By Allison Lampert, Valerie Insinna and Abhijith Ganapavaram
SEATTLE (Reuters) - Rosemary and Larry Brester have been running Hobart Machined Products since 1978, milling and grinding metal to make aircraft components out of a tiny building behind their home.
Hobart is one of many suppliers that dot Boeing (NYSE:BA)'s home turf around Puget Sound in Washington state, and the Bresters had planned to double their four-person workforce to meet Boeing's ambitions for increased production of its best-selling 737 jets. Hobart supplies parts to larger companies that sell directly to Boeing.
Those plans are now up in the air after U.S. regulators curbed Boeing's production following a mid-air jet panel blowout, and the Bresters are not alone. The incident risks further erosion of trust and financial strain on the planemaker's most vulnerable suppliers, some of whom could close if Boeing's problems drag on, Rosemary Brester said.
"It's very concerning," she said. "We brought on equipment to support that growth strategy and delivery schedules. There are a number of other companies in our region and probably globally that did exactly the same thing. Now we're all waiting to find out when we're going to be able to utilize all of that space and capacity."
Boeing's latest crisis erupted after the Jan. 5 panel blow-out on an Alaska Airlines flight. Federal investigators are trying to determine what caused the incident, which spurred the U.S. Federal Aviation Administration to take the drastic step of capping Boeing's production rates.
Many suppliers struggled from a pandemic-induced slump in demand and an earlier 20-month grounding of Boeing's 737 MAX 8 that temporarily halted production. For some, the Jan. 5 incident also dampens optimism for payback sparked by the recent travel boom that revived aircraft orders.
Aircraft parts have to be ordered up to a year in advance. Many suppliers added employees and materials or have been running at faster production rates, expecting to be paid later in the year. Now, they face an inventory build-up that will eat up cash.
"It is going to have a negative ripple effect on the whole Boeing supply chain, which was already struggling to ramp up," said Eric Bernardini, a top aerospace specialist at consultancy AlixPartners.
The FAA's order allows Boeing to continue producing MAX jets but not increase its current monthly rate until the agency is satisfied that quality-control issues uncovered during the probe are resolved. The FAA did not say how long its limitation would last.
The FAA did not specify the number of planes Boeing can produce each month, and Boeing has declined to confirm its current monthly rate, creating confusion over the cap. Boeing declined comment.
Boeing said in October that 737 production would reach 38 per month by the end of 2023. In a Jan. 22 email seen by Reuters it told suppliers to adhere to the master schedule that calls for an increase to 42 a month in February.
One Boeing 737 MAX supplier said if the production cap is for a limited period of time, it could catch up on work on other aircraft programs, but they noted other suppliers would likely see the cap as a "pretty big problem."
The uncertainty is especially harmful for the smallest that invest in working capital for announced production increases that do not happen, said Glenn McDonald, a supply chain specialist at AeroDynamic Advisory.
"Many suppliers were counting on rate increases in 2024, 2025," he said. "Over the last three or four years even the trust of the supply base in Boeing's rate announcements has been eroded."
Spirit AeroSystems (NYSE:SPR), which already faces financial pressures, depends heavily on the MAX program. Total 2023 aerostructure revenue from an index of suppliers like Spirit, GNK and others is roughly 80% of 2018 levels, according to AeroDynamic. Spirit said it would continue to cooperate with the FAA and coordinate with Boeing.
TNT Aerospace, a family-run business in Sumas, Washington, considered joining the 737 program, but Boeing's struggles have President Aaron Theisen thinking twice. "We need to make sure we have a strong foundation underneath the business to grow," he said.