Spirit AeroSystems Occupies an Increasingly Untenable Position Between OEM and Supplier

Equity Analyst

Nicolas Owens

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, and structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing military aircraft segment and acquired parts of Bombardier's commercial jet business in 2020. Spirit's interim CEO since October 2023, Pat Shanahan, recently stated, "only the OEM can unlock that value" of the manufacturing intellectual property and highly integrated supply chain of large aerostructures production that Spirit offers, which amounted to a pitch for selling the company to Boeing and carving off other parts related to Airbus, which now owns the A220 line pioneered by Bombardier.

For now, Spirit's management is focused on digging out of the very deep hole Spirit fell into when the Boeing 737 MAX was grounded in 2019, manufacturing flaws in the Boeing 787 came to light, and covid-19 disrupted global air travel and the industrial supply chain. The dramatic drop in revenue as Boeing slowed production of 737s and 787s, rising input costs, and cost overruns from disruptions and rework rendered a good portion of Spirit's product portfolio unprofitable between 2019 and 2022. The company is renegotiating its customer contracts and refinancing debt to provide enough liquidity for the company to survive and try to generate positive cash flow. Longer term, if the company can rationalize its manufacturing processes, true up customer pricing, and manage its incremental costs, steep increases in demand for its primary products should provide opportunity for significant revenue growth and restored profitability.

However, the depths of the manufacturing and inspection quagmire that Spirit and Boeing succumbed to, as well as the apparently untenable economic arrangement between Spirit and Airbus, make it seem more likely than not that the company will be absorbed by its former parent, Boeing.

Business Strategy & Outlook

We do not assign Spirit AeroSystems a moat. Ultimately, we believe the firm plays a distant second fiddle to Boeing and Airbus in the aviation manufacturing value chain because it does not govern either the pricing of components or the quantity produced. Moreover, the firm has little control over the prices of its inputs such as raw materials, labor, and the subassemblies and products of its suppliers. While Spirit's top two customers may experience some hint of switching costs because it is their sole supplier of various aerostructures, Spirit is unable to capitalize on this position because it does not own most of the intellectual property it works with—the designs of the planes, wings, and even tools it uses belong to Boeing and Airbus. While the original equipment manufacturers would likely find difficulty finding an alternative supplier, long-term agreements that set fixed prices and sometimes volume-based discounts govern the bulk of Spirit’s revenue, so the firm cannot effectively capitalize on that putative switching cost, for example, by raising prices.

As most of the company’s revenue is set by fixed-price contracts that sometimes stipulate volume-based discounts, inherent in the company’s strategy is to reduce costs per unit by more than the decrease in average unit pricing, ideally through the manufacturing learning curve. The fixed-price nature of these contracts also exposes Spirit to fluctuations in raw materials. We think this puts Spirit in a structurally difficult position. The firm must improve processes to maintain or improve margin in the upswings, which requires capital expenditures and increased fixed costs. In downswings, the firm must cover the increased fixed costs it took on in the upswing to stay afloat. 

One critical weakness Spirit has relative to other aerospace and defense companies is that it does not own most of the intellectual property and tooling used in its business. When Spirit was spun out of Boeing, Boeing maintained the intellectual property rights it originally developed, and Boeing licenses these rights to Spirit. While Spirit AeroSystems has developed some intellectual property on its own and acquired companies with intellectual property on Airbus platforms, we have not seen evidence that this intellectual property is material enough to drive pricing power. There are several competing independent aerostructures manufacturers, such as GKN, Kawasaki, Subaru, and Mitsubishi, not to mention the approximately 40% of aerostructures that Boeing and Airbus produce in-house themselves. 

Within the aerospace industry, economic profits often follow the aftermarket revenue companies derive from servicing, refurbishing, or replacing the proprietary parts of their products or assemblies as the aircraft endures thousands of takeoffs and landings over its multidecade service life. While Spirit has an aftermarket segment, and it is more profitable than the rest of its businesses, at roughly 6% of total revenue, it isn't enough to make a difference to our competitive analysis. The firm has provided examples of its aftermarket services, which include rebuilding heavily damaged engine nacelles. We see this as a potentially high-margin way to put its tooling and talent to use, where the repair cost has to be just enough lower than the net replacement cost of the assembly to make it worthwhile for the airline customer, but it does not fit the mold of the "razor-and-blades" business model we see at Pratt & Whitney, TransDigm, or Heico, where the manufacturer owns the design of the part and has recurring opportunities to replace or service it. Should Spirit successfully grow its aftermarket business line as a global maintenance, repair, and operations provider, we would compare it with others, some of which have a narrow moat in that portion of their business.

None

Economic Moat

Spirit AeroSystems Hlds

Spirit AeroSystems Holdings, Inc. engages in the design and manufacture of aero structures for commercial and defense aircraft. It operates through the following segments: Commercial, Defense & Space, and Aftermarket. The Commercial segment designs and manufactures forward, mid, and rear fuselage sections which related to floor beams, nacelles, struts and pylons, horizontal and vertical stabilizers, flaps and slats and wing structures. The Defense & Space segment offers fixed wing aircraft aerostructures, missiles and hypersonics and rotorcraft aerostructure. The Aftermarket segment includes development, production, and marketing spares and repair and overhaul (MRO) services related to commercial and defense & space program. The company was founded in 2005 and is headquartered in Wichita, KS.

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Spirit AeroSystems reports revenue growth amidst challenges, focuses on optimization

Spirit AeroSystems navigated challenges in 2022 with a focus on revenue growth, cost reduction, and production optimization. The company's performance in the Defense & Space segment was a highlight, contributing to a positive outlook. Despite facing supply chain and labor issues, Spirit AeroSystems remains proactive in addressing challenges and pursuing opportunities for growth.

Spirit AeroSystems tackles quality issues, eyes production improvements amid challenges

Spirit AeroSystems addresses quality issues, focuses on production standards, and strengthens relationships with Boeing. Despite challenges, the company is leveraging opportunities to enhance operations and financial performance.

Spirit AeroSystems reports Q2 revenue growth but faces supply chain challenges

Spirit AeroSystems faced challenges with supply chain disruptions impacting profitability, leading to negative free cash flow projections for the year.
Despite these challenges, the company demonstrated strengths in Defense & Aftermarket segments with strong revenue growth and operating margins.
Opportunities lie in increasing production rates, addressing supply chain issues, and focusing on operational execution for improved profitability and cash flow.
Overall, Spirit AeroSystems aims to stabilize its supply chain, increase production rates, and enhance financial health amidst industry challenges and forward losses.

Spirit AeroSystems reports revenue growth and positive impacts from Boeing agreement

Spirit AeroSystems' Q3 performance showed revenue growth and financial impacts from the Boeing agreement. The company faces challenges with disruptions, labor issues, and potential Airbus program impacts. Opportunities include positive cash flow projections and resolving negotiations with Airbus.

Spirit AeroSystems reports strong Q4 performance amidst challenges and opportunities

Spirit AeroSystems demonstrated robust financial performance in Q4 2023, driven by revenue growth, positive EPS, and operational improvements in production and quality.
While facing challenges such as forward losses and cash flow impacts, the company is focused on leveraging opportunities like debt reduction and quality-driven incentives for future growth.
Strategic initiatives in product safety, innovation, and cost management position Spirit AeroSystems for long-term success and operational excellence in the aerospace industry.

Spirit AeroSystems reports revenue growth, faces challenges in Airbus negotiations

Spirit AeroSystems reported improved revenue and operational performance in Q1 2024, with a focus on safety, quality, and financial stability.
Challenges include negotiations with Airbus, cash usage impact from production disruptions, and labor scarcity in key locations.
Opportunities lie in discussions with Boeing for potential acquisition, securing supply agreements with Airbus, and enhancing operational efficiency.
Overall, Spirit AeroSystems' strategic initiatives aim to address challenges, leverage strengths, and capitalize on growth opportunities for long-term success.

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Spirit AeroSystems Holdings, Inc. engages in the design and manufacture of aero structures for commercial and defense aircraft. It operates through the following segments: Commercial, Defense and Space, and Aftermarket. The Commercial segment designs and manufactures forward, mid, and rear fuselage sections which are related to floor beams, nacelles, struts and pylons, horizontal and vertical stabilizers, flaps and slats, and wing structures. The Defense and Space segment offers fixed wing aircraft aerostructures, missiles and hypersonic, and rotorcraft aerostructure. The Aftermarket segment includes development, production, and marketing spares and repair and overhaul services related to commercial and defense and space program. The company was founded in 2005 and is headquartered in Wichita, KS.

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