LDN - Business

Boeing's Spirit Aero bid could help supply chain but is no cure-all

[March 05, 2024] By Allison Lampert and Abhijith Ganapavaram

(Reuters) - Boeing's possible takeover of Spirit AeroSystems, along with delaying plans to ramp up production of 737 MAX jets, could help the planemaker manage its supply chain, but the move is no quick fix for its quality problems, analysts said.

Boeing is trying to manage a sprawling crisis that erupted after a door plug blew off a 737 MAX jet at 16,000 feet (4,877 meters) above the ground on Jan. 5. U.S. aviation regulators have curbed production as they scrutinize safety processes at Boeing and Spirit, which was a Boeing subsidiary until it was spun off in 2005.

The companies are in talks for Boeing to pull Spirit back into its fold, they said on Friday. Three industry sources have called the advancing discussions serious, although two said it could be weeks before a deal.

“I think that’s Boeing trying to get control of a major portion of the supply chain,” said Jon Holden, president of District 751 of the International Association of Machinists and Aerospace Workers, the planemaker’s largest union.

"I have no inside info on if they are going to accomplish it, but it looks like it's heading that way and I think it's the right move," Holden told Reuters.

Holden and his fellow Seattle area machinists will start contract talks with the U.S. planemaker on March 8.

A Spirit deal could force the hand of European rival Airbus in acquiring a plant in Belfast, Northern Ireland, that makes wings for the A220, industry sources have said.

On Friday, Reuters reported that Airbus and Spirit had held exploratory talks on selling the plant to Airbus. Questions remain over other Airbus-focused plants including Kinston, North Carolina, which makes center-fuselage frame sections for the A350.

Spirit, a key supplier on Boeing's 737 MAX, makes about a quarter of its revenue from Airbus programs. An Airbus spokesperson declined comment on confidential discussions with suppliers.

For Boeing, bringing back struggling Spirit could help operations since the combined company would command more manufacturing resources, but any deal may not result in immediate quality benefits, analysts said.

The Federal Aviation Administration said on Monday its 737 MAX production audit found multiple instances where Boeing and Spirit allegedly failed to comply with manufacturing quality control requirements.

Boeing and Spirit pointed to a Friday statement confirming the talks. Boeing has cited quality issues as one reason for buying Spirit.

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Airplane fuselages bound for Boeing's 737 Max production facility await shipment on rail sidings at their top supplier, Spirit AeroSystems Holdings Inc, in Wichita, Kansas, U.S. December 17, 2019. REUTERS/Nick Oxford/File Photo

Preliminary investigations of the Jan. 5 incident show it was Boeing staff in Washington state that removed the door plug to fix rivet damage stemming from production at Spirit - but bolts required to hold the plug in place were not reinstalled.

One of the three sources, a senior supply-chain executive, said Boeing had little choice but to initiate acquisition talks. Faced with the prospect of ever more loans or price concessions to Spirit as it struggles to increase 737 production, it may make more sense to buy the company back.

"The cards are on the table to ensure and protect the 737 MAX program in the face of Airbus competition," Jefferies said in a note.

A deal could also give Boeing greater influence over its supply chain, J.P. Morgan analyst Seth Seifman wrote, at a time when there are new delays to production increases crucial for its 2025-26 cash flow goals.

On Friday, Boeing told suppliers it was delaying expected increases in production.

Many suppliers struggled with a slump in demand during the pandemic and an earlier 20-month grounding of Boeing's 737 MAX 8 that temporarily halted production.

"It's giving us time to get our own house in order," said Rosemary Brester, who runs Hobart Machined Products with her husband in Washington state.

Hobart Machined Products has been wrestling with delays in obtaining certain steel for its business, which includes milling and grinding metal to make aircraft components. She said small suppliers need help, given inflation and higher costs to access capital.

But while Boeing's new production schedule might be more realistic, each delay erodes confidence by suppliers in the planemaker's production rate announcements, said Glenn McDonald, a supply chain specialist at U.S. aerospace consultancy Aerodynamic Advisory.

"Realistically, I think most suppliers are already discounting rate plans somewhat," he said.

(Reporting by Allison Lampert in Montreal and Abhijith Ganapavaram in Bengaluru Additional reporting by Tim Hepher in Paris and Anirban Sen in New York; Editing by Matthew Lewis)

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