Boeing Faces Scrutiny Following Flight Incident and Production Issues

Summary

Boeing and Spirit Aerospace are facing heightened scrutiny after the aerospace manufacturer, a builder of the entire 737 fuselage, experienced a setback when a door plug detached during a MAX 9 flight. After this incident, the Federal Aviation Administration (FAA) prohibited Boeing from increasing its 737 MAX production. Further pressure arose with Spirit’s revelation of misdrilled holes on 737 window frames. Interim CEO of Spirit, Patrick Shanahan, pledged swift action with an expected repair plan within 72 hours.

Increased Aviation Scrutiny

The Federally mandated halt in production by Boeing has sparked widespread investor, regulator, and lawmaker concern. The National Transportation Safety Board will soon release a preliminary report about the Jan. 5 mishap. There were no significant injuries from the incident, although it led to significant operational disruption.

Serious Manufacturing Glitches

Subsequent to the door plug incident, Spirit discovered another well-documented manufacturing issue involving misdrilled holes on 737 window frames. This issue will necessitate additional work on about 50 aircraft, adding more strain to an already challenging situation for both Boeing and Spirit.

Steps Towards Rectification

Shanahan announced on Tuesday that Spirit is looking to identify a repair plan within 72 hours. The interim CEO also underscored a new training paradigm for mechanics and increased Boeing and Spirit-performed inspections. Spirit is also working on measures to avoid repeating mistakes in the 737 MAX production.

Utilizing Technology

In addition to the changes in training and procedures, the company is accelerating the use of technology to simplify the construction process, particularly in areas of the 737 fuselage construction that are complicated and confined. Shanahan continued that although robotics are “impractical” within Spirit’s existing factory setup, technology can still improve efficiencies for mechanics

Financial Performance Amid Operational Challenges

Despite operational issues, Spirit managed to deliver 104 fuselages to Boeing in the fourth quarter — a record for 2023. However, Spirit shares dropped approximately 16% since the mid-air door plug dislodging but were up 6.5% in recent afternoon trading. For the fourth quarter, Spirit announced free cash flow of $42 million, assisted by the $100 million funding from Boeing. However, these figures fell below analyst predictions of $122.35 million.

Renegotiation of Contract Terms

Boeing and Spirit renegotiated their manufacturing agreements in October to alleviate increasing costs. This allowed Spirit to recover $34.3 million in quarterly losses, despite recognizing losses on the Airbus A350 and Airbus A220 programs totaling $76.0 million and $57.7 million respectively.

Looking to the Future

Spirit did not provide a 2024 outlook due to the ongoing uncertainty around 737 MAX production and ongoing price negotiations with Airbus for the A220 program. However, Shanahan hinted that the negotiation could conclude as soon as this month. Moreover, all indications are that Spirit is ready to support an increased production rate of 42 jets per month.

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