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FAA Approves Boeing 737 Max's Return, Suppliers to Gain

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The Boeing Company (BA - Free Report) recently won the final approval from the U.S. Federal Aviation Administration (FAA) for flying its 737 Max jets, after a series of investigations and regulatory reviews since March 2019. No doubt, this long-awaiting news came as a blessing for the U.S. plane maker, which witnessed a sharp spike of 6% in its share price on Nov 18.

The regulatory approval is also encouraging news for suppliers that manufacture components for the plane. Notably, a network of almost 600 suppliers and hundreds of subcontractors manufacture components for the 737 Max, ranging from materials like metal and composites to components such as wings and fuselages.

These companies have been suffering since 737 Max got grounded last March following two fatal crashes that caused loss of more than 300 lives.

How Will Suppliers Benefit?

The grounding of 737 Max caused new orders to dry up, which in turn led Boeing to cut down production rate for this jetliner and ultimately stop production activity beginning January 2020. Naturally, this affected the supply chain of components and had an adverse impact on this plane’s parts suppliers, which earlier used to generate revenues through sale of such components.

Now that the 737 Max has overcome the regulatory red tape and is set to fly again, the plight of its suppliers is expected to come to an end. We believe that once deliveries for this plane are resumed, Boeing along with 737 Max parts suppliers will receive a notable cash pipeline, considering the fact that their balance sheets have been strained over the past one and a half years.

Long Road to Recovery

Although the definitive return to service news for 737 Max makes us optimistic about the suppliers’ rebound to growth trajectory, it will take some time for them to enjoy the actual benefits. This is because the FAA plans to conduct in-person inspections of the approximately 450 737 stored jets, before delivery, which may take a year or more to get completed.

This will delay the delivery procedure, thereby prolonging the time of cash flow to Boeing and its suppliers. Meanwhile, amid the demand crunch that is hovering across the aviation business courtesy of the ongoing COVID-19 pandemic, new orders for 737 Max seem to be low. Since airlines have possibly been the worst affected industry in the pandemic, it also lacks the kind of cash needed to fund new orders for planes right now.

On the other hand, the pre-requisites that FAA demanded in its approval like installing software enhancements, completing wire separation modifications and conducting pilot training for new stimulation will also take some time to be implemented on the 387 jets that are already in airlines service, along with those in storage. So, the road to recovery for the suppliers may be longer.

Is There a Silver Lining?

The above discussion should not discourage one to look for supplier stocks. This is because the FAA approval news did encourage airlines to take up some optimistic steps of adopting 737 Max jets. For instance, Southwest Airlines (LUV - Free Report) is reportedly in talks with Boeing to add up to 30 737 Max jets to its current fleet. Delta Airlines (DAL - Free Report) also recently hinted at the possibility of buying these jets in the near future. These developments bode well for suppliers over the long run, even if not in the near term.

Thus, the current situation directs investors’ attention toward the major supplier stocks that play a crucial role in the manufacturing of 737 Max jets. The fact that these suppliers’ share price gained following the recertification news further strengthens the influence that 737 Max has on their performance.

General Electric Company (GE - Free Report) makes 737 Max’s engines through a joint venture with France’s Safran SA (SAFRY - Free Report) . Following the FAA’s approval news, its shares have gained 4% so far. This stock currently carries a Zacks Rank #3 (Hold).

Spirit AeroSystems (SPR - Free Report) , which produces the fuselage, pylons, thrust reverser, wing leading edges and engine nacelles for 737 Max, earns almost 80% of its revenues from Boeing, per a report by Reuters. Its shares have gained 3.5% since FAA's approval and currently has a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Triumph Group (TGI - Free Report) provides composite environmental control systems (ECS) ducting and floor panels for the 737 Max jets. Its shares have gained 11.9%. The stock carries a Zacks Rank #3.

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