UPDATE – In the worst scenario, the eleven-day strike at Spirit AeroSystems in June and July could impact 737 P-8A and MAX fuselage deliveries to Boeing by between twenty and fifty shipsets this year. Spirit has revised its guidance for deliveries to between 370 and 390, down from 390 and 420. The strike at Spirit’s Wichita facility over a new collective bargaining agreement has cost the company $7.3 million, it says in the HY1 earnings release today. Strike could cost Spirit AeroSystems 20 to 50 737/MAX deliveries.
Members of the influential International Association of Mechanists (IAM), which represents 55 percent of Spirit’s workforce, rejected Spirit’s initial offer on June 21. They voted to go on strike from June 22, halting production for the 737/MAX and Airbus A220. On June 29, a new collective agreement was reached and approved by IAM members, resulting in a slow restart of production the next day and a full restart on July 5.
While CEO Tom Gentile is most satisfied with the new four-year agreement that brings stability to Spirit, it will result in approximately $80 million in higher labor costs per year. Already $28.3 million has been included in the Q2 results. Analysts told Reuters last week that they are concerned about a potential price hike resulting from the new labor contract, as Spirit will likely have to pass on the higher costs to Boeing and Airbus. But Gentile said during the earnings call that no price hike is assumed.
In the short term, the strike is having an impact on the total output of Spirit this year as it won’t be able to recover the lost production from the eleven days work stoppage. Consequently, deliveries to Boeing of the 737 and MAX fuselages are now guided at 370 to 390 this year compared to 390 and 420 mentioned in the Q1 forecast in May. Taking the latest and previous guidance into account, the difference could thus be twenty to fifty fewer shipsets. This will have a negative impact on revenues, earnings, and cash flow.
Higher revenues, deeper operating loss
In Q2, Spirits consolidated revenues grew by eight percent to $1.366 billion from $1.258 billion. But the operating loss deepened to $-120 million from $-105 million. The net loss was $-206 million compared to $-122 million in the same quarter last year. The operating margin was -8.8 percent. Excess capacity costs totaled $53.2 million, while forward losses on the Boeing 787, Airbus A220, and A350 increased by 64 percent to $104.7 million plus another $21.6 million in unfavorable catch-up adjustments.
Free cash flow has taken a hit in the past quarter, going from $-79 million last year to $-211 million in Q2 this year and $-280 million in HY1. Chief Financial Officer Mark Suchinski and Gentile said that rate increases and the stabilization of production should improve cash burn, resulting in full-year guidance of $-200 to $-280 million. The current estimate is that free cash flow will end at $-230 million this year.
For HY1, revenues grew by fifteen percent to $2.796 billion from $2.433 billion. The operating loss increased to $-216 million from $-147 million, with the operating margin at -7.7 percent. The net loss for the period was $-488 million versus $-175 million last year.
The Commercial segment produced $1.083 billion in revenues in Q2 (2022: $1.031 billion) or $2.232 billion in HY1 ($1.970 billion). The operating loss was $-72.9 million ($-45.1 million) in Q2 or $-118.4 million ($-48.5 million) in HY1. Defense and Space reported a $12 million operating profit ($13.7 million), with revenues of $189.6 million ($146.1 million).
The Aftermarket business unit produced a $24.3 million operating profit in Q2, up from $11.8 million in the same period last year. For HY1, the profit was $43.5 million from $29.8 million. Revenues increased to $92.1 million from $80.4 million in the quarter and to $186.6 million from $158.2 million in the six-month period. Higher spare parts sales and more MRO activities drove positive results, boosting the operating margin to a solid 26.4 percent in Q2 and 23.3 percent in HY1.
Boeing
Five percent higher revenues for Commercial were mainly thanks to higher volumes to Boeing for the 737/MAX and 787 programs and increased Defense & Systems, but were partially offset by lower A220 revenues. Thanks to strong commercial aircraft orders, the backlog grew from $27 billion to $41 billion.
Looking by program, Q2 deliveries for the 737/MAX were only marginally up from 71 last year to 74 this Q2, while HY1 deliveries were up to 169 from 131. This, of course, has all to do with the tailfin fitting issue that was discovered early in Q2, resulting in the temporary suspension of deliveries to Boeing and the rework of fuselages in production in Wichita and on assembled aircraft in Renton. Spirit says it has now completed all the rework in Wichita, so is delivering conforming airframes to Boeing while Boeing is roughly halfway through the repairs, which includes removing the vertical tailfin on an assembled airframe.
In May, Spirit said that it had included a $17 million impact from the rework in its Q1 results and was expecting a full-year impact on gross profits of $31 million. The rework has been completed within this target, but Spirit said today that it has recorded a provision of $23 million in contra revenues in Q2 to account for a potential claim from Boeing for the rework on aircraft in their inventory. Spirit doesn’t expect a material financial impact associated with previously delivered aircraft but also says that this still needs further assessing.
To help Spirit weather the situation, Boeing offered $180 million in advance payments in Q1. This will be repaid in two installments of $90 million each in 2024 and 2025. Another $50 million in (non-Boeing) customer advances will be received in Q4, bringing the total to $230 million this year.
During the tailfin rework and work stoppage, Spirit’s buffer of 737/MAX fuselages came in very handy to keep deliveries to Boeing going, said Gentile. “We were able to deliver more fuselages from buffer to minimize the disruptions to Boeing. The buffer has gone down, but we still have about 50 to 55 units in Wichita and some others that are held up in Seattle. Some are for customers that aren’t going to deliver in the near term, for example to China. But the buffer is still performing a very valuable function to ensure we can meet Boeing’s production rates as they go up and we go up.”
The production rate of the 737/MAX is going to 42 per month this August, which is two months earlier than what Spirit said in May. Back then, a rate increase to 38 per month was planned for August and another to 42 for October, but the higher number is now the new base level that will also be the starting point for 2024. As Boeing intends to ramp up to fifty aircraft per month in 2025-2026, another ramp-up sometime next year is most likely. There are two lines in Wichita, producing 21 aircraft per month each.
Higher 787 deliveries
The 787 program saw the delivery of ten shipsets in Q2 versus four last year and sixteen in HY1 versus seven. Spirit added $37.5 million in forward losses to the program in Q2 to cover the additional costs from the new labor agreement, higher supply chain costs, and other costs increases.
The Dreamliner is produced at five per month, resulting in between 40 and 45 deliveries this year. Following the full review of the production process following shimming issues in 2021 and 2022, some changes to the build process have been made. Increasing the rate to ten aircraft at the end of 2024 is not a huge problem, said Gentile: “We have already the capital because we have been up as high as fourteen 787s. There is some more pressure on the build process because we changed it after the fit and finish issue, which has resulted in some changes in the build process. So it is really a question of heading the headcount and taking into account some adjustments and changes in the build process.”
Boeing 767 shipsets were up to nine from eight in Q2 and to seventeen from sixteen in HY1. Those for the 777 were up to seven from six in Q2 and to fourteen from eleven in HY1. In total, Spirit delivered 100 shipsets to Boeing in Q2 versus 89 last year, or 216 versus 166 in HY1.
Airbus
Deliveries to Airbus were 188 versus 180 in Q2 and 364 versus 374 in HY1, so actually below 2022 levels. The most significant drop in deliveries is for the A320neo family, which was still up to 152 from 147 in Q2 but down to 294 from 302 over HY1. This is in line with what CEO Tom Gentile said in May: that they had over-delivered to Airbus in previous quarters and that the OEM had revised its plans.
Deliveries of the A220 were also down to fourteen versus sixteen in Q2 and 27 versus 34 in HY1. Widebody deliveries were higher in Q2, with the A330 up to nine from seven and those for the A350 to thirteen from eleven. HY1 deliveries were 18 versus twelve for the A330 and 25 versus 26 for the A350.
As on the Boeing 787, Spirit included forward losses on the A350 and A220 in its quarterly results. “The Airbus A350 program forward loss of $27.5 million was primarily due to increased costs related to production rate recovery efforts, including freight, as well as unfavorable foreign currency movements. The Airbus A220 program forward loss of $27.4 million was driven by higher estimates of supply chain costs and unfavorable foreign currency movement.”
Spirit AeroSystems is fully aware that its Q2 results have been disappointing and that the new labor agreement will bring both stability but also higher costs. Improving the financials and raising free cash flow can essentially only be done by higher production rates. At the same time, supply chain challenges remain, often with smaller suppliers that need financial and other support. Spirit incurred impacts approaching $200 million in the past eighteen months from these supplier issues, which have been reflected in its earnings.
As CFO Suchinksi said: “Our top priority for the second half of the year remains on the execution and stability, with rate increases in the back half of this year as well as in 2024 and 2025. The supply chain remains very challenged but we continue our efforts to mitigate the impact and proof predictability as the industry continues to recover.”
