Spirit AeroSystems 3Q23 Results are Irrelevant

After a steady stream of unsettling news throughout the year, we get to the 3Q23 results for Spirit AeroSystems. The loss per share is $1.42, which was expected, reflecting a “revised consensus.” after Spirit issued preliminary results last month.  The third quarter at Spirit began with a strike, followed by the quality issue on the rear pressure bulkhead of the 737 MAX.  Those two items materially impacted financial performance in the third quarter, leading to executive changes and renegotiation of arrangements with Boeing.  The Boeing Memorandum of Agreement will materially change the financial outlook for the company and has already caused the reversal of program charges as the new terms will turn the 787 program from a loss to a profit.

In Q3, Spirit took hits on the 737, 787, A350, and A320 programs to the tune of $134m. Spirit further lowered its deliveries of 737 MAX shipsets to 345-360 this year, down from 370-390 in August. This was already down from the previously expected 390-420. Spirit delivered 332 shipsets in the quarter, of which 83 were Boeing 737 MAXs.  The company plans between 37-42 737s monthly in the 4th quarter.

The company also plans for 42 737 MAX per month in 2024 but has not provided firm guidance for next year.  There are about 80 units in a buffer inventory, including about 50 owned by Boeing, that it could pull whenever it likes.  Synchronizing schedules to lower inventory levels and ensure on-time deliveries will be addressed in early 2024.

Vertical Research Partners makes a great point in their note: “Spirit’s 3Q23 results are essentially irrelevant. This doesn’t just reflect that they were pre-announced, but more that they have been superseded by the company’s Memorandum Of Agreement with Boeing that should re-set their relationship“

The MoA with Boeing provides increased revenue for the 787 and a price drop for the 737 starting in 2025.  The MoA also provides funding for CAPEX expansion, a cost Spirit used to bear.  This provides a lifeline on the Boeing side of the business.

Similar negotiations are now underway with Airbus, focused on the loss-making A220.  Spirit acquired the former Bombardier nee Shorts facility in Belfast that makes the A220 composite wing.  Pat Shanahan, their new CEO, was hopeful that an agreement could be quickly put in place with Airbus to stabilize the company’s financial performance and outlook.  Working with new materials, such as the resin transfer molding process for the composite wing, is an essential element of the company’s future success, according to Shanahan.  

A second major hurdle coming up for Spirit is re-financing debt.  Current debt begins to come short-term in late 2024, and the company must refinance.  The company indicated it has access to the capital markets, and Boeing will not be underwriting debt on their behalf.

Those two significant issues are the focus of management, with a third issue – ensuring quality and timeliness of production.  Spirit wants to deliver a “clean” product free of defects on time and budget.  That is something the company has historically been unable to do in recent years, and it needs to focus on execution, according to Shanahan.  He has set new priorities for the company, which include safety, quality, and efficiency on the shop floor.  He indicated that “management has a long shadow, and that’s where I will be spending time” to focus the company on execution.

When asked, however, if there was a scenario in which he would remain CEO for more than the planned one year as interim CEO, he indicated that his commitment to his wife and the company was for that year, and nothing has changed in that respect.  The interim title will likely be maintained as the company seeks a new CEO.

Having been CEO for about 30 days, Pat Shanahan deferred to February, the next quarterly briefing, to provide more detailed answers about the company’s outlook, performance, and hopefully an MoA with Airbus.  The challenges are daunting, but management believes the company can turn around and become an industry leader based on its capabilities and engineering expertise and a renewed focus on execution.

Ernest Arvai

President AirInsight Group LLC

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