Why are Boeing and its suppliers falling today?

What happened

Actions of Boeing (NYSE: BA) Tuesday morning, it was down 6% after the company lost a couple of large orders for its 737 MAX aircraft. Some of Boeing’s main suppliers were worse off, with shares of Triumph group (NYSE: TGI) and Spirit AeroSystems (NYSE: SPR) down 8% each as of 11:30 am EDT.

And that

The commercial aerospace sector has been hit hard by the COVID-19 pandemic, and airlines responded to falling demand by landing planes and slowing deliveries. But for Boeing and its suppliers, the problems started long before the pandemic. Boeing’s 737 MAX has been in operation since March 2019 after a couple of fatal accidents.

Image source: Boeing.

The 737 MAX remains problematic and provides an excuse for some of Boeing’s customers to withdraw from future aircraft purchase commitments. Norwegian Air on Tuesday reportedly canceled an order for 92 Boeing 737 MAX aircraft and said it would sue Boeing, demanding compensation for the aircraft-related problems.

Furthermore, the aircraft leasing company BOC Aviation will allegedly cancel 30,737 MAX aircraft from its order.

Cancellations are only a small part of Boeing’s order book of more than 4,000 marks, but they continue a negative trend that has caused Boeing to report negative net orders in recent months.

Boeing is making progress to re-certify the 737 MAX, but even when the plane is allowed to fly again, the cancellations are a reminder that there is likely to be lukewarm demand for the foreseeable future.

Now what

Boeing built around 400 737 MAX aircraft during grounding, and will likely have difficulty removing that inventory from its lots, even when the aircraft is cleared for commercial use. Boeing has already warned Spirit to topple production targets for 2020, and further action may be necessary.

Boeing topped $ 4.7 billion in the first quarter, in part because of the 737 MAX, and the company desperately needs to make deliveries on the plane to increase cash flow. Given its excess inventory and the continuing steady stream of write-offs, Boeing is likely to remain conservative on production rates until 2021 and perhaps beyond.

That’s bad news for the 737 MAX, an aircraft that at launch was expected to be one of the best-selling commercial aircraft of all time. Boeing is likely to manufacture and sell the plane in the coming years, but the reward for the aerospace giant and its supply chain will never reach levels once anticipated.

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