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This special report from The Air Current was published in May 2023 and we have now made it available to enjoy without a subscription following the announcement of an acquisition agreement between Boeing and Spirit AeroSystems. This report has been nominated for a 2024 Aerospace Media Award for best in-depth feature. Please subscribe to TAC to be at forefront of aerospace and aviation industry coverage.
In early April, a Spirit AeroSystems employee watching the assembly of 737 fuselages at the company’s sprawling Wichita, Kansas plant noticed something out of place. After some quick investigation, Spirit found that two of eight fittings underneath where the jet’s vertical fin meets the aft fuselage were installed using a manufacturing process that didn’t conform to approved specifications.
“That is the only way that we would have ultimately found out about it,” said Boeing CEO David Calhoun on April 26. The issue had been going on for the past four years and Boeing on April 14 said that it and Spirit would have to resolve the issue on every affected 737 Max and P-8A Poseidon14 before delivery. A mere 36 months after COVID crippled global aviation, formerly stricken airlines now can’t get airplanes fast enough as travel rebounds. Fixing the issue at Spirit and Boeing will keep about 9,000 seats, 45 to 50 737s, unavailable during the busiest summer travel season since 2019, though the company is maintaining its plans to increase output from 31 per month to 38 by the middle of the year.
It’s a frustrating hiccup as Boeing tries to build back its single-aisle output from a standstill in May 2020 when the company restarted its single-aisle assembly lines as it closed in on the ungrounding of the 737 Max. Yet, understanding the cause and its solution requires an examination of the tumultuous partnership between Boeing and Spirit. “It’s been a strained relationship for a long, long time,” said one retired top Boeing executive.
Related: Boeing’s long and inevitable road to South Carolina
The Air Current put the most important industrial relationship in U.S. aerospace under the microscope, revealing a bitter previously unreported 2018 lawsuit between the two and interviewing more than a dozen current, former and retired executives and senior staff at both companies to chronicle the complex relationship.
The 2005 divestiture of Wichita to create Spirit AeroSystems “ranks as the highest misstep” Boeing has ever made, according to one retired Boeing commercial airplane development executive. It was a view shared unanimously across TAC’s interviews as we explored the bigger strategic question: Is it time for Boeing to bring Spirit home again?
During a 2012 interview with The Wall Street Journal, then Spirit chief executive Jeff Turner reflected on the fundamental economics of the commercial aviation business. The cost of air travel, which has been consistently deflationary, set the pace for the rest of the industry, he said. It’s a trend that went hand in hand with declining real prices for airplanes like the 737 and A320 and a supply chain that had been chasing lower costs — all while airplane development became more expensive.
“That’s the ultimate driver in this industry. And that’s the ultimate squeeze,” said Turner, underscoring the necessity to improve factory productivity and share those savings with Boeing and Spirit’s own supply chain. But was there a risk of pursuing cost savings that went too far?
“That’s one of the very interesting things about business history,” he said. “It is companies who figure it out, you know, have a sustainable business model. And companies who don’t figure it out…end up stepping on their own air hose and running out of air.”
Subscribe to The Air CurrentBoeing and Spirit share an air hose. Boeing cannot deliver a single airplane without Spirit and Spirit cannot survive without Boeing. While that level of interdependence means one party cannot win if the other loses, the arc of an imbalanced strategic relationship over the years suggests otherwise.
Turner’s comments in July 2012 came just 12 weeks after an F3 strength tornado ripped through 10 buildings at Spirit’s Wichita campus. The company supplies 70% of the structure for every 737, including its entire fuselage, and had been building parts for 35 each month when the tornado struck. Without power fully restored for 91 hours, many roofs and walls were piles of rubble. But Spirit had moved mountains to get back to full production within a week and Boeing didn’t have to delay a single 737 delivery. It was a feat Boeing leaders hailed as “awesome” and a moment to celebrate in the storied relationship between the two companies.
“When the interests are aligned, it’s an unbeatable combination,” said the retired Boeing development executive.
Yet, in the decade that followed, the complex relationship struggled. While the working relationship remains constructive day-to-day in solving problems as the pair builds airplanes, at the strategic level executives and staffers describe a relationship that at times has been “acrimonious”, “punishing”, and “inexplicably vindictive” even while the companies are simultaneously entirely reliant on one another for their survival.
In commenting on this story, a spokesman for the supplier said, “Spirit AeroSystems values the important relationship it has with Boeing. We interact regularly with Boeing in a constructive manner. Our work together spans both commercial and military programs, as well as, research and development efforts. We look forward to working with Boeing as they ramp up production rates to meet increasing demand for air travel.”
Related: Supply chain fragility drives fourth 737 Max line decision
Boeing in a statement to TAC, too, emphasized the importance of its relationship with Spirit: “Spirit has been a valued Boeing supplier for years. We remain committed partners and are working closely together to address recent quality challenges.”
The birth of Spirit AeroSystems
In February 2005, Boeing was carving off pieces of itself in pursuit of greater economic returns. Canadian private equity firm Onex bought Boeing’s fabrication operations in Kansas and Oklahoma for $1.2 billion15, and when the deal closed in June, the 7,200 Wichita commercial fabrication division employees and another 1,300 in Oklahoma handed in their Boeing badges and joined a company known as Mid-Western Aircraft Systems, Inc.
Turner went from the vice president and general manager of Boeing’s Oklahoma and Kansas plants to being the new company’s CEO. It would be formally renamed Spirit AeroSystems a few months later and instantly became Boeing’s most important supplier — what one industry consultant called the “crown jewel” in the plane maker’s supply chain.
Embedded in Spirit’s creation was “guaranteed market share on a lot of products,” said the top retired Boeing executive. For as long as Boeing built the 737, 747, 767, 777 and 78716, Spirit would deliver the major structures it had provided when it was still part of Boeing. The interdependency between the two companies was baked directly into Spirit’s creation.
But why sell off these pieces of the company? Boeing’s leadership under Harry Stonecipher had embraced a strategy of maximizing Return on Net Assets (RONA), an investor-satisfying metric. Shedding assets on the same output would instantly provide a better calculated return. McDonnell Douglas had been enamored with the RONA business model as it floated a superjumbo MD-12 in the early 1990s, leaning on suppliers to provide systems and components while the plane maker would handle integration and final assembly.
Dr. John Hart-Smith, a senior technical fellow at Boeing Phantom Works (and previously Douglas Aircraft Company), famously warned in an internal paper in 2001 that strategic dis-integration with excessive outsourcing would lead to ruin. It was a warning that was also communicated by some in Boeing’s strategy ranks and went largely unheeded.
Boeing commercial airplanes chief Alan Mulally at the time of Spirit’s divestiture said, “This agreement fully supports our strategy to focus Boeing on large-scale systems integration, which is where we are most competitive and can add the most value to our airplanes and services.”
The 787 was the first all-new airplane to test the strategy, a wildly successful product built upon wildly flawed assumptions. Boeing wanted suppliers around the globe to share the development costs, estimating that Boeing’s contribution to the 787 development could be met for a mere $4.8 billion and a recurring manufacturing cost that averaged $38 million per plane17 over the first 300 aircraft, according to people directly familiar with its original estimates.
In reality, Boeing would end up spending tens of billions to complete the 787, reconstitute and reintegrate parts of its supply chain and as of the end of March 2023 still maintained a deferred production cost balance of $12.4 billion18 almost 12 years and more than 1,000 airplanes since the first delivery. “Enormous unrealistic expectations were built in at launch” for the 787, said a retired program executive.
TAC Explains: What’s program accounting and how is it used by Boeing?
In striking out on its own under Onex, Spirit’s mandate was to build a portfolio of aerostructures programs that would allow it to invest in technology and run a highly-efficient operation. In early 2006, it acquired BAE Systems’ Prestwick, Scotland operations and quickly became a supplier to Airbus. In addition to the 787, Spirit became a major structural supplier on five more all-new aircraft programs: the A350, Gulfstream’s G650 and G280, for which it began building wings, and providing the engine pylons for Bombardier’s C Series (now A220) and the Mitsubishi Regional Jet.
In the years that immediately followed Spirit’s creation, Boeing leaders in Puget Sound and Spirit leaders in Wichita pointed to the shared DNA between the two companies. During the delays in getting the 787 to market, program insiders and supply chain leaders agreed that Spirit was arguably Boeing’s best supplier on the troubled program. That smooth performance was largely attributed to common lineage, according to leaders at both companies.
Spirit excelled where other suppliers struggled as the program slipped off track. FlightBlogger reported in September 2009, “Spirit’s legacy as a unit of Boeing’s commercial operations enabled steady communication throughout design and industrialization while other partners’ contractual agreements, intended to protect intellectual property, in fact stifled the flow of information.
Related: FlightBlogger – Inside the South Hangar: Spirit’s road to ten a month – Part One & Part Two
“Boeing support personnel signed non-disclosure agreements while stationed at other partner sites that prevented them from fully reporting back to Boeing on supplier status. In 2006 and 2007, information only flowed through the highest level channels, providing an overly optimistic assessment of the 787 program.”
Harold Leslie is today director of operations for Spirit and in 2009 was the company’s senior manager for 787 systems integration. “Even when we were Boeing, we had a lot of interaction,” he said then of the communication between Seattle and Wichita. Leslie believes that Spirit “by all means” benefited from the Boeing legacy that enabled Spirit to “nail down a preferred build plan early on.”
Things fall apart
A year after the 787 entered service with All Nippon Airways in October 2011, Boeing was pushing ahead with its production ramp up to deliver 10 787s per month. In October 2012, Spirit announced that the sum total of its troubled new development programs with Boeing, Airbus and Gulfstream would force a $371 million pre-tax charge. “As we have consistently described, the biggest risk for Spirit has been, and continues to be, the 787,” said Turner.
Spirit was juggling too many programs at once and they were all performing poorly. The company’s stock tumbled 30.2% and Turner, who had been with Boeing (and later Spirit) since 1973, announced the following month he was retiring, kicking off a search for his replacement.
In April 2013, Larry Lawson, a longtime Lockheed Martin executive on both the F-22 and F-35 programs, took over as CEO. Leaders inside Boeing and Spirit who had described a more conciliatory and flexible approach to the relationship under Turner (owing to the Boeing legacy), found Lawson with a radically different approach.
“Under Larry, things got very tense,” said one retired Boeing program executive, who described him as a “bull in a china shop” for the relationship. Those directly familiar with the relationship said that Lawson took the reins of a Spirit hemorrhaging money, just as Boeing had embarked on a wholesale realignment with its suppliers coming off of the astronomical costs of 787 and 747-8 development and surging production after the global financial crisis.
In 2019, Spirit was building as many as 14 shipsets for the 787 per month. Its work statement for Boeing includes the entire forward fuselage stuffed with systems and a complete cockpit. It also supplies the jet’s engine pylons and fixed leading edge and movable trailing edge of the carbon fiber composite wings. Under CEO Jim McNerney, Boeing’s Partnering for Success (PFS) initiative sought 15-20% cost reductions from its suppliers and it created no-fly lists to bar uncooperative suppliers from bidding on work and loudly moved work from non-compliant suppliers like United Technologies Corporation who initially resisted the cost cutting push.
“You’re going to break your industrial base,” warned one senior Spirit executive at the time, pointing out that the Boeing push was creating a “highly antagonistic relationship with the supply chain they rely on.”
How much Boeing would pay Spirit for its enormous contribution to each of Boeing’s programs19 had become an ongoing feud.
The Hart-Smith paper of 2001 posited that with excessive divestiture and outsourcing, Boeing would not only be shifting its industrial footprint to the supply chain, it would be outsourcing both its profits and revenues as well.20 Even as its return on its slimming assets grew, over time the company wouldn’t be capable of generating sufficient cash to fund an all-new airplane.
Hart-Smith was right, but what his analysis didn’t foresee was Boeing turning around and demanding those profits back in the form of cost cuts. Partnering for Success had engineered a way for it to maximize its cash as it went up in rate, while leveraging its position over suppliers on which it relied. Boeing was staunchly of the belief that it had taken the lion’s share of the risk to launch the 787, therefore it deserved the reward.
While Boeing was able to turn the 75% of the 787 that it purchased from the supply chain into a profitable cash cow, “PFS eroded all of the trust and relationships and made it really hard for all the suppliers to want to lean into Boeing,” according to a senior Spirit advisor.
What was Spirit’s recourse? “You can’t harm your customer,” the senior Spirit executive said. “There’s no scenario where Spirit succeeds and Boeing doesn’t.”
Yet, while Spirit wrestled with high carbon fiber composite manufacturing costs on the 787 and the new development programs on which its future existence was anchored, the 737 remained a bright spot. “We grew up with Spirit, right?” said Bev Wyse, then 737 vice president and general manager in February 2014. “We have really been working extremely closely with the Spirit team.”
In 2014, as Spirit was struggling with non-Boeing programs as it tried to build work with Gulfstream21 and Airbus, for example, Boeing was effusive about its positive contribution to the growing 737 rate. That growing rate was riding a wave of post-recession demand, bridge sales to the 737 Max and the cash generating potential needed to offset a cash draining widebody program — a dynamic that was not altogether different from Airbus on the A320, A380 and A350 at the time.
“We are seeing some of the same significant improvements from Spirit as we’re seeing inside [Boeing]. Really, really pleased with the partnership there. And their on-time delivery to the program, and their number of defects per fuselage have come down really, really well,” said Wyse.
When a train car carrying six 737 fuselages derailed in Montana in July 2014, Spirit scrambled to pick up the slack for Boeing. In 2015, Spirit was watching Boeing and GKN struggle to manufacture a key component in the 737 Max engine nacelle. As it became clear the novel titanium inner wall was going to be a major impediment to meeting the steep Max production ramp up to 57 airplanes per month, Spirit stepped up to quickly design and supply an alternative and keep the program on track, according to the retired Boeing development executive.
Yet, the industrial relationship has had its ups and downs. The quality issues that have acutely frustrated Boeing, like the most recent 737 fitting issue, have “come in waves,” said the development executive. “We had armies of people there” in Wichita. “Every time we send an army in there, things get better. When they go home, they backslide.”
Stan Deal, today CEO of Boeing Commercial Airplanes, played an active role in the relationship between the two companies. As head of Boeing’s supply chain from 2011 to 2014, Deal was a “central figure in making determinations on what the pricing would be” for the components Boeing would buy from Spirit, said a former senior Spirit executive.
Deal was later promoted to run Boeing’s burgeoning commercial airplanes services business in 2014, and in January 2017 was elevated to CEO of Boeing Global Services when the company pressed ahead to make its aftermarket unit a $50 billion business — an initiative spearheaded under Boeing chief executive Dennis Muilenburg.
As the fight over pricing continued, in February 2016 Boeing stopped Spirit from selling 737 thrust reversers and other large parts directly to airlines, cutting off its aftermarket business. “It was a punishment,” said the former senior Spirit executive. “It was aligned with their strategy.”
Boeing threw its weight around, grabbing back its intellectual property licenses as part of its now-abandoned services push. Canaccord Genuity at the time estimated that Spirit’s aftermarket business made up about 5% of its total sales the year before.
The situation over the years with Spirit and its life-of-program contracts has prompted significant frustration for Boeing. “You want to hold their feet to the fire, but there’s only so much you can do. You can’t vote with your feet,” said a senior staff member who recently left Boeing.
The lawsuit
Lawson left the company in June 2016, elevating then-COO Tom Gentile to the role of chief executive, but the tension persisted. “The difference between Tom Gentile and Larry Lawson is so significantly different, I know it’s made a difference” in the relationship, said a former production executive.
In August 2017, Spirit and Boeing hammered out a new definitive agreement “resolving commercial issues through 2022” related to the 737 Max and 787, according to Spirit’s statement at the time.
“We can now focus 100 percent of our time and attention on executing on our existing commitments and growing our business,” said Gentile, implying the distraction of bruising negotiations. “This agreement reduces a great deal of uncertainty, solidifies our relationship with Boeing and positions us to meet our long-term financial goals.”
“The new agreement brings stability for both Boeing and Spirit, and it locks in on cost reduction and improved efficiencies,” said Commercial Airplanes CFO Kevin Schemm. “These are at the heart of our Partnering for Success efforts.”
Yet the strategic and industrial tension persisted. In March 2018, as Boeing was accelerating its transition from the Next Generation 737 to the 737 Max while going from 42 to 47 (on its way to 57) aircraft per month, Spirit’s own supply chain began to stumble and it fell behind on fuselage deliveries to Renton.
And despite the 2017 pricing agreement hailed by both companies, Boeing had continued to extract from Spirit. “A prosperous Spirit means they’re not making their margins at Boeing,” said the former senior Boeing staffer, explaining the zero-sum approach. “One clearly wants to have dominion over the other.”
As Boeing feuded with Spirit the staffer said meeting notes reflected the angst: “The points were pretty acrimonious.” Boeing’s frustration was palpable. “You’re holding up our ability to grow, you’re holding up first time quality.”
By the summer of 2018, things came to a head. Spirit sued Boeing, according to court documents reviewed by The Air Current. Spirit alleged that Boeing was wrongfully withholding $64 million it was owed, dating back to an April 2015 decision by Boeing “of its intent to withhold payments otherwise due under ‘current and future Spirit invoices.’”
“Boeing has repeatedly refused to pay the full contract price for products Boeing purchased and accepted,” according to the July 2018 complaint filed in King County Superior Court. “Instead, Boeing has withheld portions of the full contract price from its payments to Spirit. Boeing has not disputed that the amounts invoiced were properly calculated and owed under the terms” of its agreement.
“Boeing has informed Spirit that it will continue to underpay Spirit, on a schedule and at amounts that Boeing unilaterally chooses.”
Boeing’s decision to withhold payments from Spirit was based on its alleged warranty claims, including many that pre-dated Spirit’s existence when it was still Boeing. According to the lawsuit, “Spirit has for years attempted to resolve this dispute with Boeing, including in multiple recent discussions between senior executives.”
The legal battle went on for months, despite never being explicitly disclosed to investors in any 2018 regulatory filing by Boeing or Spirit.
The suit forced the two companies to return to the negotiating table. On December 21, 2018, Boeing and Spirit amended their pricing terms across the P-8, 737 Max, 767, 777F and 777-9 to December 31, 2030 and pricing for 787s from line number 1,004 to 2,205. The last of eight short bullet points describing the agreement noted a “release of liability and claims asserted by both parties related to Boeing 737 disruption activity and other matters” — an apparent reference to the suit.
“The length of the agreement removes uncertainty well into the next decade,” said Gentile at the time. Three days later the suit was formally dropped, according to court records.
Yet, while Boeing and Spirit got clarity on their program pricing, the agreement also illustrated how Boeing’s financial success with the 787 was achieved on the back of its suppliers.
The 787, which helped deliver billions in cash for investors in the second half of the last decade, was officially a boon for Boeing and a bust for Spirit. In that same December 2018 agreement, Spirit disclosed it “expects that price will exceed cost on the Boeing 787 Dreamliner program after line unit 1,405.” That predated the collapse in production that came with both the pandemic and the halt in 787 deliveries. In February 2020, Spirit expected to hit that milestone in 2023, but in its most recent quarterly filings Spirit said that after the steep ramp down and added cost of fixing 787 quality issues it “has recognized forward losses on the 787 for program forecasted production through May of 2026”, some 19 years after it delivered the first shipset to Boeing. Boeing recently delivered the 1,147th built22 off its assembly lines. The South Carolina 787 plant is currently building at a rate of three airplanes per month, aiming to reach five by year end.
Spirit’s own cost crunch flowed down to its suppliers. “Executing on these cost initiatives will help to offset headwinds of material, labor escalation, volume-based discounts and customer price step downs. As I’ve frequently said, you have to run fast in this industry to stand still,” said Gentile in February 2019, six weeks before the Max was grounded.
The jet’s grounding and eventual halt in production in December 2019 forced Spirit to rapidly downshift from producing parts for 606 737s in 2019 to just 71 in 2020.23 Boeing opened its wallet to keep Spirit afloat. Boeing paid Spirit $225 million, including $70 million for “inventory and production stabilization” and $155 million for partially prepaying for deliveries over the coming two years. The pair also extended their December 2018 agreement on 737s through 2033 and created a “joint task force to monitor the health of Spirit’s 737 Max supply chain.”
As the pandemic roiled commercial aviation, Gentile said in May 2020 that Spirit in had been running ”what we call hotel bids, for hypercompetitive competitions” inviting in suppliers over the course of a week to jockey for work. “So over the last few years we’ve transferred more than 15,000 parts to make sure we have the most competitive rates.”
Yet, the sum total of Boeing’s moves with Spirit and Spirit with its own chain before the pandemic left the supply chain in a significantly weakened state heading into the 737 Max production shutdown and the COVID-19 pandemic.
Related: Boeing grapples with a ‘Pandora’s box’ on 787
Despite having armies of supply chain managers keeping watch on operations, the overarching strategy that flowed from the legal and contractual strategies like Partnering for Success left Boeing extremely vulnerable, concluded many of the Boeing leaders interviewed by TAC. “Boeing has never internalized that supply chain risk is your risk,” said one recently former senior Boeing executive who still maintains close ties with the company and its leadership.
The relationship between the two remains tumultuous and the stakeholder ecosystem that surrounds both has tried to bring the pair together. On at least one occasion in recent years Kansas’s influential United States Senator Jerry Moran formally asked Boeing for a meeting between Calhoun and Spirit to fortify executive lines of communication, according to two people directly familiar with the request.
Spirit’s more than 11,000 employees in Kansas (13,200 before the pandemic) makes the company the largest private employer in the state. And that figure is growing rapidly as Spirit swells its ranks in conjunction with the ramp up.24
Despite the latest quality disclosure, Boeing is pushing ahead with its 737 and 787 ramp ups. “We are not changing the supplier master schedule including any anticipated rate increases,” said Calhoun in April. “And we are comfortable holding buffer stock so that our supply chain can keep its pace. We appreciate the actions that our fuselage supplier took to notify us promptly and we’re working constructively with them to accelerate their recovery plan.”
Bernstein’s Doug Harned wrote in a recent investor note that he expected Boeing to shake off the highly public quality issue and delivery delays, but “for Spirit, this situation is a more serious disappointment.”
“Our greatest worry is that there could be further issues at Spirit, given the track record, which could derail both Spirit and Boeing’s performance,” he wrote.
“They have an uncertain future until the production rates stabilize,” said the retired Boeing production executive of Spirit.
Subscribe to The Air CurrentBuying back Spirit
In the dynamics of their complex duopoly, Boeing and Airbus’s moves have tracked closely to one another. One re-engined the A320, the other the 737. One pursued a small airplane tie up with Bombardier, the other with Embraer. After initially resisting a derivative approach, the all-new composite twin-aisle A350 followed Boeing’s all-new 787.
In 2008, European Aeronautic Defence and Space Company (EADS) sought to follow the same industrial divestments that created Spirit in 2005. Amid a weakening dollar and rising euro, Airbus committed to spinning off several German and French aerostructures plants. “We as Airbus can focus on our core business, being an aircraft architect and integrator,” said Fabrice Brégier, Airbus Chief Operating Officer at the time. It was a near identical “vision” to Mulally’s when Spirit was divested in 2005.
Airbus was unsuccessful in selling the new companies. Instead, they would remain wholly-owned, but each was given a mandate to control its own destiny: win non-Airbus work and get lean. Airbus kept trying to sell, but by 2021, it reversed course altogether.
Today the industrial reintegration of Airbus’s aerostructures supply chain is the polar opposite of its original goals. “The connection between the design and the industrial system of aerostructures…we think this has to remain in Airbus, that has to be really core to Airbus,” said CEO Guillaume Faury.
Related: In Hamburg, Airbus passes last embers of A380 torch to A321XLR
With the strategic barrier gone, the structure of the newly formed Airbus Atlantic lets the company speed up design changes, factory automation and digitization, said the senior advisor to Spirit. To be sure, production headaches faced by Spirit and Boeing are far from unique and remain widespread across the supply chain. Airbus has struggled to meet its own delivery targets and recently replaced the head of its A320 program, Michael Menking, with Christoph Zammert.
Is that move by Airbus a prelude to Boeing bringing Spirit back under its own control?
“They shouldn’t have to buy them to solve this problem,” said another retired top Boeing executive of the quality issues slowing 737 deliveries.
Yet, a Boeing acquisition of Spirit would not solely be about smoothing out product quality, said the Spirit advisor. Examining Airbus’s own move, “It puts them in the driver’s seat,” allowing Airbus to invest and take risks absent a feeling of “dragging these guys along.” Owning its aerostructures chain gives Airbus a cost advantage and the margin it once paid on those structures “goes away” while it pushes to build 96 single-aisle A320s and A220s every month in the second half of this decade, the advisor added.
Related: Absent 797, Boeing bets on Wisk’s autonomous moonshot
Notably, Boeing, too, brought key next-generation aerostructures work back under its own direct oversight. It was forced to buy Vought and Global Aeronautica (a joint venture between Vought and the company now known as Leonardo) to right the 787 program and establish Boeing South Carolina. It’s also building its own massive carbon fiber composite wings for the 777X.
Yet, with the exception of the 737’s wing, Boeing’s legacy chain for aluminum airplanes has remained outside of its direct control and Spirit’s fortunes remain more closely tied to Boeing than any other company. Gentile has repeatedly outlined the company’s goal to diversify its business away from Boeing, taking on a larger defense portfolio with the Northrop Grumman B-21, as well as acquiring Bombardier’s Belfast division to supply the carbon fiber wings to the A220.
“You can build as many [A]220 wings as you want, but it’s still your bread and butter,” said the advisor of the 737 Max, which makes up 58% of Spirit’s total backlog of work. Wall Street analysts estimate that Spirit earns between $6 million and $7 million in revenue per 737 shipset.
The inescapable truth is that Boeing’s most important product, the 737, is with a cash strapped supplier. Since its founding in 2005, Spirit has had negative free cash flows in 10 of its last 17 years of operations. And only one year, 2015, when the company tallied free cash flow of $929 million just as it was transitioning to 737 Max production, is almost entirely the difference between generating any free cash flow at all in its history.
For Boeing, the strategic necessity of a healthy Spirit has only grown. Boeing’s single-aisle eggs are in Spirit’s basket until at least the middle of the next decade without near or medium term plans to launch an all-new airplane — and one that will rely more heavily than ever on the digital integration of design and production, and potentially anchored by a high-rate metal fuselage.
Related: NASA gives Boeing a second shot at reshaping commercial aviation
In the decade leading up to the pandemic, there was never a serious move to consider reintegrating Spirit back into Boeing, despite one suggestion Spirit sought to initiate a discussion. “It would seem stupid. We sold them and we have to buy them back? It was bad enough that we had to buy Vought,” said the second top retired Boeing executive.
Each of the current and former senior Boeing leaders TAC interviewed said that there were plenty of times that they lamented the divestiture and “wouldn’t it be nice” to have them back.
“Boeing leaving Kansas was the biggest mistake,” said the retired production executive.
How would an acquisition of Spirit by Boeing work? Such a deal looks like a “classic private equity rollup”, where one party identifies the assets that are of principal value, while divesting others, said the senior Boeing executive who recently left the company, but maintains close ties with Boeing.
Spirit’s Boeing programs in 2022 accounted for 65% of its overall revenue25, but it has taken on a greater defense portfolio with its B-21 manufacturing26 and Bell’s V-280 tiltrotor. Industry officials suggested that its Airbus work in North Carolina, France, Scotland and Northern Ireland, would be divested along with its regional and business aviation programs helping pay for the deal.
Selling off Boeing Wichita to create Spirit was “based on a faulty financial construct,” said the retired airplane development executive of Boeing’s RONA strategy from the early 2000s. “Controlling our destiny is far more valuable than any accounting treatment associated with the divestiture.”
Though the financial constraints for both companies are very real. “Where are you going to get the cash?” said the retired Boeing program executive. “Even if it is a good idea.”
In addition to the ramp-up, Boeing’s slate of expensive priorities are a mile long. It has to complete the 737 Max 10 and 7, the 777X in 2025 and the 777-8F in 2027, along with working through a spate of money-losing defense and space projects. “I can’t even imagine [Boeing] wanting to put even one more rock in their backpack,” said the Spirit advisor, but noted an offer would be seriously considered.
The plane maker reached a cash flow positive position at the end of 2022, but turned negative again in its first quarter earnings and still has a $55.4 billion pile of debt. Boeing has promised Wall Street $10 billion in free cash flow, built on building 50 or more 737s each month and 10 787s by the middle of the decade.
Boeing finds itself in a paradox of its own making. Boeing cannot afford to buy back Spirit in its current financial position, but without buying back Spirit it may not be able to stably reach the production rates to achieve its own promised mid-decade financial goals.
Yet, the discussion stretches far beyond meeting the mid-decade ramp up goals outlined by both companies. The very nature of the increasingly-imbalanced duopoly is at stake: “It’s entirely a battle of supply chains,” said the retired airplane development executive. “Our ability to rate up is crucial.”
Spirit’s shares are off 70% from its pre-pandemic, pre-grounding highs in 2018 and have fallen another 16% since Boeing and Spirit disclosed the 737 fuselage fitting issue on April 14. Its market capitalization at the close of trading on May 2 stood at $3.15 billion.
“If they’re going to do it, now would be the time to do it,” said the top retired Boeing executive.
Write to Jon Ostrower at jon@theaircurrent.com
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