UPDATE – Tier 1 supplier Spirit AeroSystems has been hit hard by the latest quality issues on the Boeing 787. After recognizing a $46 million forward loss on the Dreamliner in Q2, the company expects to incur another $40-60 million loss in Q3, it announced on August 4. Nose issues 787 drive up Spirit’s forward losses.
Spirit is a supplier of Section 41, the nose section of the 787. CEO Tom Gentile confirmed earlier that the company had identified ‘fit and finishing’ issues on the nose barrels, similar to those found on the aft fuselage sections produced by Boeing itself. These issues included incorrect shims and a skin flatness issue. In July, another problem was found on the forward pressure bulkhead, with tiny gaps of 0.005 inches between the pressure bulkhead and the nose section.
“As a result of our ongoing engagement with Boeing on the 787 program, we identified an additional issue in the forward section of the fuselage”, Gentile is quoted in the Q2 results release. “We continue to coordinate with Boeing to ensure that we are performing all necessary rework. Primarily driven by this issue, we have recognized a $46 million forward loss on the 787 program in this quarter.”
Mirroring Boeing CEO David Calhoun’s remark during last week’s investor’s webcast on July 28 that the issue was found because of “Boeing being hard on Boeing”, Gentile said the nose issue was identified because “Spirit was being hard on Spirit.” The problem has been traced to a part produced by a tier 2 supplier for which Spirit has design responsibility, but that was designed “before Spirit existed”. The issue, which doesn’t affect flight safety, has been fully understood, but it is up to Boeing and the FAA to decide how it must be addressed. Calhoun said on July 28 he hoped that any rework on 787s that are already in service can be done during regular maintenance.
Nose fix takes about a week
Gentile added to that: “during normal scheduled heavy checks. (…) The rework involves essentially replacing the part. Boeing and the FAA will decide on the final fix but we have already defined what the fix is. The rework evolves. It took 8-10 days to do the first ones and then it gets progressively smaller as the team gets more experienced.” Spirit has already started the rework but leaves it up to Boeing and the FAA to communicate when 787 deliveries will restart, which have been paused in May. The airframer said it expects to deliver less than half of the inventory this year and the majority in 2022.
Boeing hasn’t announced any reach-forward losses on the Dreamliner this year and said last month that all costs have been included in the Q2 results. Spirit already did a $29 million forward loss and has announced another $46 million today. The incremental forward loss for Q3 of $40-60 million includes headwinds that are expected over the next few years, not in 2021, Chief Financial Officer Mark Suchinksi said. The impact on cash will mostly be in 2022. The forward loss covers the impact of reduced production volumes of the 787 “and the corresponding amount of fixed overhead absorption applied to lower deliveries. This preliminary assessment is subject to change if Boeing revises its production and delivery plans.” The 787 production rate has come down to below five per month and might only return at this level by the end of the year. Gentile hopes to offer more clarity in the third quarter.
Net loss reduced thanks to higher volumes
During the second quarter, Spirit AeroSystems reduced its net loss to $135 million from $256 million. The operating loss was $97.7 million versus $367 million but still includes $47.5 million in excess capacity costs. Revenues were up by 55 percent to $1.005 billion. Free cash flow improved to $-53 million, up from $-249 million last year.
For January-June, the net loss improved to $307 million from $419 million, with the operating loss at $224 million versus $535 million last year. Revenues were $1.903 billion compared to $1.722 billion last year.
At Fuselage Systems, these results are reflected by higher quarterly production volumes and deliveries of 243 shipsets compared to 159 last year. Spirit delivered 35 737/MAX shipsets to Boeing, up from nineteen in Q2 last year, or 64 in HY1 compared to 37 last year. Gentile expects to deliver 52 shipsets in Q3 and some 160 for the whole of 2021, including fuselages that come from destocking inventory to twenty next year. Boeing said that future production rates of the MAX will depend on the recertification in China, “so that’s something we will continue to monitor closely”, said Gentile.
Airbus takes slightly fewer A320 shipsets quarter-on-quarter
Airbus received 96 A320neo shipsets in Q2 versus 69 last year or 226 in HY1 versus 257 in 2020. Actually, deliveries in Q2 were lower than the 130 in Q1. Spirit attributes this to “a little bit of destocking, post-Brexit. Nothing to be concerned about, our rates remained the same. Airbus pulled a few fewer units just because they were probably adjusting their inventory levels. We are more aligned now”, said Tom Gentile. A220 shipsets out of Belfast were 15 in Q2 (eight last year) or 27 in HY1 (23).
Widebody deliveries were lower. The 787 issues halved Q2 deliveries to 11, for HY1 to 26 from 62. The 777 was at 6 in Q2 (7), or 11 in HY1 (16). Airbus received 4 shipsets in Q2 (5 in 2020), or 9 in HY1 (13), while A350 deliveries were 11 versus 13 in Q2 or 23 in HY (39). Fuselage Systems reduced its HY1 loss to $91.6 million from $337.9 million.
Business/regional jet deliveries were also significantly better to 54 from 10 in Q2 and to 104 from 22 in HY1. Gentile was unwilling to specify which types are involved but said it is mainly because the Bombardier Challenger and Global Express business jet program is now a bigger part of the portfolio.
Propulsion Systems (nacelles) also benefitted from higher 737 and MAX volumes, partially offset by lower 777 volumes. It reported a $44.9 million HY1 profit compared to a $22.6 million loss in 2020.
Wing Systems revenues soared from $122.5 to $259.3 million thanks to increased production on the 737/MAX, A220, and A320neo programs. Still, the segment took $4.3 million in restructuring costs and $12.8 million in capacity costs and reported an HY1 loss of $35.1 million compared to $28.9 million.
Spirit AeroSystems expects to become operationally cash flow positive again next year thanks to the tailwind from higher MAX volumes, “which is the single biggest driver of cash flow in 2022”, said Suchinski. Another factor is destocking inventory, less rework on the 787, and higher production volumes of the A320neo as Airbus ramps up rates.
The company also intends to tap into the market of new eVTOL aircraft. Chief Operating Officer Samantha Marnick said Spirit is exploring opportunities and is in talks with a number of players. The business could potentially grow revenues to $500 million.