The complex three-way deal announced late Sunday night to split Spirit AeroSystems between Boeing and Airbus, returning the huge Boeing manufacturing facilities it sold two decades ago, was engineered by Spirit AeroSystems CEO Pat Shanahan.
Just four months after Boeing announced its intention to take back most of this critical supplier, Shanahan secured the deal through personal negotiations with the top leadership of the two biggest rivals in the aviation world.
A former senior Boeing executive and President Donald Trump’s former acting Defense Secretary named Spirit CEO late last year, Shanahan was already considered a leading contender to replace Dave Calhoun as Boeing CEO.
As an engineer and Mr. Fix-It in production, Shanahan would be “an inspired choice,” veteran aviation analyst Adam Pilarski of consulting firm Avitas said in March.
After reaching the Spirit deal, Shanahan, 62, who spends weekends at his home in Seattle, is now positioned as the favorite to take over when Calhoun leaves later this year.
In an exclusive interview Monday with The Seattle Times, Shanahan waved but didn’t deny interest when asked if he could be Boeing CEO.
“It’s not my place to comment on what Boeing may or may not do,” Shanahan replied. “I’ll take care of getting this deal done in Spirit.”
Shanahan was brought in to take control of Wichita, Kan.-based Spirit. in October when previous CEO Tom Gentile was fired. Spirit was losing money, deeply in debt and dealing with repeated revelations of quality defects.
A few months later, the mid-air explosion of a fuselage panel on a Boeing 737 MAX — a plane built in Wichita last September, before Shanahan took over — sparked an ongoing crisis at Boeing over its quality management.
Part of Boeing’s response was to accept delivery of MAX planes to the final assembly plant in Renton only if they are mostly complete and free of defects.
Unfinished jobs and defects that required rework had disrupted the assembly process at Renton and contributed to the critical installation error that caused the Alaskan explosion.
Work at Spirit was drastically slowed, and every plane is now carefully inspected before leaving Wichita.
“Our teams have made critical improvements to the quality management system over the past six months,” Shanahan said Monday. “These improvements will continue.”
“The work we have undertaken is to make changes that are sustainable, resisting mistakes in a number of critical operations,” he added.
And he contends that the future for both companies will be more secure when Boeing takes home those Spirit units that make the entire MAX fuselage and forward fuselage of all its other planes, in addition to other major Boeing components. .
“Bringing Boeing and Spirit together will enable greater integration. … It’s going to bring their safety and quality systems together and make them better,” Shanahan said. “The new organization will be faster and more agile.”
“This is a fabulous industry,” he concluded. “I’m proud to play a part in making it stronger and better.”
Analysts warn that there will be no quick fix
For its part of the deal, Boeing paid $4.7 billion a share, or $37.25 a share, and also assumed Spirit’s net debt of about $3.6 billion.
Spirit, meanwhile, will pay Airbus $559 million to divest its cash-bleeding facilities that make A350 and A220 parts.
Financial analysts were skeptical Monday in their assessment of what the deal would mean for Boeing.
Rob Stallard of Vertical Research Partners summed it up as “good for Spirit, good for Airbus and less good for Boeing.”
While Spirit shareholders get a 10% increase in the value of their shares compared to when the deal was first revealed in April, and Airbus takes a big profit, Boeing inherits a troubled supplier that will require investment considerable to fix it.
Still, Stallard concludes in his note to investors that, for Boeing, “we think it’s worth taking the financial hit if it increases the chances of getting the 737 program back on track. … Bringing Spirit back home should increase the chances of successfully increasing production.”
Stewart Glickman, deputy director of research at CFRA Research, agreed that the deal will not be a panacea for Boeing.
“Boeing’s standing with regulators, and its delivery speed for the 737 MAX, will be slow to recover,” Glickman wrote, adding that the planemaker’s higher debt level and the near-term outlook for change of CEOs brings risk.
If production of the planes does not increase, credit agencies will likely penalize Boeing, said Ben Tsocanos, director of airlines, S&P Global Ratings, which for now is maintaining Boeing’s rating.
“We may downgrade if the company fails to ramp up aircraft production and deliveries later this year,” Tsocanos wrote. “We don’t believe there will be any imminent improvement.”
The deal is expected to take about a year to finalize. So if Shanahan leaves to take the top job at Boeing, some of his lieutenants at Spirit will have to take over the company’s division.
To complete this, the deal must first undergo a regulatory review. And the acquisition of Boeing is also conditional on the finalization of the Airbus part of the deal.
Shanahan expressed confidence that the deal will be sealed. He doesn’t see a regulatory block because “it’s not anti-competitive.”
And as for getting the Airbus side of the deal done, he said “working with senior leadership for all parties, everyone is connected and interested in a smooth and fast transition to ensure system performance of production”.
Assuming the deal is finalized, analysts said the task of seamlessly merging Spirit’s operations with Boeing’s is not straightforward because each faces its own domestic production issues.
“The reintegration of Spirit into Boeing is unlikely to be a silver bullet for either company’s operational issues,” wrote Rob Spingarn of Melius Research.
“Issues of the soul are due to the loss of institutional knowledge,” he added. “When the 737 MAX hit the grounding and the pandemic, Spirit cut headcount by about 34% to conserve cash. … Many experienced employees retired or took jobs elsewhere.”
“It will take talent, training and time to fix Boeing and Spirit’s operations in lieu of a deal,” Spingarn concluded.
Likewise, Peter McNally, global head of analysts at Third Bridge, an equity research firm, cited the “lack of a skilled workforce” at Spirit as complicating the same depreciation problem at Boeing, which the deal may not bring “no quick fix”.
“The industrial logic of supply chain integration is sound, but the reality may be more challenging,” he wrote. “For Boeing customers, this is unlikely to bring an immediate adjustment to the number of aircraft that can be delivered.”
Shanahan, of course, is much more optimistic.
He said he has already deployed new technologies in assembly plants to improve quality. These include cameras used for inspection and “automation or new types of tools that allow less experienced people to do the job accurately”.
He said his team has already revamped many of Spirit’s work procedures and created “more in-depth training, not in the classroom, but supporting the mechanics” on the factory floor.
“I feel really good about the progress,” Shanahan said. “We’re going back to being airplane builders, gear heads.”