News that Boeing’s beleaguered 737 Max might not return to the air until mid-2020—which many are taking as meaning June to even July, assuming no further delays—did an immediate number on share prices.
Shares were down 3.33% Tuesday to close at $313.37. That puts the cumulative loss since March of 2019 at 28.9%. But it’s not just Boeing shareholders that are hurting.
A Fortune review of the company’s financials and government data, along with confirmation from multiple expert sources, show that GDP in the first quarter could take a 0.5% hit because the expected loss of Max sales have that big an impact on the economy. That doesn’t necessarily take into account potential layoffs and impact on hundreds of vendors.
Boeing said in a statement that it acknowledges and regrets “the continued difficulties that the grounding of the 737 Max has presented to our customers, our regulators, our suppliers, and the flying public.” The company will provide more information next week when it releases its quarterly and full-year financial results.
An economic hit
The experts Fortune spoke to were not sweating Tuesday’s stock swing. A frequent pattern in sudden drops is that amateur investors panic on bad news and immediately sell. Professionals wait, see the drop, and then—knowing that Boeing has purchase contracts worth tens of billions and only one competitor, Airbus, that doesn’t have the capacity to take over that business—see the low price as a buying opportunity.
As for the broader economy? The contribution Boeing makes is a much bigger deal than many people realize.
The company’s 2019 third quarter 10-Q statement shows sales data for the first three quarters (nine months) of both 2018, when the Max was still flying, and 2019, when the plane was grounded starting in March. During that period in 2018, the company’s commercial airplane sales were $41 billion. In 2019, they dropped 39.5% to $24.8 billion.
Boeing can’t technically count the revenue of a sale until it delivers a plane, which it has not been able to do since the Max was grounded.
During the full year of 2018, Boeing’s commercial airplane division had revenue of $60.7 billion. The final numbers aren’t yet available for 2019, but if the Max drop continues at that same 39.5% rate, we might expect the division’s sales to be off by at least $24 billion.
Results in the first half of 2020 will be even more painful: the missing sales would be somewhere in the neighborhood of 0.2% of U.S. GDP. Or likely larger because Boeing’s commercial airplane sales had been growing at almost a 5% rate, making the expected reduction in GDP more like 0.21%.
Some market watchers are far more pessimistic going forward.
A commentary published before Boeing’s Tuesday announcement, which Federated Investors sent to Fortune, said the continued grounding “will create an air pocket for first quarter 2020 GDP growth of about 0.5% (within a range of 0.25% to 1%).” Federated was assuming that the Max would get FAA recertification and return to the air months before the summer. The additional delay means the 0.5% reduction in GDP would continue at roughly the same pace for the first half of the year.
Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, agreed separately that a half percent drop in GDP was also likely. “Things could get even worse if it extends and leads to layoffs or furloughs, as Boeing alone employs 12,000 staff on the 737 Max production line and has over 600 smaller companies in its supply chain,” he wrote to Fortune. “This is increasingly likely with FAA signaling further delays to recertification, although Boeing is pushing hard to get the all-clear quicker.”
“The 737 Max is probably about 2% of manufacturing GDP,” said Timothy Fiore, chair of the Institute of Supply Management’s manufacturing business survey committee. “And we know every dollar of manufacturing output tends to affect anywhere of 25% to 35% of the service sector. It also impacts our computer electronics sector, primary metals, fabricated metal products. It impacts a lot of other subsectors.”
One major Boeing vendor, Spirit Aerosystems (not associated with the airline) laid off 2,800 employees earlier this month in response to Boeing’s halt of Max production.
There is also the question of what Boeing does with its own staff. Although the company had said there were no immediate plans to lay anyone off, it reassigned about 3,000 Max workers in the Seattle area to other duties for the time being, according to a CNBC report.
Boeing has a similar problem as major auto manufacturers like GM, according to Giacomo Santangelo, a senior lecturer in economics at Fordham University. “Everyone who gets paid to touch the plane” is a potential cost, he said. That’s a concern, especially as analysts have estimated that Boeing is losing $1 billion a month and multiple reports say the company is looking for $10 billion in additional financing.
“Those loans are only going to happen if they can show on paper it makes sense to give them money,” Santangelo said. “They’re going to have to cut costs somewhere. And they’re not going to cut it in production costs—they’re not going to use cheaper materials.”
Boeing’s final destination is still unknown, but the flight still looks awfully bumpy.
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