their suppliers today, then production would be crippled for years.

During the quarterly earnings call both CEO and CFO made it clear that the company looks at the incident as a bad fall rather than a crippling accident, which makes their supply chain critically important in the long run. “We’ll keep taking steps to manage our supply chain health and maintain workforce expertise across the enterprise. So that in particular with respect to the 737 MAX we’ll be ready to restart production, increase rate safely, smartly, disciplined and with the highest standards of quality.”

CFO Greg Smith leaned on the company backlog to explain their confidence. “Our 737 program has a backlog of approximately 4,400 aircraft,” he said, “And we continue to see these new airplanes creating capacity for growth and provide required replacement for older, less efficient aircraft.”

If we compare 4,400 backorders to the 737 MAX production of 52 planes per month, we can certainly understand the confidence. That is enough demand to last Boeing for years after they return to full-scale production.

So what exactly will the production schedule look like? Here is the scenario they foresee as of today: “We’ve assumed that the regulatory approval for the 737 MAX will begin in mid 2020….We’ve assumed that we will resume 737 max aircraft production at low rates in 2020 as timing and conditions of return to service are better understood. Then we expect to gradually increase previously planned production rates over the next few years.”

What can machine shops in the aerospace supply chain do to help ensure they stay afloat?

Given that projected scenario, production will be hit hardest in 2020 when less than half of the normal production schedule will be built. However, Boeing has set aside funds to help its suppliers: “…this includes costs related to our decision to maintain the 737 production infrastructure including labor during the suspension and low rate production. As you may recall, this decision is part of our efforts to sustain the games in the production system and supply chain quality and health made over the last several months. We currently estimate these abnormal costs to be approximately $4 billion.”

If machine shops can walk away with a morale of this tragic story, then it is this: communicate.

Even if $4 billion is a low estimate, it is also reassuring that the estimate is not capped. When asked later about the supply chain and specifically who would be compensated, Mr. Smith replied, “I would tell you it’s a one-on-one engagement. And not just them but their suppliers. And so I would say kind of tiered down suppliers and understanding the impact that this is having on them. And then what levers do we all have in order to help get them through this, and, again, with the objective, we want to come out of this healthier, quite frankly.”

If machine shops can walk away with a morale of this tragic story, then it is this: communicate. If you are being impacted by reduced demand, then discuss the issue with your customer, so that they can pass the information down the supply chain. That is the best way to receive help where it is needed.

While it is clear that this catastrophe will negatively impact machinists across the US, Boeing’s response — at this point — is cause for some optimism. But though the first impulse might be just to “grit and bear it,” the best thing, for machine shops, for Boeing, and for the economy, is to talk.

Appendix: Facts and estimates regarding 737 MAX economic impact

  • The 737 Max Series accounts for 16.2% of total end-use aerospace market in the US or $76.1 Billion (est based on monthly production and cost per plane) out of a $471 Billion end-use market; supply chain feeding this market is $459 Billion (AIA 2018)
  • Aerospace employs 2% of total workforce and 20% of US manufacturing workforce
  • Of the industry’s total end use employment of 881,575, commercial aircraft systems employs 573,300 workers while defense employs 370,084
  • 1.67 million workers in the total aerospace supply chain
  • Assuming supply chain workers are split similarly on defense vs. commercial aerospace, then approximately 1.08 million workers in supply chain are devoted to commercial aerospace for a total of 1.65 million employed on commercial aerospace work
  • 16.2% of that workforce is 268,000 workers

MachiningCloud is a one-stop, industry-wide resource that gives you the ability to fast-track the process of creating tool assemblies. Our application reduces the time it takes to find, select, and assemble tools by 75% or more, so try MachiningCloud today. It’s easy to get started. 

Keep up on MachiningCloud

Sign up for product info and news

  • Your information will be handled in accordance with the MachiningCloud Privacy Policy.

  • This field is for validation purposes and should be left unchanged.