Boeing and top supplier under pressure as defect cuts jet deliveries, profits

Quality lapses and financial shortfalls at Spirit AeroSystems of Wichita, Kan., are hitting Boeing’s two most important jet programs — the short-haul narrowbody 737 MAX and the long-haul widebody 787 Dreamliner.

For the 737 MAX, a manufacturing defect discovered at Spirit last month is likely to reduce the MAX delivery rate by about a third this quarter, leading to a negative cash flow and a financial loss, Brian West, Boeing’s chief financial officer, said Thursday.

The MAX defect is complicated to fix and affects three-quarters of the 220 jets still parked in inventory, all of which must have the part repaired, West told the Jefferies investment bank conference.

“We’ve got literally armies of people from Boeing and the supplier working on this issue,” West said. “It is 100% the most important thing we’re working on right now.”

For the 787, it’s a financial squeeze.

Speaking separately at the same financial conference Thursday, Spirit CEO Tom Gentile said the company is renegotiating 787 contract terms with Boeing because of Spirit’s cumulative heavy losses on that jet program amounting to $1.4 billion since the first one rolled out in 2007.

“It really is not sustainable for Spirit,” Gentile said.

500 holes to be checked per airplane

The most pressing problem is on the MAX.

In August, Boeing discovered that MAX fuselages built by Spirit had been delivered with improperly drilled holes in the aft pressure bulkhead — the heavy metal dome capping the back end of the passenger cabin that is essential to maintaining cabin pressure.

The defect is not an immediate safety-of-flight issue, but must be repaired before planes are delivered. Some MAXs already in service will presumably also have to be fixed during scheduled maintenance.

For the past three years, Boeing has suffered a cascade of quality defects that have repeatedly disrupted production and deliveries of both the MAX and the 787.

In April, Boeing found some fittings that attach the MAX’s vertical tail fin had been improperly manufactured by a subcontractor to Spirit. That defect cut MAX deliveries to airlines during the summer peak season, but the repairs on the jets scheduled for near-term delivery were done within a few months.

West said the aft pressure bulkhead defect is “more complicated.”

“The rework hours will likely be higher and the cycle time longer than the vertical fin [defect] we had earlier in the summer. This is different … It’s more involved,” West said. “There’s hundreds of holes that get inspected. There’s an X-ray inspection process step that’s required. And it’s a very critical part of the airplane.”

“We know how to fix it, but it’s early in the rework process,” West added. “Not ideal, but we believe we’ll work through it.”

Gentile offered more detail. He said that of about 1,000 holes in the aft pressure bulkhead, 500 are machine-drilled and on some planes those had been drilled by one of three subcontractors as oblong instead of circular holes.

In addition to the hundreds of defective fuselages delivered to Boeing, he said Spirit has 39 finished MAX fuselages out of about 60 stored in Wichita, which will also have to be inspected via X-rays and repaired.

“We set up essentially a separate factory across the street,” Gentile said, adding that two teams of mechanics will work on X-ray inspections while six teams do the repairs.

He added that Spirit should complete the repairs on its fuselages by the end of November. But since the repairs to the planes delivered to Boeing will be done on finished aircraft, “for Boeing, it may take a little bit longer.”

West said Boeing expects to deliver only 70 MAXs in the third quarter, versus 111 delivered in the first quarter of the year and 100 in the second quarter.

He said MAX deliveries should pick up in the fourth quarter and hit the previously projected goal for the year of 400 to 450 jets, but at the low end of that range.

Losing money on composite airplanes

The 787 Dreamliner program has separately struggled with a series of manufacturing quality defects, chiefly gaps at the joins throughout the aircraft structure that are larger than specification.

These defects have showed up on the parts from several of the major supplier partners, not just Spirit.

As of the end of July, Boeing still had 85 parked 787s awaiting repair and delivery.

Repair work on the fuselage joins “is progressing as expected, which gives us confidence that we will be within that 70 to 80 airplane deliveries this year,” West said.

He said Boeing is building 787s at a rate of four per month in South Carolina and will increase that to five per month by year end. Boeing hopes to hit 10 per month by late 2025 or early 2026.

Yet as Boeing plans this ramp up, the financial strain on the 787 supply chain is immense.

Gentile said Spirit has never managed to make enough progress on reducing the cost of building carbon composite structures. The 787 was the first commercial jet built largely from this material.

“Even from day one, we were never able to get down the learning curve as fast as we expected. And so we’ve lost money. It’s not a secret,” he said. “We have delivered about 1,165 [Dreamliners] so we’ve lost over $1 million per unit.”

This is a problem for Spirit not only with Boeing’s 787 but also with the Airbus A350 and its A220.

Spirit supplies substantial parts on both Airbus programs, both of which are also made from carbon composites.

“We are having discussions with our customers, with Boeing and Airbus, about these pressures that we’re facing and how we address them,” Gentile said. “Sometimes it involves price, sometimes it involves change in terms. Sometimes it might involve extending contracts, or adding new work, or offloading some things.”

Recovery is two to three years out

West, the Boeing CFO, also conceded that the company’s defense and space division is still struggling and will lose money in the third quarter.

That business is losing money on fixed-price development programs for the Pentagon that were bid too low and have faced multiple setbacks. That’s affecting about 15% of the division’s revenue, he said.

In addition, a few long-running military programs that bring in another 25% of the defense-side revenue are also losing money due to “persistent supply-chain and labor-stability issues,” West said.

He didn’t specify which military products are affected, saying only that it’s “a few legacy programs that we know how to make that we just got to get back on track.”

“We have to start to see progress,” he added. “But it’s going to take us a little bit of time.”

Nevertheless, West stressed that Boeing’s long-term financial outlook remains unchanged.

Demand for aircraft remains very strong, and so if Boeing can find stability and ramp up jet production, cash should flow freely.

That means fixing the supply chain, which as Gentile made clear, is fragile due to higher costs and labor shortages.

“We’re still seeing a fair amount of attrition, especially among newer employees,” Gentile said, adding that a lot of older, more experienced workers took voluntary retirement from Spirit during the pandemic.

“The new workers that are replacing them are taking a little bit longer to get up to speed,” he said.

“We also see shortages of raw material and even fasteners, some basic things, and that creates disruption,” Gentile said. “In the last 18 months, we’ve had $200 million of charges in supply chain that we’ve had to cover.”

Boeing has provided $150 million in advances to Spirit this quarter to help it get through.

West repeatedly referenced “the 2025-2026 time frame” as when Boeing expects to be fully recovered from the pandemic slowdown and to be rid of the burden from all the undelivered MAXs and 787s that have been parked pending repair work.

Though free cash flow — cash generated minus cash spent on equipment — will be negative for the third quarter, Boeing still projects between $3 billion and $5 billion in positive free cash flow for the year, and expects the number to reach $10 billion in that 2025-2026 time frame.

By then, Boeing’s target is to be producing 50 MAXs and 10 Dreamliners every month, up from today’s rate of 31 MAXs and 4 Dreamliners.

Sticking to those long-term projections implies a belief that Boeing will reduce the spate of new quality problems popping up unexpectedly.

“Our job — and the job of the supply chain — is to drive stability and predictability,” West said. 

Boeing’s share price, which had fallen almost 2% on Wednesday from $222.57, dropped further after West’s remarks closing down $1.90 Thursday at $216.05.

Spirit shares dropped $1.52 Thursday, down more than 7%, to close at $19.19.