Boeing has reached an agreement valued at “hundreds of millions” of dollars with Spirit AeroSystems, the second of its major outside airframe suppliers to be compensated for 787 program delays, which are approaching three years past the original goal for initial deliveries.
Terms were not disclosed. Spirit Senior VP and CFO Phil Anderson called the agreement a “fair and equitable framework that reflects current program financial realities.”
The agreement likely centers on pricing for 787-8 shipsets only and was reached in late December but not announced until Jan. 13, when it prompted a rise in both companies’ stocks. Some Wall Street analysts are not sure if the stock price rise is justified given that details of the agreement were kept secret.
Formal agreements are to be completed by the end of the first half of 2011, and any impact on Spirit’s 2010 performance is expected to be reported in its full-year financial report planned for release Feb. 10.
Spirit makes the Section 41 nose and forward fuselage for the 787, which has resumed flight testing after being grounded late last year by an onboard electrical fire unrelated to airframe manufacturing.
Last year, Finmeccanica, whose Alenia Aeronautica unit provides center fuselage and horizontal stabilizer assemblies for Boeing’s premium long-range mid-sized jet program, agreed to compensation terms on the first 200 deliveries, notes Bernstein Research analyst Douglas S. Harned. The three remaining major airframe suppliers, Fuji, Mitsubishi and Kawasaki, remain in negotiations with Boeing.
“Our understanding is that Spirit will receive an increase in pricing for its work, which will decline over the lifetime of the program block (currently 500 airplanes),” Harned said. The agreement covers only the standard-sized 787-8 and not the stretched 787-9, nor does it anticipate any production issues related to the buildup to a 10-aircraft-per-month production rate.
Spirit is to receive some cash, enough to be material for it but not for Boeing. “Spirit has been stretched for cash lately,” Harned said.
“Given what we know now, we see this news as positive” for Spirit, J.P. Morgan analyst Joseph B. Nadol 3rd said. “We believe that the total value of the settlement was probably in “the hundreds of millions” of dollars, consisting of a cash payment in Q4 [2010] and a change in the pricing curve.”
Nadol theorizes that the heart of the agreement is a reset of pricing on 787-8 shipsets that raises prices for current units and provides for a slower ramp-down for future units. “Ultimately, we still believe the price will decline to around $8 million, but it will take years to get there,” he says of Spirit’s Section 41 shipsets. “We do not believe that the number of units the contract covers—1,300 787s—or the size of [Spirit’s] first block, 500 787s, has changed.”
It is not known how much Spirit is paid for shipsets.
One reason the agreement appears positive for Spirit is that it rules out a forward loss for the company, Nadol said. The company would have had to disclose such a loss and did not.
Boeing pays its suppliers when it gets paid. Airlines make small down payments when they order but reserve the bulk of their payments until they take delivery of each aircraft. Thus, even on large orders, payments trickle in from each customer as individual aircraft are delivered.
The 787 was supposed to begin deliveries in May 2008, so the strain on suppliers’ cash flow has been enormous now that the program has nearly passed the three-year mark for being late. The strain was so large for Vought Aircraft Industries that Boeing had to buy it out of the program entirely. Finmeccanica did not pose quite that large of a risk, but Boeing relieved it of responsibility for integrating center fuselage assemblies in the South Carolina factory it built with Vought. The result is that Boeing now owns facilities in South Carolina that its suppliers had built for the program.
Airbus follows a similar payment schedule. While some analysts say the 787 experience may prompt suppliers to refuse to agree to such terms on future programs, it is unclear that they individually have the leverage to fundamentally rewrite these common rules.
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