Boeing 737 Max: Layoffs start in supply chain

Layoffs are increasing in the global supply chain for the troubled 737 Max airliner after Boeing decided to pause production in January. And the job cuts could get even worse as suppliers that have so far avoided them say they’ll likely have to slash their workforces if production doesn’t resume soon.

Spirit AeroSystems, which makes 737 fuselages in Wichita, Kan., laid off 2,800 workers last month. Following that reduction—by far the largest among 737 suppliers—credit rating agency Moody’s downgraded Spirit’s bond rating and said the workforce cuts put the area’s local economy at risk.

Meanwhile, GKN Aerospace, a global supplier to many airplane makers, has announced a few dozen layoffs at facilities from Sumner, Wash., and in the United Kingdom, where it let 37 contractors go.

“It’s too early to put a final number” on layoffs, GKN Aerospace spokesman Wes Bates says. He adds that the cuts are part of an ongoing process, and that the company “continues to consider what steps to take on a site-by-site basis.”

The U.K.-based manufacturer supplies Boeing with winglets, part of the engine housing for the Max, and other components. It also makes windows for Spirit AeroSystems, which installs them in the fuselages it makes for Boeing.

The cuts come on the heels on regulators worldwide grounding the 737 Max after two fatal crashes—one in October 2018 and another the following March. Together the crashes killed 346 people.

Boeing continued production, albeit at a slower rate, until stopping entirely in January. Unable to deliver those aircraft, it has nearly 400 737s in storage.

In a conference call with Wall Street analysts last week, Boeing’s new chief executive, David Calhoun, intimated that his company may restart manufacturing as soon as April. He did not specify, however, whether he was referring to production by suppliers or by the Max’s final assembly lines in Renton, Wash.

Delays getting regulators to re-certify the plane as safe are already sapping the overall U.S. economy. In January, Treasury Secretary Steven Mnuchin said the Max crisis could knock half a percentage point off economic growth in 2020.

In the meantime, suppliers increasingly are feeling squeezed. But Boeing “believes this decision is least disruptive to maintaining long-term production system and supply chain health,” says Paul Bergman, a Boeing spokesman. “We will work closely with our supply chain to ensure we are ready to safely and smartly return to production.”

The company has thousands of outstanding 737 orders, enough work to keep its Renton plant busy well into the 2020s. If Boeing hopes to fill those orders in a timely manner, it cannot risk starving its supply chain now.

With that in mind, Bergman says: “We are extremely engaged, especially as we navigate the current MAX grounding and production rate outlook. Suppliers’ health and rate readiness will be critical as we assess production rates going forward.”

Several smaller suppliers that are heavily dependent on 737 work for revenue say they have either already laid workers off, as well as furloughed workers and cut back hours to reduce labor costs.

“We’ve managed so far, but it hasn’t been easier,” says the CEO of a Washington-based supplier. The executive, whose company supplies parts directly to Boeing as well as some of its other suppliers, spoke on condition of anonymity out of fear of Boeing retaliating against his company.

“If this lasts much longer (through February), we will have hard choices to make,” says the CEO, who adds that work for the 737 accounts for slightly more than one-third of his company’s revenue.

During the previous decade, Boeing leaned on suppliers to cut its own costs as part of its push to maximize profit margins. Those successive efforts left some suppliers with considerably less margin to weather the current crisis, according to several industry analysts.

Precision Castparts, a major metal fabricator, issued layoff notices in Oregon last week, according to Clackamas County, which is holding workshops for the laid off employees. Roughly 150 workers were let go, according to Oregon’s state government.

Additionally, Senior Aerospace AMT, a major supplier of aircraft structural parts, recently issued layoff notices, according to news reports.

In another cutback, managers at a Seattle-area machine shop tell Fortune they let 20 workers go–about 10% of their workforce—and face similarly tough decisions in the coming weeks.

“We’ll be scrambling to ramp up” when Boeing restarts 737 production, says one of the managers who was not authorized to publicly speak about the company.

Struggles at one supplier, even a small one, can create bottlenecks and other problems that ripple through a global supply chain.

“The tier 2, tier 3 suppliers are the most vulnerable, and it’s a flashing red light,” says Kevin Michaels, principal at the aerospace consulting firm AeroDynamic Advisory. Industry insiders typically classify suppliers by tiers: Boeing buys directly from tier 1 suppliers, who procure from tier 2 companies, who in turn buy from tier 3s.

“If I run a 100-person parts machining company in Wichita, Kan.—if I lose half of my volume—can I stay alive?” he says. “The answer for some is yes, and answer for some is maybe not.”

Correction, February 7, 2020: A previous version of this story misspelled the GKN Aerospace spokesman’s name.