The companies agreed to the deal in January against the backdrop of Boeing Co, Woodward's biggest client and Hexcel's second-largest customer, struggling with the grounding and later production halt of the 737 MAX jet.

The virus outbreak has since compounded the problems for the suppliers, as Boeing extends production shutdowns to other planes and Airbus SE considers a sharp cut in output of its top-selling A320 plane series due to airlines deferring deliveries amid a cash crunch from plummeting travel demand.

Given the crisis in the airline industry, the deal did not make sense to either company, people familiar with the deal said. The companies agreed they did not want to pursue any claim against the other for walking away, the sources added.

While Woodward's and Hexcel's businesses are complimentary and would have given the combined company scale, the companies did not believe they could integrate them successfully during the crisis, one of the sources said.

Airbus has also ordered suppliers for the larger A350 aircraft to run for now at about half-speed, equivalent to 5 aircraft a month compared with about 9.5 before the coronavirus crisis, Reuters reported last week.

Boeing has said it would extend the suspension of production at its Washington state facilities, which also make the 787 Dreamliners, until further notice.

"Although surprising given the cultural overlap and history of these two management teams (Hexcel and Woodward), the termination aligns with uncertainty due to COVID-19 and required resource shifts," Jefferies analyst Sheila Kahyaoglu wrote in a note.

The combined company would have been one of the world's biggest aerospace and defense suppliers, with the capacity to generate combined free cash flow of about $1 billion annually.

Teal Group analyst Richard Aboulafia attributed the decision to pull the deal on "changing program valuations" and the additional "distractions" their management is coping with.

The market rout triggered by the pandemic and the resulting economic devastation have hit corporate dealmaking.

U.S. printer maker Xerox Holdings Corp last month walked away from its $35 billion hostile cash-and-stock bid for HP Inc.

Shares of Woodward, which gets about 15% of its annual sales from Boeing, were up more than 14%, while Hexcel's stock was down about 3%.

Hexcel also announced on Monday it had adopted a so-called "poison pill" provision that would dilute anyone seeking to acquire more than 15% of its stock without its board's approval.

(Reporting by Ankit Ajmera in Bengaluru, Allison Lampert in Montreal, Tim Hepher in Paris and Greg Roumeliotis in New York; Editing by Sriraj Kalluvila and Nick Zieminski)