Financial Times Europe - 20.02.2020

Thursday20 February 2020 ★ FINANCIAL TIMES 13

COMPANIES

C L A I R E B U S H E Y— C H I C AG O

Rick Taylor had a meeting with his com-
pany’s management team last week to
discuss what to do with their growing
inventory of toilet seats.
Strictly speaking, the meeting was
about entire lavatories: toilet seats, but
also sinks, counters and the materialsto
make them ll. Mr Taylor is vice-presi-a
dent ofAltek, a contract manufacturer
in Washington state that is among the
680 companies supplying parts for Boe-
ing’s 737 Max, work that slowed last
April and stopped in January.
The production changes hurt Altek’s
sales and left it with raw materials and
half-built and finished products to store
around its factory. The meeting was
called to total up the costs of expensive
paint and adhesives that were due to
expire, so the company could pass that
information to Altek’s customer,Collins
Aerospace, a top-tier Boeing supplier.
Collins andBoeing ave treated smallh
suppliers well, Mr Taylor said, but prof-
itability has still been squeezed. “You’re
never happy when business is off 7 per
cent,” he said, referring to last year’s
sales, “because you’re carrying the same
overhead... It erodes that profit mar-
gin”.
Small manufacturers across the US
are hurting from the silencing of the 737
Max assembly line, a reality that could
haunt Boeing when theaircraft maker
restarts and increases production.
Boeing tried for months to keep pro-
duction going, albeit at reduced rates,
but it became clear the grounding of the
Max would drag on beyond a year. The
aircraft has been out of service since
March after the second of two fatal
crashes that killed 346 people in total,
triggering an overhaul of the plane’s

software and pilot training that are still
awaiting regulatory approval.
US industrial outputdeclined 0 basis 3
points in January from the previous
month, partly because of the shutdown,
and economists predict the crisis will
shave half a percentage point off gross
domestic product in 2020.
“We’re passing the pain all the way
through the supply chain,” saidPat
Moody, president ofKlinger IGI, a gas-
ket and seal maker with $10m in reve-
nue and operations in Oregon and Colo-
rado, which makes components for the
Max’s cabin systems.
The production halt had decreased
the company’s sales between 5 per cent
and 10 per cent, Mr Moody said, and he,
in turn, had decreased his raw material
orders, encouraging Klinger IGI’s sup-
pliers to seek other customers.
“We will lose purchasing power,
which will affect pricing,” he said.
“When Boeing wants to ramp this all
back up, we’ll be in a situation poten-
tially where the materials cost more.
Are we going to be able to increase pric-
ing to Boeing based on the reductions in
volume? I don’t know.”
Altek avoided laying off any of its 210
employees because executives immedi-
ately sought replacement work last
April when Boeing cut Max production
from 52 a month to 42, but other compa-
nies have cut jobs.Spirit AeroSystems,
the Wichita, Kansas company that
makes the Max’s fuselage,laid off 2,
in January. Component makerPrecision
Castparts aid off 150 this month in Ore-l
gon.
The threat for Boeing is that the
longer it idles its own machines and
workers, the greater the risk of long-
termdamage to the supply chain.
Suppliers that lay off employees now
may struggle to rehire them, consider-
ing the 3.6 per cent US unemployment
rate. Defence contractors were already
recruiting in Wichita for workers who

want to move to California or Florida,

Ron Epstein, Bank of America analyst,

pointed out.

Other worries: companies under pres-

sure may have to delay needed invest-

ments in machinery; those without

enough capital to weather the stoppage

couldclose entirely.

Large suppliers were better equipped

financially to handle the production

halt than small ones, yet a small sup-

plier may be just as critical to Boeing’s

operations, said Eric Bernardini, co-

head of the aerospace practice at

restructuring consultancy AlixPartners.

The aerospace industry employs more

than 525,000 people in the US, and 43

per cent work at companies with fewer

than 1,000 employees.

“You’re talking about the whole sup-

ply chain for commercial aerospace,” he

said. “The shorter [the halt] is, the bet-

ter it is. I cannot remember anything

even close happening in the industry for

the last 40 years.”

In 2009, Boeing was building 32 737s a

month. By 2019 that number had risen

to 52, and Boeing anticipated raising it

to 57 before the second plane crash

upended those plans.Airbus, too,lifted

production of single-aisle planes76 per

cent over the same period.

But aerospace suppliers, which tradi-

tionally enjoyed higher profits thanair-

craft makers, became stretched finan-

cially over the decade as they loaded up

on debt to invest in machinery, plants

and hiring. Mr Bernardini said “their

position on the 737 or [Airbus] A

programmes and the resulting predicta-

ble revenues were something they could

— literally — take to the bank.”

Boeing has said it expected aviation

regulators to clear the Max for flightin

mid-2020 utb that it would slowly

restart production before then in order

to limit the damage to the supply chain.

Greg Smith, chief financial officer, said

last week that it would take “a couple of

years” to reach a rate of 57 a month.

Most suppliers think production will

restart in March or April, according to a

recent note by Ken Hebert, an analyst at

Canaccord Genuity. He forecast an ini-

tial rate of fewer than 20 per month,

with the company attempting to reach

30 per month by December.

“The resumption of production ahead

of the recertification points to the

importance of starting up the line

sooner rather than later, to try and miti-

gate future risk,” Mr Hebert wrote. “As

Boeing looks to step up the rate in

2021-22, this is when other issues could

come to the fore.”

Boeing needed to “resynchronise” its

supply chain, Mr Bernardini said, and

“decisions made now by Tier 3 and 4

suppliers will affect Boeing’s 2021 pro-

duction rate”. Yet uncertainty makes

decision-making difficult for owners

and executives in the supply chain.

Mr Epstein t BofA echoed the senti-a

ment. “We were talking to a little

supplier this morning and they said in

the last three months they were given

seven different production scenarios,”

he said. “How do you plan for that?”

Larry Waltz, president ofWaltz Bros

machine shop in Illinois, is another sup-

plier having to navigate that uncer-

tainty. The business makes rod pistons

forTriumph Group, another key Boeing

supplier, and Triumph asked it to halt

shipments for now, possibly resuming

in June.

Waltz is “holding the whole bag”, Mr

Waltz said, on costs for those compo-

nents and work in progress.

Meanwhile, Mr Taylor at Altek

and Mr Moody at Klinger IGI said they

were trying to make the best of the

situation by diversifying their custom-

ers, and in the case of Klinger IGI, to

make their manufacturing processes

leaner.

That dovetails with the counsel Mr

Bernardini gave to AlixPartners’ clients,

namely to use the shutdown as an

opportunity to improve operations. Yet

the advice sometimes prompts a wry

response: “They answer, ‘That’s very

nice, but I need to survive first’.”

Boeing’s 737 Max woes plague small suppliers

Grounded aircraft leaves businesses facing capital squeezes, delayed investment and the threat of long-term damage

Sources: FactSet; the Wichita Eagle; Boeing; FT research

Spirit AeroSystems

Supplies/parts: Fuselage, wing, exterior

casings that hold the engines

The company laid o  in January

and began oering buyouts to managers

and salaried employees this month

Senior

Supplies/parts: Precision-machined

airframes, system components and

precision tubing

Aerospace revenue in  will fall 

from , which will be released on

March , and margins will shrink as well

 profit margin growth will be hurt

partly because of the Max grounding,

which costs the company m per month

Meggitt

Supplies/parts: Sensing systems for

engine temperature monitoring, control

systems

GE (JV with Safran)

Supplies/parts: Leap engine

‘We were delivering to Boeing at normal

rates through . We're going to see

our shipment rates fall to half the 

rate in  ... which in turn will challenge

us on the cost side’

Larry Culp CEO

Boeing troubles mean uncertainty for supplier earnings

United Technologies (UTC)

Supplies/parts: Avionics, cabin

components including seats and lighting,

and mechanical systems such as wheels

and brakes

‘Operating profit for Collins Aerospace will

be down m to m’

Neil Mitchill Acting chief financial oicer

TA N YA P OW L E Y
T R A N S P O RT C O R R E S P O N D E N T

Qatar Airways as raised its holdingh ni
British Airways wnero IAG o 25.1 pert
cent asit ramps up its strategy of
investinginothercarriers.

The move to increase its stake from 21.
per centcomesweeks after IAG, which
also ownsIberia nda Aer Lingus,
removed an almostyear-long cap no
non-EU investments.
The Gulf carrier said the increase
showed its “continued support of IAG
and its strategy”, with chief executive
Akbar Al Baker oting that its invest-n

ment in the Europeangroup had been

“highly successful” to date.

Mr Al Baker hassaid his strategy is to

invest in profitable airlines —“gold-

smiths”, as he calls them, rather than

“scrap dealers”.

Themove comes a month beforeWil-

lie Walsh, IAG chief executive, is due to

step downand be replaced by Iberia

chief executiveLuis Gallego.

Qatar Airways has been busybuying

shareholdings in other carriers to help

boost traffic through its Doha hub, a

strategy that has become more pressing

after it was hitby a blockade from Saudi,

Emirati and Bahraini airspace.

This month itsaid it was in talks to

buy a49 per cent stakeinRwandAir,

weeks after it agreed to buy a 60 per cent

stake inRwanda’sBugeseraairport.

Qatar Airways has acquired holdings

inCathay Pacific,China Southern nda

Latam. Mr Al Baker hasexpressed inter-

est in increasing its holding in Latam sa

well as buying a stake inIndiGo.

The carrierowns 49 per cent ofAir

Italy, which this month said it would be

put into liquidation.

IAG hares have risen about 50 pers

centin six monthsamid lower fuel

prices, diminishing Brexit uncertainty

and an improved outlook for capacity.

Airlines

Qataris own a quarter of IAG after lifting stake

‘I cannot remember

anything even close

happening in the industry

for the last 40 years’

Boeing 737 Max fallout

Employees and wages in US aerospace by size of company (Q1 2019)

Source: US Bureau of Labor Statistics

525.

224.

157.

101.

4 5.

23.

9.

Employment (’000) Number

of employees

Wages ($bn)

16.

5.

3.

2.

0.

0.

0.

Under 30

Under 50

Under 100

Under 250

Under 500

Under 1,

All

Altek’s Rick Taylor

says the parts

supplier is being

treated well by

Boeing but profits

are suffering

An Altek worker in Washington state prepares 737 Max toilet components for painting. The business is among 680 parts suppliers to the jet Young Kwak/FT—

FEBRUARY 20 2020 Section:Companies Time: 2/202019/ - 17:22 User:cathy.pryor Page Name:CONEWS2, Part,Page,Edition:USA, 13, 1