(Bloomberg) -- Sign up here to receive the Davos Diary, a special daily newsletter that will run from Jan. 20-24.
Leaders in Wichita, Kansas, suffered a series of gut punches in recent weeks after their biggest employer, Spirit AeroSystems, said it would stop working on the troubled Boeing 737 Max jetliner and later announced 2,800 layoffs in its home city.
City manager Robert Layton is sitting through two or three meetings a week on what to expect, as fallout from the Max’s temporary shut-down ripples through the aircraft’s 600 mostly U.S. suppliers. Republican Senator Jerry Moran of Kansas promptly called Boeing’s new chief executive and the head of the Federal Aviation Administration to urge them to get the Max flying again. The new mayor of Wichita -- a city of 380,000 that claims to be the “Air Capital of the World” -- just took office on Monday, three days after Spirit announced its mass layoffs.
Boeing is the largest manufacturer and exporter in the U.S. Its stumble, which started with the fatal crashes of two 737 Max aircraft and culminated in the grounding of its best-selling Max fleet last March, could have repercussions for the entire U.S. economy.
Treasury Secretary Steven Mnuchin has said the company’s problems could cut U.S. gross domestic product by half a percentage point this year -- a figure repeated by President Donald Trump on Wednesday.
While Wichita tries to suss out what’s to come, aviation supply chain experts warn that the numerous suppliers could fail causing major job losses if the U.S. industrial titan allows the Max program’s shutdown to linger much past this month. Boeing shares have fallen about 25% from a record high on March 1.
“I would not be surprised that smaller suppliers end up going out of business, because they’re two, three levels down,” said Gary Weissel at consultancy Tronos Aviation Consulting. “The guys above them can’t take deliveries.”
That could prove a hurdle for Trump as he makes his case for reelection on the strength of the economy and his record on job creation, although Boeing’s biggest supplier bases in Kansas and Washington are in deeply red and blue states, respectively.
“With the shutdown, there could be political pressure exerted in the FAA’s direction to get things moving,” said Kevin Michaels, a managing director at consultancy AeroDynamic Advisory.
So far, there’s been relatively little bloodletting at Boeing’s suppliers throughout the Max’s 10-month grounding. Several Max suppliers didn’t return calls to discuss the potential impact on their businesses, while the Pacific Northwest Aerospace Alliance, a collection of aviation companies, declined to comment.
”We are working with local and state organizations to help provide information about available opportunities and resources to employees who need them,” a Spirit spokeswoman said.
‘Delicate Balancing Act’
Still, there have been relatively few job cuts to date because, until now, Boeing had kept producing 42 Max planes a month, down only slightly from its previous rate of 52 a month. That probably will change now that Boeing suspended production of the model this month, analysts said.
Moody’s Investors Service in a Jan. 10 report identified 24 Max suppliers whose credit it had previously rated. Big suppliers like Precision Castparts Corp. and Honeywell International Inc. are best suited to withstand the shutdown, while smaller companies could face the most financial stress, according to Moody’s.
“Each supplier will face a delicate balancing act involving efforts to quickly reduce overhead costs,” while making sure it’s able to ramp up again when Boeing restarts production, Moody’s wrote.
Boeing is talking with suppliers about ways that it can mitigate their challenges through “delivery rate options,” a company spokesman said, without giving further details.
In Wichita, community leaders are trying to diversify their economy so it’s not so dependent on aviation. Aerospace hit its peak in Wichita in 2008 at more than 40,000 jobs, but by 2017 employment had fallen by a third to about 26,000.
The 2,800 layoffs at Spirit, which makes aircraft fuselages and other major components, is expected to cut into the area’s wages by around $220 million, although unemployment insurance would offset some of that, said Jeremy Hill, director of the Center for Economic Development and Business Research at Wichita State University.
The loss of such valuable jobs would deal a blow to the Wichita economy. Average aerospace positions in the community pays $80,000 a year, or almost double the average for all industries.
(Updates with comment from Spirit AeroSystems)
--With assistance from Siddharth Philip.
To contact the reporter on this story: Michael Sasso in Atlanta at email@example.com
To contact the editors responsible for this story: Sarah McGregor at firstname.lastname@example.org, Anita Sharpe
For more articles like this, please visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.