Boeing 737 Max woes could wallop slumping U.S. manufacturing sector
Boeing's move this week to suspend production of its troubled 737 Max plane could dent the broader U.S. manufacturing sector, already mired in its deepest slump since the Great Recession.
The aircraft maker's move threatens to impact hundreds of companies that make parts for the plane. For now, the company says it will support its suppliers, but with Boeing's own finances looking pinched it's not clear how long that could go on.
Here's a look at how temporarily halting production of the 737 Max could affect Boeing, the company's suppliers and even the broader U.S. economy.
Economic hard landing
As America's largest manufacturing exporter, Boeing's problems can have a major economic ripple effect. Boeing's 737 Max sales were once expected to total around $30 billion in 2019. That's a fraction of the $21 trillion U.S. economy, but it still amounts to big bucks in terms of employee pay and supplier income, both of whom could pull back on spending while the 737 Max's fate hangs in the balance.
Michael Pearce, senior economist at Capital Economics, estimates that Boeing's production freeze may slice as much as 0.5 percentage points off U.S. gross domestic product next year — a $100 billion hit. That amounts to 70% of the economic output of the entire U.S. farm sector, or about the total economic activity of Montana and Wyoming combined.
Boeing's move could also have an impact on the 2020 election. President Donald Trump promised the economy will grow at least 3%, and as much as 6%, annually as a result of his 2017 tax cuts. That hasn't happened: GDP rose 2.9% last year and has since faded to growth of just over 2%. The 737 Max's woes could act as a further drag on the economy.
Hundreds of suppliers at risk
Boeing relies on more than 600 suppliers to make parts for the 737 Max. It is not clear whether they will have to suspend production, partly because it's not known when the Federal Aviation Administration will clear the plane to fly again and when Boeing will resume airline deliveries.
To keep the supply chain ready to quickly restart production, Boeing needs to negotiate payments to prevent layoffs or shutdowns, experts said. "It's really in Boeing's interest to identify who needs payments to keep workers and capabilities in place for when the ramp up eventually happens," said Richard Aboulafia, an analyst with Teal Group.
Stocks of Boeing suppliers have already felt the pain. And Spirit AeroSystems, which makes the Max's fuselage, has already expanded the holiday break for its workers in Wichita, Kansas, by three days, according to the Wichita Business Journal. The company is "working closely with our customer to determine what that means for Spirit," the company said in an email to CBS MoneyWatch.
General Electric, which makes the only engine used in 737 models through a joint venture with France's Safran SA, may take a hit to its cash flow of about $2 billion, analysts told the Wall Street Journal.
Draining billions in cash
Not surprisingly, Boeing has taken the biggest financial hit. The company's shares have lost more than $50 billion in market value since the second 737 Max crash in March. The stock rose slightly on Tuesday, but that's only because the production halt could preserve cash.
Jefferies analyst Sheila Kahyaoglu estimates that Boeing has been burning through $4.4 billion a month to keep the 737 Max production operational. But the hiatus will cut the cash drain by roughly half, she said in a note to investors.
Growing pressure on Muilenburg?
Meanwhile, the Max's uncertain future is likely to cast a cloud over Boeing CEO Dennis Muilenburg. For months, the executive said publicly that the plane would be approved to fly again by year-end. But that stance appeared to anger Federal Aviation Administration officials, who reportedly believe Muilenburg's public statements are aimed at pressuring the agency to clear the Max for takeoff.
Last week, FAA chief Stephen Dickson called Boeing's timeline unrealistic and told lawmakers that the 737 Max won't fly until 2020. Given the strained relationship between Boeing and it regulator, the company's board could decide it is better off without Muilenburg.
If so, his exit won't come cheap. Under Boeing's executive compensation plan, Muilenburg would be owed nearly $40 million if he were to be asked to leave the company, including $7 million in additional salary. Boeing could cut some of that pay if it decides to fire Muilenburg for cause. But that could open the company up to allegations that it was at fault for the two crashes.
Even so, Muilenburg could receive over $15 million on his exit. And since Boeing's "clawback" policy does not cover safety issues, it is unlikely Boeing could ever ask for any of that pay back no matter if the company or other investigators decide Muilenburg or others did something wrong.
CBS News' Stephen Gandel and the Associated Press contributed to this report