SEATTLE – Spirit AeroSystems, losing money, deep in debt and facing repeated revelations of quality defects on parts supplied to Boeing, at the weekend abruptly fired CEO Tom Gentile.
The board of the Wichita, Kansas, company appointed an interim replacement from its own ranks: former Boeing senior vice president Pat Shanahan, who led manufacturing operations and supplier management at the jetmaker before joining the Trump administration in 2017 as deputy secretary of defense.
In a statement, Shanahan expressed confidence that Spirit can get through its troubles and said he will meet with customers and suppliers to “stabilize operations and drive improved cash flow.”
Gentile’s firing reflects a crisis at Spirit that deeply affects Boeing.
Defects in major parts supplied by Spirit have repeatedly set back Boeing’s efforts to recover jet production after the steep downturns that followed first the 737 MAX crashes and then the COVID-19 pandemic.
In 2020 and 2021, multiple small but out-of-tolerance gaps at the joins in the 787 airframes were found in sections supplied by Italian and Japanese suppliers and also in the forward fuselage built by Spirit.
That led to a halt in 787 deliveries for about 19 months and a buildup of parked aircraft that cost Boeing $6.5 billion.
This year, Boeing in August discovered that MAX fuselages built by Spirit had been delivered with improperly drilled holes in the aft pressure bulkhead – the heavy metal dome capping the back end of the passenger cabin that is essential to maintaining cabin pressure.
While not an immediate safety issue, a labor intensive fix is needed on hundreds of MAX airplanes. Boeing CFO Brian West said as a result the company will sink back into the red this quarter.
In April, Boeing had found some fittings that attach the MAX’s vertical tail fin were improperly manufactured by a subcontractor to Spirit. That defect cut MAX deliveries to airlines during the peak summer season.
While repairing those jets and avoiding further quality lapses is a priority, Shanahan must also renegotiate contracts so that Spirit can survive financially.
At the end of June, before the latest 737 MAX setback, Spirit was $3.7 billion in debt with just $526 million in cash on hand.
The crisis has renewed speculation that Boeing might think again about buying Spirit and taking over its operations, a move executives ruled out at the Paris Air Show in June.
That may not even be possible given Boeing’s $38.5 billion debt load and stretched resources.
Ken Herbert, an industry financial analyst with RBC Capital Markets, told investors Monday that he expects a positive reaction to the CEO change in the stock market.
“We are uncertain on the ability of the interim CEO to change the near-term execution challenges facing Spirit, but we do believe Gentile had lost substantial credibility with investors and even within the company and industry,” Herbert wrote. “The focus for Spirit will remain production execution, potential customer contract renegotiations, and then debt refinance.”
Two decades ago Spirit was an integral part of Boeing. The company’s largest parts plant with a workforce then of 12,000, it built the forward fuselage and cockpit section of every Boeing jet and the entire fuselage of the 737.
Spirit was sold off in 2004 in an effort to appeal to Wall Street and boost the stock price. Boeing’s then CEO Harry Stonecipher led a round of asset sell-offs, divestments that top executives later acknowledged were misconceived.
Now an external supplier of airplane structures to both Boeing and Airbus, Spirit is still the sole supplier of those critical major components on all Boeing’s jet programs.
While Boeing is no longer Spirit’s sole customer, it’s still by far the biggest. Financial filings show that last year, with the 787 program mostly halted, the 737 MAX program alone provided 45% of Spirit’s revenue.
The relationship with Boeing grew strained as the jetmaker squeezed all its suppliers on pricing over the years. It worsened when Spirit’s finances were devastated by the prolonged stoppage to 737 production after the MAX crashes in 2018 and early 2019 and then the slowdowns in all jet programs due to the pandemic.
The crisis expanded with the discovery of the latest cascade of 737 and 787 quality defects.
Already burdened by its existing contract terms that mean it is losing money on Boeing programs – Spirit has seen a cumulative loss on the 787 program since its inception of $1.4 billion, which Gentile last month declared “not sustainable” – it has struggled to cope with the additional costs of the repair work on all these defects.
Former top Boeing executive Shanahan will have a wealth of insider knowledge to draw on in the ongoing negotiations to improve Spirit’s contract terms with the jetmaker.
He must do the same with Airbus, for Spirit is also losing money on the European jetmaker’s A350 and A220 programs.
This year, Boeing propped up Spirit with an advance payment of $180 million, half of which is to be repaid in February and the rest a year later.
Airbus also gave Spirit cash assistance, with an advance of $50 million in the first half of the year and another $50 million coming in the fourth quarter.
But money alone is not enough. Boeing said last month it has sent “armies of people” to Spirit to help get their manufacturing processes under control.
‘Clock is running’In a securities filing Monday, Spirit revealed a separation agreement with Gentile that will give him $1.3 million plus another $1.5 million in stock and a year’s medical and dental coverage.
Gentile, a former GE executive who took charge of Spirit in 2016, will also get a retainer of $50,000 to provide Shanahan consulting services for a three-month transition period.
While Spirit searches for a new permanent CEO, Shanahan, 61 – who was elevated to acting secretary of defense for six months after Jim Mattis resigned and who since leaving office has served on various corporate boards – will receive an annualized base salary of $2 million and a one-time grant of restricted stock worth $8 million.
Scott Hamilton, Bainbridge Island, Washington-based founder of industry analysis firm Leeham.net, speculated Monday that Boeing might consider various options to secure its parts supply, including a possible buyout of Spirit or setting up a new 737 MAX fuselage production line in Everett to supplement Spirit.
Boeing once before bought out its major 787 airframe suppliers in South Carolina – Global Aeronautica in 2008 and Vought in 2009 – when each proved incapable of doing the work to the required quality. That’s what first established Boeing’s jet assembly facility on the East Coast.
However, even if Boeing could come up with the money and resources, a Spirit buyout would be much more complex. It would have to split off the parts of Spirit in Scotland, Northern Ireland and North Carolina that make Airbus parts from the facilities in Wichita and Tulsa, Okla., that make Boeing parts.
European regulators would no doubt be wary of the competitive consequences.
Still, some fix for Spirit has to be found.
“The clock is running on Spirit. It is adding debt. It is burning cash,” Hamilton said. “At a time in the not too distant future, Spirit will need an injection of cash to continue operating.”
Spirit on Monday did not respond to a press query. Boeing in a statement said, “We look forward to continuing our strong partnership.”
Shanahan will publicly offer his view of the situation when Spirit reports its third quarter financial results on Nov. 1.