2021 will be driven by 787 and 737 deliveries as Boeing plans to unwind inventory and deliver from its production lines. Boeing’s plan of action promises to ensure stability within its supply chain.
As the Federal Aviation Administration (FAA) cleared Boeing’s 737 Max to fly passengers after a nearly two-year ban in November 2020, Boeing’s supply chain sprung back into action in 2021. The FAA’s decision allowed the company to begin customer deliveries in December 2020, as revealed by the company executives on the manufacturer’s earnings callOpens a new window last week.
The FAA had grounded the aircraft in 2019 due to two fatal crashes in 2018 and 2019 and claimed 346 lives. Boeing responded to these events by slowing down its supply chain and cutting down its production levels. The production for the aircraft was slowed down in April 2019. The number of the manufactured aircraft went down from 52 per month to 42 per month. This led to the accumulation of planes in storage post the FAA proceeding.
The manufacturer handled the grounding situation as it relied on multiple storage locations for maintaining its inventory of aircraft, which further depended on the aircraft model type – implying those having a 117-foot wingspan and 120-feet length would need one particular storage. The storage locations included Boeing Field in Renton, Washington; Moses Lake, Washington; and Boeing’s San Antonio maintenance facility. Boeing has a massive global supply chain, which meant that hundreds of suppliers were affected by this inventory backup and production cutback due to the grounding.
Besides, in 2019, many companies involved in Boeing’s supply chain sawOpens a new window their stock price drop significantly as Boeing announced the halt in production of the 737 Max.
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Suppliers Bear the Brunt
Boeing’s largest supplier, Spirit AeroSystems, lowered its production levels drastically as it delivered only 15 737 shipsets in Q3 2020. This was a significant drop in number as the supplier had delivered 154 shipsets during the same quarter in 2019, according to its earnings presentationOpens a new window posted in November 2020.
As we start 2021, Spirit AeroSystems currently has a backlog of 128 shipsets for the 737 model. The supplier plans to reduce this backlog before matching Boeing’s production rate.Â
“We will lag Boeing’s production rates by about five units per month and plan to decrease the inventory of shipsets to a permanent buffer of 20 to 25 units,†Spirit AeroSystems CEO Tom Gentile said on the company’s latest earnings call.
The downturn in demand impacted the supplier massively as Spirit AeroSystems had to cut 8,000 employees from its commercial aviation programs. The number accounted for a 44% reduction in supplier’s actual strength and eventually led to the closing down of one factory location.
Recently, the supplier announced the McAlester, Oklahoma site’s closure, which facilitates 3-axis machining and assembly for Boeing programs. Due to the closure, the company plans to shift from McAlesterto other supplier locations like Tulsa and Wichita facilities.
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Boeing Clears the 737 Inventory Backlog
Boeing has now begun clearing the inventory backlog for its 737 and announced another production backlog. To add to the problems, Boeing has been dealing with delivery delays for its 787 models. The inspections are underway and could take a few more weeks.Â
Boeing is implementing changes in the production process to ensure that the newly built airplanes comply with their unique specifications and do not require further inspection. The company adopted this approach to eliminate rework from the production system and position them on a stronger foundation when the market recovers.
The company plans to resume its 787 deliveries to the customers soon, after finishing the groundwork. However, with the current situation, the company expects 787 deliveries to resume later this quarter, i.e., in Q1 2021.
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Boeing’s Future Plans
“Last quarter, we shared with you that we had about 450 737 MAX aircraft built and stored in inventory,†Boeing chief financial officer Greg Smith saidOpens a new window . “With deliveries of 27 aircraft in December and now 40 to date, this number has been reduced to approximately 410 aircraft in inventory.â€
With the pandemic decreasing the demand for new aircraft, the company’s priority remains to deliver finished inventory. Once the company gains control of the inventory backlog, it plans to increase the production. It expects to increase 737 Max production to 31 per month by 2022, after manufacturing the aircraft at a substantially lower rate in Q4 2020.
“We will continue to assess the delivery profile for 2021 as it will help inform our 737 production ramp plan, and we will continue to communicate transparently with our supply chain to ensure stabilityâ€, CEO David Calhoun said on the Q4 2020 earnings conference call.
Also, Boeing continues to investOpens a new window in carriers critical to their business, focusing on design practices and manufacturing technology that will position Boeing for a better future. The company is optimistic about future air travel and does not want to lose sight of the future and innovations that will reshape air travel in the coming years.
The aircraft company also announcedOpens a new window that it will provide a one-time stock grant to its employees that will reap benefits in the next three years as the market recovers and the company’s business grows.
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In conclusion
At the end of Q4 2020, Boeing had approximately 3,300 aircraft in its 737 backlog. As we head into 2021, the market continues to stay dynamic. Boeing may need to closely monitor the market situation to balance supply and demand across its 737 programs. With proper planning, the company can pass through these unprecedented and uncertain times, and prepare itself to support its customers when air travel returns to normalcy.
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