Via Financial Times

The stock price for Spirit AeroSystems, maker of the fuselage for Boeing’s troubled 737 Max, fell 14 per cent on Tuesday after it revealed the plane-maker significantly cut its order for the year.

The Wichita, Kansas, supplier said Boeing instructed in a June 19 letter that for 2020, Spirit should make 72 aeroplane bodies with accompanying parts, instead of 125.

Boeing had reduced its order with Spirit twice this year already. In February, the Chicago company said it wanted 216 jet bodies. Last month it lowered the target to 125.

“Boeing indicates in the June 19 letter that the reduction is due to Covid-19’s impact and accumulated inventory of Spirit’s [Boeing 737] products,” the company said in a regulatory filing.

The production cut could force Spirit to breach the terms of its credit agreement in the fourth quarter, the company said. It is talking to lenders to amend the terms to avoid defaulting on its debt, which totalled $3.1bn at the end of the first quarter.

Spirit’s stock traded down 14.2 per cent on Tuesday. Boeing’s stock fell 1.5 per cent, even as the S&P 500 rose more than 1 per cent.

Boeing said that it was “working closely with Spirit to adjust delivery schedules and rate profiles as appropriate” during the aerospace industry’s downturn.

Boeing has been trying to return the 737 Max to the skies since it was grounded in March 2019 following two fatal crashes that killed a combined 346 people. Overly optimistic assessments irritated US aviation regulators, leading to the ouster of former chief executive Dennis Muilenburg in December.

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David Calhoun, his replacement, said during Boeing’s first-quarter earnings call on April 29 that the company expected to resume Max deliveries to customers in the third quarter.

Boeing restarted Max production in May “at a low rate”, with the goal of building 31 Max jets per month in 2021.

But the company already has 450 Max planes in storage. Adding to that number when airlines are reluctant to take delivery of new planes while the pandemic hammers their own revenues increases Boeing’s costs to maintain the grounded fleet.

Boeing’s latest target for Spirit includes 35 jet bodies the supplier has already shipped to the manufacturer’s factory in Washington, leaving it just 37 more to make for the year, or about six per month. Those jet bodies are used to build both the Max and the P-8, a military aircraft used for anti-submarine patrols.

Boeing builds the P-8 at a rate of 1.5 per month, so the remaining fuselages will be used for the Max. Before the grounding, Boeing was making 52 Max aircraft per month.

“The reality of Boeing operating the 737 Max production line at a single-digit rate for the balance of 2020 tells the whole story,” wrote Peter Arment, RW Baird & Co analyst, in a note.

The airline industry was “basically insolvent at current traffic levels, demand is not expected to be back at pre-Covid-19 levels until 2023, and Boeing has 450 737 Max jets already built that have yet to be delivered”, he added. “737 Max production is going to be much lower for a longer period, which warrants caution on the Boeing stock.”

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