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Boeing in early talks to buy supplier Spirit Aero

Published 01/03/2024, 21:19
Updated 01/03/2024, 21:45
© Reuters. FILE PHOTO: A Boeing 737 Max aircraft during a display at the Farnborough International Airshow, in Farnborough, Britain, July 20, 2022.  REUTERS/Peter Cziborra/File Photo

By Abhijith Ganapavaram, Allison Lampert and Valerie Insinna

(Reuters) -Boeing said on Friday it was in preliminary talks to buy its former subsidiary Spirit AeroSystems as the company tries to get control of a sprawling crisis sparked by a Jan. 5 mid-air panel blowout.

The planemaker said in a statement it believes its reintegration with Spirit would strengthen aviation safety and improve quality. Spirit AeroSystems confirmed the discussions with Boeing (NYSE:BA) in a separate statement.

In a related development on Friday, Reuters was the first to report the company told suppliers it was delaying expected increases in plane production as it tries to regain the confidence of the industry and satisfy regulators' desires for better oversight of its safety and quality control systems.

For weeks, Boeing has been reeling from the fallout of the 737 MAX incident when a door plug blew off at 16,000 feet (4,877 meters) above the ground. U.S. aviation regulators have already curbed production and air carriers have been in discussion for more aircraft deliveries with its bigger rival, Airbus.

Reuters reported last month that years of decentralization of Boeing's planemaking capacity — along with an exodus of experienced workers and aggressive cost-cutting — has affected quality. Bringing Spirit back into the fold could address some of those quality issues as it would give Boeing more control over manufacturing.

Spirit was spun off in 2005 and in recent years has struggled with cost pressures and problems that have slowed aircraft deliveries and thinned its balance sheet. The company has hired bankers and has had preliminary discussions with Boeing, the Wall Street Journal reported earlier on Friday.

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Such a move could also help Boeing lower Spirit's production costs, a senior industry source told Reuters. Boeing had previously considered repurchasing Spirit AeroSystems, but the optics of buying back at a higher price discouraged such a move, the source said.

However, Spirit's shares have fallen 70% over the last five years, and its $3.3 billion market value is far short of Boeing's $124 billion.

"Boeing probably realizes that divesting its Wichita operations that make up the core of Spirit AeroSystems was a strategic mistake," Scott Mikus, equity research associate at Melius Research said.

Shares of Spirit AeroSystems closed up 15% on Friday in regular trading and were up 2% after hours. Boeing closed down 1.8% and were flat post market.

BOEING AND REGULATORS

The U.S. Federal Aviation Administration in late January barred Boeing from increasing production of the 737 MAX as it presses for changes.

On Feb. 12, FAA head Mike Whitaker visited Boeing's Renton, Washington, factory, where the 737 MAX line is produced, and expressed concerns about some things he saw on the tour to CEO Dave Calhoun earlier this week, two people briefed on the matter told Reuters.

According to Boeing's latest 737 supplier master schedule seen by Reuters, the company had to delay plans to increase production from 38 to 42 aircraft per month to June, from the initial target date of February. Boeing has also pushed back subsequent production increases throughout 2024 and 2025.

Spirit, one of the industry's major manufacturers of large aircraft structures, has struggled with cash flow problems over the past few quarters and quality issues surrounding the fuselages it makes for Boeing's 737 narrowbody jets.

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The company is also exploring selling operations in Ireland that makes wings for the Airbus A220 jet, as it would be unusual for Boeing to supply its competitor.

"For Boeing, this does give them the opportunity to bring Spirit in-house and fix its problems, but Boeing of course has its own issues and has hardly covered itself with glory when it comes to execution of late," said Vertical Research Partners analyst Robert Stallard.

Investigators are still trying to definitively sort out responsibility for the Jan. 5 incident. Spirit made the panel, but Boeing removed it to fix rivet damage and then put it back, according to a preliminary report by U.S. investigators who found pictures showing the panel at Boeing apparently missing key bolts.

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