Full Circle: Boeing in Talks to Acquire Spirit Aero

Boeing confirmed that it is in talks to re-acquire Spirit AeroSystems Holdings, Inc. to bring the quality plagued supplier of fuselages and components for the troubled Boeing 737 MAX program back in house. Boeing spun off Spirit in 2005, and it has remained independent since then. Spirit is Boeing’s largest parts supplier for the 737 MAX and also produces 787 components. An acquisition would enable more uniform oversight of quality as Boeing responds to the recent and highly critical FAA report

, and awaits manufacturing audits of both Boeing and Spirit operations.

“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 said in a statement. Spirit separately confirmed that discussions were underway.

Spirit has been the source of numerous “quality escapes” recently, including mis-drilled holes near the critical rear pressure bulkhead of the fuselage and other issues. Former Boeing VP Pat Shanahan landed the CEO position at Spirit to assist in quality improvements. With Boeing accounting for 64% of Spirit’s total business, Shanahan’s knowledge of Boeing will be helpful in the transition back into Boeing.

Spirit has also been struggling financially given the ups and downs of the MAX program, and is too critical a supplier to Boeing for them to allow a bankruptcy. Spirit is also in talks with Airbus to sell its Northern Ireland division, acquired during Bombardier’s divestiture of the CSeries. Such a transaction would also enable Airbus to take more control of wing production for the A220 family and bring it in-house.

The Bottom Line

Boeing’s strategy after the McDonnell-Douglas acquisition in 1997 changed Boeing’s culture from an engineering-driven one of cost controls and financial returns. A part of that strategy was outsourcing key aircraft components to third-party risk-sharing partners, which reached a pinnacle with the 787 Dreamliner, with its massive developmental delays and cost overruns. The 2005 divestiture of fuselage production to Spirit has now come full circle. The key question is whether Boeing finally recognizes that their outsourcing strategy has been an absymal failure, and that the Boeing culture must return to one focused on product performance and quality rather than financial returns.

Spirit AeroSystems is a troubled supplier with multiple quality issues on the 737 MAX and 787 programs. Re-integration with Boeing will allow Boeing to take full responsibility for fuselage quality and eliminate the embarrassing quality flaws for which there are no excuses, such as mis-drilled holes.

With Boeing having manufacturing quality issues, this will expand the scope of their quality turnaround plan, due in less than 90 days. Boeing needs to clearly explain to the FAA how this acquisition will eliminate quality issues and transition to the revised Boeing quality system.

From a financial perspective, this acquisition should be easy for Boeing to accomplish, given their cash position. We expect the company will be creative and structure the transaction in a share swap, using Boeing shares in lieu of cash, which would not result in major dilution for existing shareholders.

The critical question is whether this acquisition represents Boeing management’s recognition that their culture is flawed and part of a plan to fix it, or simply a move they can represent as a $3 billion plus investment in quality at the subsequent congressional hearings. If it is the former, this could be the breakthrough the company needs to fix its problems. If it is the latter, Boeing will find itself in a crisis of confidence with airlines, regulators, and potentially even passengers.