• Spirit AeroSystems shares hit a three-year low due to the company's cash flow troubles caused by rising component and maintenance costs in an inflationary environment.
  • To address the issue, Spirit will need to renegotiate prices with Boeing and Airbus, as well as repay over $250 million in advance payments received from the manufacturers.
  • The financial difficulties faced by Spirit highlight the broader impact of economic conditions on the aviation industry, and the need for compromises among aircraft buyers, manufacturers, and suppliers to maintain supply chain efficiency.

On 2 August 2023, Spirit AeroSystems shares dropped to their lowest point in three years following an announcement from the manufacturer that the company's cash flow will not recover until next year. The company has suffered as a result of the inflationary environment, which increased both component and maintenance costs.

Spirit Aerosystems has no relationship with US-based ultra-low-cost carrier Spirit Airlines.

Spirit AeroSystems is a Wichita-based aerostructure manufacturer and designs key components of product lines for both Airbus and Boeing's commercial aircraft offerings. Currently, the company is experiencing significant losses on components it designs for the Boeing 787 Dreamliner and Airbus' A220 and A350.

What will Spirit do to address the issue?

In order to address rising prices for both labor and materials, Spirit will certainly need to renegotiate the prices in contract agreements with both Boeing and Airbus. In a recent call with shareholders, Tom Gentile, the company's CEO, issued the following statement:

It’s important that we have these conversations with them. The orders are coming in, production rates are going up, but all suppliers are facing challenges with these higher level of costs.

Recently, the company addressed a Machinists' strike at its main plant in Kansas, which resulted in an additional $80 million in salaries added in a renegotiated contract. This drastically increased the company's labor costs.

Photo: Spirit AeroSystems

Last quarter, both Boeing and Airbus provided advance payments to Spirit in an attempt to help stopgap the company's persistent financial issues. In total, Spirit received over $250 million that will need to be repaid in the next two years.

Furthermore, the two major manufacturers have continued to increase demands for product quality, resulting in significantly higher material costs. In the remainder of this year alone, the company will spend between $200 million and $250 million in its remaining reserves this year alone.

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A closer look at Spirit Aerosystems

Spirit supplies key components for both Airbus and Boeing jets, and production of major aircraft will be sure to slow given Spirit's woes. The company manufactures wings and fuselages for both narrow-body and wide-body jets, among other products.

Photo: Spirit AeroSystems

The company certainly plays a critical role in the manufacturing of short-haul aircraft. In Kansas, Spirit builds the majority of the airframe of the 737 MAX, and the company's Scottish plant constructs the wings of Airbus' A320 family of jets. Furthermore, Spirit's components play major roles in the construction of A220, A350, and 787 Dreamliner jets.

Despite the manufacturers' attempts to provide Spirit with additional funding, the efforts are clearly not enough. The key issues that exist for Boeing and Airbus will continue to exist until contracts are renegotiated. The major agreements governing these orders were made far before the current inflationary environment, rendering them financially inappropriate for given economic conditions.

737 MAX
Photo: Boeing

Ultimately, Spirit's situation stands as yet another example of how broader economic conditions have affected the aviation industry as a whole. Furthermore, the burden of financial hardship will have to be borne by aircraft buyers, manufacturers, and component suppliers. If any individual group in the system is unable to compromise, the efficiency of the entire supply chain could be drastically reduced.

Source: The Seattle Times