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Boeing pumps cash into Spirit AeroSystems to shore up troubled supplier

By Dominic Gates Seattle Times

Boeing has reached a sweeping financial agreement with Spirit AeroSystems of Wichita, Kansas, pumping in millions of dollars to support the financially hobbled supplier.

The deal comes after Spirit’s chief executive Tom Gentile was fired earlier this month and replaced by former top Boeing executive Pat Shanahan, who was deputy secretary of defense under former President Donald Trump.

Boeing’s most important supplier, Spirit builds the forward fuselage, including the cockpit, for every Boeing jet and the entire fuselage for the 737 Max.

The goal of the agreement is to stabilize Spirit’s production system, by stemming the flow of quality defects that have afflicted the 737 Max and the 787 Dreamliner jet programs this year and positioning Spirit to ramp up to Boeing’s planned rate increases.

In a statement Wednesday, Spirit said the deal will provide “greater collaboration to achieve improved quality and higher deliveries in the future.”

“Boeing and Spirit will continue to work shoulder to shoulder to mitigate today’s operational challenges,” Shanahan said.

A Spirit financial filing said the deal requires the supplier to “create and implement, to Boeing’s satisfaction, an operational stability plan.”

It will have to demonstrate reductions in quality defects; increase support staffing; coordinate with Boeing to buffer parts supplies, “including two weeks’ worth of finished goods for 737”; and provide detailed plans for outsourcing to any new subcontractors, the filing states.

To make this possible, Boeing has agreed to provide Spirit $100 million immediately for capital investment in tooling.

In addition, the deal provides new pricing so that Boeing will increase what it pays Spirit for its 787 parts by a total of $455 million over the next two years.

The agreement allows Boeing to start clawing back some of that amount later with $265 million in price reductions between 2026 and 2033 on the 737 parts Spirit makes.

The new deal also pushes out the repayment schedule for Spirit to reimburse Boeing for $180 million in advance payments granted this year to help it through its financial crisis.

The first repayment of $90 million was due in February, with the second $90 million required a year later, and it wasn’t clear that Spirit would be able to make those payments.

Now Spirit will have until February 2025 to repay the first $90 million, with the remainder due in two $45 million installments at the end of 2026 and the end of 2027.

Rob Stallard, an industry financial analyst with Vertical Research, said Wednesday the money Boeing is pouring into Spirit through 2025 will come out of its cash flow, the metric most closely watched by Wall Street.

Boeing has set a target of $3 billion to $5 billion in free cash flow this year and $10 billion per year by 2026.

Spirit is in financial distress

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.

In September, Gentile said at a conference Spirit’s cumulative heavy losses on the 787 jet program – amounting to a staggering $1.4 billion over the 16 years since the first one rolled out in 2007 – were “not sustainable.”

To address that, the price increases on what Boeing pays Spirit for the major 787 parts that it makes apply to the next 440 airplanes.

After that, Boeing has agreed to negotiate further pricing changes “in good faith.”

Those 787 pricing increases will give Spirit an extra $60 million in revenue for the remainder of this year and an additional $395 million in the following two years.

The 737 Max pricing decreases don’t kick in until 2026.

They will cut Spirit’s revenue by $60 million between 2026 and 2028 and by another $240 million between then and 2033, the financial filing states.

With Spirit deep in debt and financially wobbling, Boeing senior vice president Ihssane Mounir, who heads up the global supply chain for Commercial Airplanes, has been in negotiations on pricing and compensation claims for many months.

The deal, released publicly Wednesday morning, was signed October 12, just 10 days after Gentile was fired.

Shanahan’s close ties with Boeing and the mounting sense of crisis at Spirit seem to have provided the final impetus to come to the agreement.

Separately, Spirit has also been negotiating new financial terms with its other major customer, Airbus.

Gentile said last month Spirit has been bleeding money on the parts it builds for both the A350 and A220 programs.

It’s possible a deal with Airbus may follow this one with Boeing.

The Boeing agreement ends all legal claims of liability between the parties over the series of quality defects.

The most recent quality problem was the discovery of misdrilled holes in the aft pressure bulkhead of the 737 Max fuselage.

Boeing has said it will post a loss in the third quarter as a result of the extensive inspections and repairs required on previously built Maxes.

The agreement also offers protection of Boeing’s interests in the event of Spirit sinking deeper into financial distress and becoming a takeover target by another company or a hedge fund. Boeing must consent to any such “change of control.”

In a statement, Boeing called the deal “mutually beneficial.”

“This agreement with our valued supplier will enhance operational stability in our production system and help us deliver on our customer commitments,” Boeing said.

Boeing needs Spirit not only to steady the ship and stop the defects but also to prepare for an aggressive ramp-up plan.

Boeing has said it wants to raise the 737 Max production rate from the current 31 jets per month to 38 per month soon and then 50 jets per month by 2026.

And it plans to boost the 787 rate from four per month now to five per month by year end and 10 per month by 2026.

Reuters this month reported that Boeing has signaled a more aggressive ramp up to suppliers, asking them to be ready to go up to 57 jets per month on the 737 Max by mid-2025.

Near-term boost for Spirit

Spirit said the injection of Boeing cash means it can cancel more than $350 million in expected write-offs on the 787 program for the fourth quarter.

And Boeing’s agreement to release Spirit from claims over its supply of defective parts means Spirit won’t have to pay the $23 million it anticipated for the previous 737 defect on fittings in the vertical fin discovered in April.

However, with the Boeing cash not coming in until the fourth quarter, Spirit now projects that it will lose between $50 million and $60 million in the third quarter.

Spirit projected in the filing a write-off of more than $100 million for losses in the third quarter on the Boeing 787 and Airbus A350 jet programs, citing higher supply chain and labor costs.

And it projected more than $60 million in additional negative accounting adjustments on the 737 Max and the Airbus A320 programs, with the cost of repairing the 737 Max defects adding to the higher labor and supply chain expenses.Spirit will announce the final third quarter results on November 1.