By Tracy Rucinski and Eric M. Johnson
CHICAGO/SEATTLE (Reuters) – Boeing Co’s
Equipment suppliers like United Technologies
But with demand slumping, airlines are canceling flights, idling jets and trying to negotiate shorter-term maintenance programs in an effort to preserve their own cash.
“Our business model involves long cycles,” said Philippe Petitcolin, chief executive of France’s Safran
“We don’t earn money on the first installation on a new plane but on the life of our products over 20 years. If planes don’t fly, we don’t sell spare parts and our products don’t create a need for maintenance,” he told French reporters.
Safran co-produces engines for the 737 MAX alongside General Electric
Many parts have to be repaired or replaced at set intervals, driven by the number of flights since the last regular check.
Suppliers that have already slowed a significant slice of their manufacturing because of a Boeing 737 MAX production freeze that began in January are especially exposed.
“When it starts going down, it’s usually faster than you think,” said Eric Bernardini, co-head of aerospace, defense and aviation at consultants AlixPartners.
Bank of America said in a research note on Friday it estimates that 175 MAX aircraft will likely be cancelled between now and its estimated return to service in October. Boeing shares closed up 10% on Friday.
So far this year the Chicago firm is advising more aerospace companies on cash management than in all of 2019, he said.
Financial distress rippling through the airline industry on Friday, as the epidemic hits demand and prompts travel restrictions, is more bad news for suppliers.
The link between aftermarkets and airline profits emerged in the 2009 financial crisis when airlines carried out maintenance hand-to-mouth, replacing just the parts needed to keep planes safely and legally flying for another 6-12 months rather than the six years guaranteed by a full overhaul, Petitcolin said.
A Boeing spokesman said it is in frequent contact with suppliers to deal with disruption through contingency plans.
SILVER LINING
United Technologies unit Collins Aerospace, which makes avionics, seating and lighting, has already warned adjusted operating profit would be hit by $550 million to $600 million this year, largely due to the MAX.
If the coronavirus crisis persists for another three months, companies will have to reassess.
“The uncertainty is so high, you can’t just say I have a plan and I’m good for the next six months, you have to revisit this on a weekly and monthly basis. From what you had forecast, is it getting worse or is it getting better?” Bernardini said.
The crisis is not without a silver lining.
Suppliers have been grappling with efforts by Boeing and Airbus
Traditionally jetmakers left the high-margin servicing business to parts suppliers and in return got attractive prices on development and parts supplied with aircraft when brand-new.
The drive by manufacturers to shift the business model was due to receive a decisive test with the arrival of a mid-sized aircraft being pondered by Boeing, with suppliers under pressure to grant Boeing a bigger share of the post-sales market.
Boeing placed the project on ice in January due to the MAX crisis and analysts say coronavirus turmoil is likely to delay it further, though the tug of war between planemakers and their suppliers over aftermarket profits has merely been postponed.
“Manufacturers want cheap parts up-front and now they want aftermarket business. They can’t have both,” one supplier said.
(Reporting by Tracy Rucinski, Eric M. Johnson, Tim Hepher, and Ankit Ajmera in Bangalore; additional reporting by David Shepardson; Writing by Tracy Rucinski and Tim Hepher; Editing by Marguerita Choy)
