Boeing Co. (BA) is facing another setback in its efforts to ramp up production and deliveries of its best-selling 737 Max model, after discovering a new quality issue involving its largest supplier, Spirit AeroSystems Holdings Inc. (SPR). The defect, which affects the aft pressure bulkhead of some planes, could put pressure on Boeing’s annual delivery target of 450 jets, according to some analysts.
What is the defect and how does it affect the 737 Max?
The aft pressure bulkhead is a structure that seals off the rear of the pressurized cabin and helps maintain the structural integrity of the plane. Boeing said it identified fastener holes that did not conform to its specifications in the bulkhead on certain 737 airplanes during factory inspections. The inspections have uncovered hundreds of misaligned and duplicated holes in some aircraft, according to a report by The Air Current1.
The defect could cause some near-term 737 delivery delays, as Boeing conducts inspections and determines how many models were affected and what work they need. Boeing said it was evaluating whether the issue could cause it to miss its annual delivery target of at least 400 737s this year. The company had delivered 156 of the jets in the first half of 20232.
The Federal Aviation Administration (FAA) said the issue was not a safety threat, but a complication for Boeing as it speeds up the manufacturing pace of the 737 family while dealing with supply-chain strains and the aftermath of a strike at Spirit.
How did Spirit respond to the issue?
Spirit, which builds about 70% of the 737 frames, said it had changed its manufacturing processes to address the issue and was continuing to deliver units to Boeing. The company said it used multiple suppliers for the aft pressure bulkhead, and not every unit was impacted.
“Based upon what we know now, we believe there will not be a material impact to our delivery range for the year related to this issue,” Spirit said in a statement3.
Spirit shares fell 6.4% in premarket trading on Thursday, while Boeing shares fell 2%. Both stocks had gained about 20% this year through Wednesday’s close, as demand for travel and new jetliners surged.
What are the implications for Boeing and its investors?
The latest quality issue is another blow for Boeing, which has been struggling to recover from the grounding of the 737 Max in 2019 after two fatal crashes that killed 346 people. The company resumed deliveries of the jet in late 2020 after winning regulatory approvals, but faced several production challenges and customer cancellations.
Some Wall Street analysts warned that the defect could cost Boeing and its investors tens of billions of dollars, as it could delay deliveries and cash flow. Citi analyst Jason Gursky said he expected management to provide an update on the issue in early September at an investor conference.
“Shares are likely to see some pressure on Thursday,” he said in a note4.
Wolfe Research analyst Hunter Keay said the issue highlighted the “generally bumpier ride” on the road to recovery in the aerospace industry.
“BA remains worth the bumpy ride given the FCF track record and we see HWM and HXL as OEM plays with the least drama,” he said in a note5, referring to Howmet Aerospace Inc. (HWM) and Hexcel Corp. (HXL), two suppliers of aerospace materials.
