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Boeing seeks to buy Spirit Aero, 19 years after selling Wichita plant

By Dominic Gates, The Seattle Times
Published: March 5, 2024, 7:58am

Boeing is in talks with bankers to discuss a potential multibillion-dollar purchase of its troubled supplier, Spirit AeroSystems of Wichita, Kan.

Boeing confirmed Friday that it is “in preliminary discussions about making Spirit AeroSystems a part of Boeing again.”

Boeing spun off the Wichita operation that became Spirit nearly two decades ago, pursuing the leadership’s then vision of making Boeing a “large-scale systems integrator” of work largely done by suppliers through aggressive outsourcing and divestments.

In a statement Friday, the company touted the potential benefits of reversing that move: “We believe that the reintegration of Boeing and Spirit AeroSystems’ manufacturing operations would further strengthen aviation safety, improve quality and serve the interests of our customers, employees, and shareholders.”

Boeing added that “there can be no assurance that we will be able to reach an agreement.” Spirit also confirmed the news with the same caveat.

If a deal is reached, it would reverse the largest divestment in Boeing’s modern history, when the jet-maker in 2005 sold off its major plant in Wichita to advance its strategy by shedding aircraft parts and systems manufacturing.

That vision was pushed after the merger with McDonnell Douglas in 1997, first by then-Boeing CEO Phil Condit and by his successor Harry Stonecipher.

But engineers inside Boeing warned as early as 2001 that the company risked losing control of its manufacturing processes and hollowing out its internal capabilities.

The move to try to reacquire Spirit essentially concedes that the strategy went much too far and has damaged Boeing.

As part of the talks, Spirit is also discussing with Airbus the possibility of selling its plant in Belfast, Northern Ireland, where it makes the wings for the European jet-maker’s A220 jet, a person familiar with the matter said.

Airbus declined to comment.

The move to acquire Spirit comes after a long series of quality problems with the fuselage sections it supplies on the 787 and 737 MAX jets. Those caused repeated delivery pauses at Boeing’s final assembly plants.

Last year, Boeing sent “armies of people,” as Chief Financial Officer Brian West expressed it, to Wichita to help Spirit get its manufacturing processes under control.

At the end of September, the effort to fix Spirit accelerated when the board fired CEO Tom Gentile and replaced him with Pat Shanahan, a former Boeing executive known for his hands-on management style.

Boeing has apparently decided that the problems run deep enough to explore a full reintegration.

Boeing cannot afford to have Spirit fail. In Wichita, Spirit makes the forward fuselage of every Boeing commercial airplane and the entire fuselage of the MAX. It also makes wing components, engine nacelles and pylons for Boeing jets.

Yet a deal to reacquire Spirit would be complex to finalize. After Boeing sold its Wichita unit to a private equity firm, Spirit went public in 2006 and spent years diversifying its business by becoming a supplier to other aircraft-makers.

It makes parts not only for Airbus but also for Bombardier business jets and various defense contractors, including Boeing competitors Lockheed Martin and Northrop Grumman.

Still, Boeing remains by far Spirit’s biggest customer, providing 64% of its revenue last year.

It’s hard to imagine Boeing reacquiring Spirit without divesting all the facilities that supply Airbus.

In addition to the Belfast A220 wing plant, those include a plant in Kinston, N.C., purpose-built to manufacture fuselage panels for the A350 and a plant in Saint-Nazaire, France, that assembles the fuselage sections from those panels.

Aerospace financial analyst Rob Stallard of Vertical Research told investors Friday that Boeing buying Spirit would likely be “great for Spirit, not so great for Boeing” in terms of the share price.

“If Spirit were able to sell its Wichita operations to Boeing this would be a coup. Clearly Spirit is in a world of pain at the moment,” Stallard wrote. “For Boeing, this does give them the opportunity to bring Spirit in-house and fix its problems, but … integrating Spirit would add additional (financial) pressure.”

Boeing shares fell $3.72 or 1.8% to close Friday at $200. Spirit shares rose $4.38, more than 15%, closing at $32.98.

The current market capitalization of Spirit is $3.3 billion. To buy the company — even if it offloads the Airbus units — Boeing would have to pay most of that plus take on some of Spirit’s debt.

Boeing ended 2023 with more than $36 billion in net debt and a promise to investors that it would prioritize paying off that debt.

To make the purchase, Boeing could either raise equity by issuing new shares or borrow the money and increase its debt.

Analyst Ken Herbert of RBC Capital Markets suggested in a note to investors Friday that Boeing could be under pressure from the Federal Aviation Administration after the Alaska Airlines in-flight incident to take firmer control of the MAX manufacturing supply chain.

“There are potential long-term benefits for Boeing from greater integration around tooling, supplier management, production best practices, and execution,” Herbert wrote.

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A turnaround for Boeing’s leadership

The news of the acquisition talks, which was first reported Friday morning by The Wall Street Journal, surprised the industry because Boeing’s leadership last summer firmly quashed rumors that it might come to this.

In a briefing to journalists in South Carolina in May, asked if Boeing had any interest in acquiring Spirit, CEO Dave Calhoun replied: “No. I don’t have a desire to do it.”

He acknowledged the quality lapses at Spirit on both the 787 and the MAX but said that, with collaboration between Boeing and Spirit, “those are solvable. I don’t think you acquire a company to solve them.”

Since then, quality control and financial problems at Spirit have multiplied.

In September, mis-drilled holes were discovered in the 737 MAX aft pressure bulkhead, the domed fuselage cap that seals the rear of the passenger cabin and is installed at Spirit. This caused a pause in MAX deliveries from the Renton final assembly plant for several months, with the result that Boeing lost money in the third quarter.

And although the midair blowout of a door-sized fuselage panel on an Alaska Airlines flight in January has been traced to a failure by Boeing mechanics to reinstall retainer bolts, the panel was opened in Renton only because of the need to fix adjacent rivets that had been poorly installed by Spirit.

Investors sued Spirit in December, accusing the company of ignoring reports of low-quality work.

Spirit has struggled to come to grips with its manufacturing quality shortfalls in large part due to a massive loss of experienced workers during the COVID-19 pandemic.

In 2020, Spirit cut 6,800 employees and put salaried workers on a four-day workweek to preserve cash. Many of the most seasoned workers who were laid off or who chose to retire never returned.

In addition, the pandemic exacerbated long-term financial distress at Spirit, much of that due to the pricing squeeze that Boeing applied to all its suppliers under former CEO Jim McNerney.

Spirit has publicly said it lost an average of more than $1 million per airplane on the nearly 1,200 forward fuselage sections it built for the 787, a cumulative loss totaling $1.4 billion.

In October, soon after Shanahan took over as CEO, Boeing and Spirit reached a sweeping re-pricing deal through which the jet-maker pumped in more than $500 million to support its financially hobbled supplier.

With Spirit also losing money on every A350 shipset it delivers, it has been trying to negotiate a similar deal with Airbus but hasn’t yet agreed terms.

If Boeing does buy Spirit, responsibility for fixing its manufacturing quality issues will be more firmly in its own hands, along with the financial risk.

A successful deal would incidentally leave Shanahan — who served as deputy defense secretary under President Donald Trump after leaving Boeing — positioned to potentially step up as the next CEO of Boeing.

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