Boeing has a serious supply problem to meet demand

The biggest risk for Boeing isn’t demand. It’s supply. In particular the supply of skilled labor needed to ramp up production across the entire aerospace supply chain.

If the industry comes up short on labor, it will be another year of missed numbers for Boeing.

Supply chain problems have been with investors for years. The pandemic spiked logistics costs and disrupted production across the globe. The pandemic also wreaked havoc on company profit and loss statements, which led to cost cutting and layoffs designed to save money during a crisis.

“The single biggest issue across the supply chain in North America….is labor, is getting skilled labor,” said BofA Securities analyst Ron Epstein on an Aviation Week podcast in February. “In North America, it’s a giant problem. And if you look across the supply chain, I think [if you] find any supplier who’s being honest about it, they’ll all say they probably need 20% more workforce.”

Before the pandemic, about 308,000 Americans worked in aerospace manufacturing. That level dropped to about 274,000 by the Spring of 2021. Employment has rebounded, but parts just aren’t flowing to Boeing and its rival Airbus (AIR.France) like they were in the past.

A irbus planned to make 700 jets in 2022. It held on to that guidance until relatively late in the year, but ultimately fell short. Full year jet deliveries came in at 661.

Boeing delivered 480 jets in 2022 and is looking to ramp up production in coming years. That will mean adding adequate buffers into the supply chain to keep production stable, said Boeing CEO Dave Calhoun on the company’s fourth quarter earnings conference call in January.

It won’t be easy to build the buffers. “The engine supply chain had major bottlenecks, especially in castings and forgings, they will take several years to work out,” says AeroDynamic Advisory managing director Kevin Michaels. “Today’s engine supply chain is the throttle which determines how many airplanes can be built.”

Michaels comment echoed what General Electric (GE) CEO Larry Culp said at his company’s fourth quarter conference call in January, that “material availability continues to be a challenge.”

GE makes aircraft engines, including engines for the Boeing 737 MAX and Airbus A320 with joint venture partner Safran.

Some of the missing material comes from Berkshire Hathaway (BRK.B) subsidiary Precision Castparts, which makes important forgings and castings for the aerospace engine industry.

Precision Castparts’ total employment is about 10,000, or roughly 30%, below peak levels. Total employment is going to need to increase to make sure GE can make all the engines it wants to and to ensure Wall Street’s projections Boeing and Airbus can be met.

Precision Castparts didn’t respond to a request for comment about employment levels.

Boeing is expected to deliver 575 jets in 2023 and 650 jets in 2024. Jet delivery projections for Airbus are 750 and 860 in 2023 and 2024. Numbers below any of those mean less earnings and free cash flow for both companies.

It isn’t clear yet what investors would do with a miss because of supply chain issues. Both companies might get a pass if investors believe that all the jets will be delivered in years to come.

Boeing and Airbus might not get a pass if the persistent supply chain issues result in lower than expected profit margins. Lower profits could result from having to compensate airlines for missed deliveries or from higher costs due to paying suppliers more for parts.

One thing that is easy to predict is that supply chain issues will be a watch item for investors for years to come.

Boeing stock is up about 12% year to date. The S&P 500 and Dow Jones Industrial Average are up about 7% and 2%, respectively. Airbus shares are up about 2% year to date.

Airbus stock is still off roughly 25% from its all-time high. Boeing shares would need to rise about 110% to eclipse their all-time high. dowjones.com