Thursday, December 26, 2019 06:00AM / by
Fitch Ratings/ Header Image Credit: Business Insider
Boeing's decision to suspend production of its 737 MAX airplane programme underscores risks of the aerospace sector, both for airliner producers and their suppliers, Fitch Ratings says. Our ratings in the industry incorporate periodic stresses. The exact credit impact will largely depend on the length of suspension and the timing of the 737 MAX's return to service, and on potential regulatory changes.
Boeing's 737 MAX, and the A320neo from its main competitor Airbus, are the largest commercial airplane programmes worldwide and account for significant shares of the companies' order books. As a result, any significant difficulties with these flagship programmes affect the manufacturers' operations, financials and reputation, which in turn affect their suppliers.
The impact of the MAX suspension should be temporary unless substantial orders are cancelled. Our rating case assumes the MAX groundings will be lifted in phases by different regions through early 2Q20 and that deliveries in various regions will resume shortly afterwards. We believe that Boeing's credit profile can support temporary MAX-related stresses due to substantial liquidity, financial flexibility, access to the capital markets, and revenue diversification. Aside from the MAX, Boeing's products and markets are healthy. We affirmed the company's ratings at 'A'/F1/Negative on 17 December 2019 following the production suspension announcement.
However, the MAX situation will present challenges throughout the aviation credit sector into 2021. These include regulatory uncertainties regarding the timing and global sequencing of the 737 MAX planes' return to commercial service, the logistical challenge of returning them to service and catching up on deliveries, substantial financing needed for the temporary working capital build-up and the risk of rising concessions to airlines.
Suppliers for the MAX programme are likely to be most affected in the short term. CFM International, a joint venture between General Electric (GE) and Safran, is the sole engine supplier for the programme. As a result of the MAX grounding, GE experienced negative cash flow amounting to USD1 billion during 9M19, and which could reach USD1.4 billion for the full year. GE's collections from engine deliveries to Boeing will be reduced in the coming months until the 737 MAX is certified and delivered to end-customers. We expect this will be partly offset by lower working-capital requirements until production resumes.
Safran indicated in its 3Q19 results announcement that the MAX situation reduced its free cash flow (FCF) by about EUR300 million a quarter (in 2018, the company generated FCF of EUR1.8 billion). At that time, MAX production was reduced, as were prepayments from Boeing, but not suspended. A large number of smaller companies are suppliers to the programme globally. Any prolonged suspension may put pressure on their performance, with the weakest potentially needing restructuring or support from Boeing, which the company is motivated to provide. The level of required support will depend on suppliers' diversification, mix of other programmes they supply, their financial flexibility and liquidity positions.
Any positive impact on Airbus will be muted in the short term because airlines have limited capacity to switch their orders between manufacturers without materially deferring delivery dates. Since the planes' grounding, the number of MAX order cancellations has been limited, while Airbus has received around 200 new orders for the A320neo, which is minor relative to its backlog of commercial planes of more than 7,500.
The long-term impact of the MAX grounding on the aerospace sector is likely to be negative due to growing regulatory scrutiny. We anticipate that certification for any new commercial airplane will become longer and costlier for manufacturers, while regulatory actions in case of difficulties are likely to be prompter and more rigorous. However, increased scrutiny and certification requirements could improve suppliers' ability to defend their market positions once they are approved on a particular aircraft.
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