Bruce Andrews and Connor Bernard, and partner and analyst at Alderman & Company assess the implications of the industrial action impacting Boeing and Textron
The strikes of 33,000 Boeing workers in Washington state and 5.000 Textron workers in Wichita, Kansas on September 13 and September 23, respectively, have effectively stopped production of the Boeing 737, 767, and 777 aircraft and the Textron Citation, Beechcraft, and Cessna aircraft.
Both companies have taken quick action to conserve cash by furloughing employees, eliminating non-cash generating programs, and freezing inventory levels by terminating or significantly delaying procurement of products related to the stopped programs.
The impact on the affected supply base of Boeing is of course very damaging and the longer the strikes continue, the more significant the result will be.
The aerospace supply chain, and in particular Boeing, has had an extremely rough road in recent years.
Starting with the two Max crashes, the grounding of the aircraft worldwide, and then the COVID-19 pandemic, this has been a very difficult patch for Boeing and its suppliers.
COVID did not just impact Boeing and its suppliers. It affected the entire sector. Raw material availability became an enormous issue, subcontractors went out of business, qualified workers retired or left the industry, and too few have wanted to return.
And this disruption continued to the small to medium manufacturers, largely because of the loss of trained and seasoned employees unwilling to return and new trainees extremely reluctant to work in the manufacturing world.
Boeing started seeing light at the end of the tunnel post pandemic, as the materials and products began to return to more predictable delivery levels.
But just as things seemed to be getting better for Boeing, an Alaska Airlines 737 MAX 9 lost a door in flight January 5, 2024 because of improper installation of the plug bolts leading to grounding of all 737 MAX 9’s. The impact on Boeing has been well publicised and documented.
While the impact on suppliers has been less publicized, it too is considerable. If we couple the supplier effects of the Boeing problems with the now one-month long strike, then it is clear that the Boeing/Textron strikes will further challenge the commercial aviation supply base.
If these strikes continue, suppliers, with far less resources than Boeing or Textron, will be forced to furlough employees, delay investments, reduce expenses, including training, and postpone equipment and facility investments.
The most significant issue is that many suppliers will be faced with the difficult issue of retaining skilled employees when there is not sufficient work to support their payroll, which means these suppliers will incur losses and generate negative cash flow.
Reuters just completed a survey of Boeing suppliers and found that 55% of the Boeing suppliers polled had already furloughed significant staff.
Clearly, the numbers will grow as the Boeing strike continues. The timing could not be worse, as this is just when suppliers have finally been able to find and train workers to produce the quality products that the aerospace industry demands.
While the short term is going to be difficult for Textron and Boeing’s suppliers, we are forecasting a very favourable year-ahead overall for M&A in the commercial aviation segment of the aerospace and defence industry.
This is because those commercial aviation suppliers that serve the aftermarket will see substantial growth in demand, above and beyond the record levels that we have seen over the recent past.
According to a recent Oliver Wyman report, global MRO spending was $80B in 2022 and is forecast to exceed $100B this year, with continued growth in 2025, in large part due to the need to keep older aircraft in revenue service.
Accordingly, we expect to see a further increase in M&A volume in in the commercial aviation aftermarket and we expect to see a further increase in multiples in this sector.
In summary, the commercial A&D supply base is once again being significantly impacted by the Boeing and Textron strikes and while this will put downward valuation pressure on those suppliers whose primary market is new production.
The good news in this bad news is that M&A multiples for aftermarket companies will remain at record high levels for a while, and may even rise further.
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