Tier-1 supplier Spirit AeroSystems is to initiate a cost reduction program to reduce structural costs and improve profitability and cash flow in 2023. It says it needs to as production rates of the Boeing 737/MAX remain around 31 per month, Spirit said in its Q3 earnings presentation. Spirit AeroSystems to reduce costs as MAX rates remain low.
Already in August, Spirit was aware that Boeing would maintain the 737/MAX production rate in the low thirties for most of 2023. Boeing confirmed this last week in its Q3 earnings call and again yesterday during its Investor’s Conference, with Chief Financial Officer Brian West saying that the rate might get to the low forties only by the end of next year. The new rates give Spirit some clarity, but it is too early to tell how they translate into new production plans.
Until rates go up, Spirit has few options to grow revenues and improve margins on the 737/MAX program. Although the program contributed favorably to the operating margin at four percent in Q3 versus minus nine percent last year, Spirit now reverts to a different strategy: “Given that our production rate is set at 31 aircraft per month on the 737 program now, and we will likely remain at that rate for much of 2023, we are initiating a focused effort to reduce structural costs to enhance our profitability and cash flow in 2023.” Chief Financial Officer Mark Suchinski said that Spirit has kept up with lower production rates for two years, “but at this point, we can’t. These are some structural things we are going to do.”
The optimization program looks at operations, the supply chain, and infrastructure overhead costs to make Spirit profitable even at a rate of 31 per month for the 737/MAX. “We have to make sure we align the costs to the production levels that we have. We want to continue to optimize those costs and make sure we get them at the most competitive rates”, said CEO Tom Gentile. “In the supply chain, we are really looking at level-loading the system, figure out where are the pockets of capacity and labor that exist and how can we move that around the supply chain? Including how we can push things back out that we brought in during the pandemic. In operations, we want to leverage investments we made, like digitalization, automation, and lean-factory flow, and drive improvements in realization and productivity.”
Asked if Spirit didn’t risk compromising its supply chain by reducing costs, just as Boeing might get to a rate increase in a couple of years from now, Suchinski said that Spirit is very mindful that the cost reductions will not have a negative impact on the ability to deliver: “We are doing it in a way that we make sure that we protect the factory, but there are some costs that we need to go and get due to the fact that production rates aren’t recovering as quickly.” Gentile added that “we aren’t not going to do anything that will hinder us from meeting the expectations of our customers.” Spirit needs around a six to eight months lead time to prepare for higher rates.
Also part of the plan is the refinancing of loans “to provide an additional cushion in the uncertain economic environment. We are not planning to issue equity,” said Gentile.
In Q3, Boeing took delivery of ninety shipsets compared to 68 in 2021. They include 69 737/MAX, up from 48 in the same quarter last year, or 200 through September versus 111 in the first nine months of 2021. Gentile reiterated that 300 737/MAX shipset deliveries are the target for the full year, of which some will come from its inventory of 72 fuselages.
Widebody deliveries to Boeing were about flat in Q3. The number of 767 shipsets was down by one this Q3 to seven, but the 777 was up by one to eight. For the year to date, 767s are 23 versus 27 last year and nineteen versus eighteen for the 777.
787 Deliveries were up by one to six in Q3, but down to thirteen from 31 for January-September as Dreamliner production was kept at a very low rate. Increased supply chain and other costs for the 787 contributed to the net forward charge in Q3. Boeing said on Wednesday that it plans to increase the 787 rates to five and eventually to ten aircraft per month in 2025-2026.
Spirit delivered 176 shipsets to Airbus in Q3 compared to 130 last year. Narrowbodies lead the way, with the A320neo family at 145 deliveries, up from 105, and the A220 program to twelve from ten. From January to September, the US supplier delivered 447 A320neo shipsets to Airbus versus 331 in the same period of last year. The A220 stands at 46 versus 37.
Widebody shipsets to Airbus were lower: eight A330neo’s in Q3 compared to six last year, or twenty year-to-date versus fifteen last year. The A350 saw eleven deliveries in Q3, up from nine last year. The A350 was largely responsible for the $49.1 million net forward loss charge in Q3, which “reflects additional costs related to labor, freight and rework and the impact of part shortages.” For the year to date, XWB deliveries were 37 compared to 32 last year.
Spirit AeroSystems reported a consolidated net loss of $-128 million for Q3 compared to $-114 million last year. It booked the first $5 million operating profit in three years, up from $-157 million. Total revenues were up to $1.277 billion from $980 million. Excess capacity costs stood at $31.4 million, of which $29.9 million with Commercial.
For January-September, the net loss was $-303 million compared to $421 million, the operating loss was $-142 million versus $-380 million, and revenues of $3.710 billion versus $2.883 billion. Free cash flow was $-73 million and is expected to remain negative for the full year between $-75 to $0 million as Airbus moved A220 and A320 deliveries out of the year until 2023, but should turn positive next year. Liquidity ended at $671 million, down from $1.5 billion, while debt was on par at $3.8 billion.
By segment, Commercial produced a $45 million profit in Q3, up from $-72.8 million in 2021. Revenues improved to $1.035 billion from $784.1 million. The operating margin improved to 4.3 percent from -9.3 percent. Defense & Space and Aftermarket also improved revenues and operating results.
The 9M result shows an operating loss of $-3.5 million versus $-200.4 million and revenues of $3.004 billion versus $2.284 billion. Expenses include a $72.6 million non-cash pre-tax charge related to the termination of the pension value plan.
Like many companies within the industry, Spirit’s day-to-day operations continued to suffer from supply chain disruptions due to part shortages as well as a high level of employee attrition, volatile schedules, and inflation. Especially volatile schedules had an impact on stabilizing production. Spirit has been recruiting new staff and offering bonuses to existing staff. Gentile described the current environment as “dynamic”.
Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016.
Richard is contributing to AirInsight since December 2018. He also writes for Airliner World, Aviation News, Piloot & Vliegtuig, and Luchtvaartnieuws Magazine. Twitter: @rschuur_aero.