Source: PaxForex Premium Analytics Portal, Fundamental Insight
Boeing has recently confirmed ongoing discussions regarding the potential reintegration of Spirit AeroSystems into the Boeing fold, a business it had divested in 2005. Despite the significance of this news, the primary beneficiaries may not be the two companies directly involved. Rather, attention should be directed towards aerospace suppliers such as Hexcel and Carpenter Technology. Here's the rationale behind this perspective.
Although a definitive agreement is yet to be reached as of the current writing, Boeing's management, in a press release, expressed that the reintegration of Boeing and Spirit AeroSystems' manufacturing operations would not only enhance aviation safety but also elevate overall quality, ultimately serving the best interests of customers, employees, and shareholders.
Not explicitly addressed was the crucial necessity of facilitating Boeing in meeting its delivery targets, particularly concerning the 737 MAX program. As previously outlined, Boeing's medium-term objective is to achieve 400 to 450 deliveries of the 737 in 2023 and subsequently raise the monthly production rate to 50 units (indicating an annual rate of 600) by the 2025/2026 timeframe.
Regrettably, Boeing is currently lagging behind these objectives, having delivered only 396 of the 737 MAX in 2023. The company anticipates a transition to a rate of 38 units per month in the latter half of the year, contingent upon Federal Aviation Administration oversight following the passenger door incident on an Alaska Air flight in early 2024.
Compounding the challenge is the central role of Spirit AeroSystems, the manufacturer of 737 fuselages, in the manufacturing quality issues afflicting Boeing over the past year. Former CEO Tom Gentile voiced concerns in September, stating that contracts with Boeing and Airbus were "not sustainable" in the current environment.
In essence, a confluence of factors, including the supply chain disruptions induced by pandemic-related lockdowns and the escalation of raw material costs, partly due to the conflict in Ukraine, has exerted significant financial pressure on suppliers. Consequently, this has strained production rates at both Boeing and Airbus.
Gentile stepped down from his position in October, swiftly succeeded by Boeing veteran Pat Shanahan. In response, Boeing entered into a memorandum of agreement (MoA) with Spirit, aiming to support and ensure the continuous production of fuselages. Whether this entails a financial agreement, an acquisition, or another form of collaboration, one thing remains evident: Boeing is reliant on Spirit for fuselages and must address manufacturing quality issues to meet its 2025/2026 delivery targets.
While this development may not align precisely with Boeing shareholders' expectations for 2024, mitigating the risks associated with delivery goals is imperative. Despite the potential for increased financial strain and operational complexities, Boeing has limited options. While this may not be an ideal situation for Boeing, it is favorable for aerospace suppliers seeking augmented production opportunities to market their solutions to original equipment manufacturers (OEM) involved in Boeing programs.
Hexcel, an advanced composite company, exemplifies this trend. Their advanced composites offer weight and strength advantages, offsetting additional costs through long-term productivity gains. With minimal aftermarket demand, Hexcel depends on increased production by airplane manufacturers. As the industry shifts toward composites, Hexcel stands to benefit from rising production and the introduction of new models incorporating more composite technology.
Another beneficiary is Carpenter Technology, which specializes in engine parts, fasteners, and structural and avionics components. Unlike Hexcel, Carpenter boasts a significant maintenance, repair, and operations (MRO) business, capitalizing on increased flight departures necessitating additional servicing. Given its high fixed costs, Carpenter's profit margins can substantially expand with rising revenue. A reduction in risks associated with airplane manufacturers' production expansion plans proves advantageous for the company, already on track to increase profit margins amid the aerospace recovery.
In summary, the significant development at Boeing presents more opportunities for aerospace suppliers like Hexcel and Carpenter Technology than for Boeing itself. While Spirit AeroSystems experiences a substantial share price surge, suggesting potential missed opportunities for those not already invested, the broader positive impact is notable for suppliers in the aerospace industry.
As long as the price is above 190.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 198.23
- Take Profit 1: 215.00
- Take Profit 2: 228.00
Alternative scenario:
If the level of 190.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 190.00
- Take Profit 1: 176.00
- Take Profit 2: 170.00
