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Boeing's 737 MAX Grounding Spills Over Into Economy, Weighs on GDP

By Doug Cameron and Alison Sider 

The prolonged grounding of the Boeing Co. 737 MAX is rippling through the U.S. economy, hurting the nation's trade balance and clouding the outlook for airlines, suppliers and their tens of thousands of workers.

Companies ranging from General Electric Co., which is the sole manufacturer of the engine for the MAX through a joint venture, to smaller parts suppliers have cited the halt in deliveries of the aircraft for some financial damage, or suspended profit guidance. Several U.S. and foreign airlines are cutting back on routes and capacity growth or delaying pilot hiring and promotions because of the MAX.

Meanwhile, economists say that Boeing's production cuts likely weighed on U.S. gross domestic product in the second quarter, and warn the negative impact could intensify if the plane maker is unable to resume deliveries in the fourth quarter as it hopes to.

Boeing is the largest U.S. manufacturing exporter and one of the nation's top private employers. The MAX is its best-selling plane, and jets worth more than $30 billion lie idle since global regulators grounded the aircraft following a second fatal crash in March.

Some airlines and officials expect the MAX to stay out of service until next year. That would further dent U.S. exports and durable-goods orders at a time when some manufacturers are already seeing higher costs and lowering output due to tariffs and trade tensions.

"It has already been a significant part of the slowdown story," said Ward McCarthy, chief financial economist at Jefferies LLC.

U.S. durable-goods orders fell 1.3% in May from the prior month, including a $2 billion drop in sales of civilian aircraft and spares, the Commerce Department said last month. U.S. exports of commercial aircraft were down 12% in the first five months of 2019 compared with a year earlier.

The U.S. economy is still growing. Michael Feroli, chief U.S. economist at J.P. Morgan Chase, said Boeing's production cuts likely shaved about a 10th of a percentage point off forecast annualized growth in the quarter. The consensus among analysts is for the economy to expand about 1.3% in the second quarter.

"The economy is big. It's moving along quite well even in spite of the issues that Boeing is having," Mr. Feroli said. Economists say that the impact would be more pronounced if Boeing cuts production further, as some analysts have said it might need to.

Boeing has reduced output to limit the number of planes piling up at its factories, pressuring thousands of suppliers that invested heavily in operations and hiring to feed MAX production. Uncertainty over the return of the MAX and Boeing's production plans have made it tougher for those suppliers to make hiring and investment decisions.

"We probably modeled four, five scenarios literally a week as to when are they going to get back in the air," said GE Aviation President David Joyce at the Paris Airshow last month. GE, the sole engine provider for the MAX through its joint venture with France's Safran SA, expects the MAX slowdown to cost it as much as $300 million in the second quarter. The partners have trimmed MAX engine output by 5% but are keeping their own suppliers working at a higher clip in anticipation of Boeing boosting output again next year.

Boeing last week said that it expects to pay up to $5.6 billion in compensation to affected airlines over several years. That is in addition to $2.7 billion in charges on the expected higher cost of producing the planes. The company is due to report second-quarter earnings on July 24.

Boeing hasn't cut any staff because of the MAX crisis. Some employees have said they worry layoffs could be coming. Boeing has trimmed from its ranks of contractors recently as it tries to be prudent with its cash. A spokesman said that pruning wasn't related to the MAX grounding.

Boeing continues to produce 42 of its 737 jets a month and said last week it plans to boost production to 57 sometime next year and deliver the backlog of planes piling up at its factories. Analysts estimate there could be as many as 300 undelivered jets by the end of the year.

Many of Boeing's 13,000 domestic suppliers have said they continue to produce at the 52-plane-a-month rate. Boeing's recent commitment to avoid further cuts and ramp up production when the MAX is cleared to fly have buoyed some big suppliers.

Boeing remains the largest component of the Dow Jones Industrial index, accounting for 9.4% of the benchmark, The shares are up almost 16% so far this year.

Spirit AeroSystems Holdings Inc., which makes the MAX fuselage and engine parts, suspended financial guidance this year after the plane was grounded. Spirit's shares gained 7.1% on Friday after Boeing laid out its bullish production target. Stocks of other suppliers such as Triumph Group Inc. and Allegheny Technologies Inc. climbed more than 2% and 3%, respectively. Boeing closed up 4.5%, though lost some ground in Monday trading.

Airlines have also been buffeted by the changing outlook for the MAX's return. United Airlines Holdings Inc. said last week that the grounding has cut into its planned capacity growth this year.

Southwest Airlines Co., the biggest carrier of domestic passengers and the world's largest U.S. MAX operator, had hired at a rapid clip in anticipation of adding over 40 more of the jets this year to the 34 it already received. Now Southwest is tapping the brakes. It has postponed initial training for about 50 new pilots and put promotions on hold for another 50 seeking to advance from co-pilot to captain.

Some pilots said the MAX suspension has cut flying they count on for additional cash.

One Southwest pilot said there has been about a 25% cut in the extra flying he would typically take on at this time of year. "You make hay when the sun shines, but this summer, the sun's not shining," he said.

A majority of the roughly 400 Air Canada pilots who were flying the carrier's 24 MAX planes before the grounding are now on leave and receiving partial pay, two people familiar with the company's operations said.

Air Canada declined to comment on the matter.

--Kim Mackrael contributed to this article.

Write to Doug Cameron at doug.cameron@wsj.com and Alison Sider at alison.sider@wsj.com

 

(END) Dow Jones Newswires

July 22, 2019 13:25 ET (17:25 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.