The complex three-way deal announced late Sunday night to split Spirit AeroSystems between Boeing and Airbus, returning to Boeing massive manufacturing facilities it sold two decades ago, was engineered by Spirit AeroSystems CEO Pat Shanahan.
Just four months after Boeing announced plans to buy most of the key supplier, Shanahan secured a deal through personal negotiations with top executives at the world’s two biggest aviation rivals.
A former top Boeing executive and former acting defense secretary under President Donald Trump who was named Spirit CEO late last year, Shanahan was already considered a leading candidate to replace Dave Calhoun as Boeing CEO.
As an engineer and manufacturing specialist, Shanahan would be “an inspired choice,” Adam Pilarski, a veteran aviation analyst at consulting firm Avitas, said in March.
After landing the Spirit deal, Shanahan, 62, who spends weekends at his home in Seattle, is now positioned as perhaps the frontrunner to take over when Calhoun steps down later this year.
In an exclusive interview with The Seattle Times on Monday, Shanahan declined but did not deny his interest when asked if he might become Boeing’s CEO.
“It’s not my place to comment on what Boeing might or might not do,” Shanahan said. “I’ll make sure that deal gets done at Spirit.”
Shanahan was named head of Wichita, Kansas-based Spirit in October when the previous CEO, Tom Gentile, was fired. Spirit was losing money, carrying heavy debt and facing repeated revelations of quality defects.
A few months later, the mid-flight explosion of a fuselage panel on a Boeing 737 MAX — a fuselage built in Wichita last September, before Shanahan took over — precipitated an ongoing crisis at Boeing over its quality management.
Part of Boeing’s response has been to accept delivery of MAX fuselages to the Renton final assembly plant only if they are substantially complete and defect-free.
Unfinished work and defects requiring rework stalled the assembly process in Renton and contributed to the critical installation error that caused the Alaska explosion.
Work at Spirit has been slowed considerably and each fuselage 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. “Those improvements will continue.”
“The work we have undertaken is to bring about lasting change and prevent errors in a number of critical operations,” he added.
And he argues that the future of both companies will be more secure when Boeing brings back in-house the Spirit units that make the entire fuselage of the MAX and the forward fuselage of all its other jets, in addition to other major Boeing components.
“The merger between Boeing and Spirit will allow for greater integration. (…) It will bring their safety and quality systems closer together and improve them,” Shanahan said. “The new organization will be faster and more agile.”
“It’s a fabulous industry,” he concluded. “I’m proud to be part of making it stronger and better.”
Analysts warn there will be no magic bullet
For its part of the deal, Boeing is paying $4.7 billion in stock, or $37.25 per share, and also assuming Spirit’s net debt of about $3.6 billion.
Meanwhile, Spirit will pay Airbus $559 million to shed its cash-sucking parts production facilities for the A350 and A220.
Financial analysts were skeptical Monday in their assessment of the deal’s implications for Boeing.
Rob Stallard of Vertical Research Partners summed it up this way: “It’s good for Spirit, good for Airbus and not so good for Boeing.”
While Spirit shareholders get a 10% increase in the value of their shares since the deal was first leaked in April, and Airbus gets a generous payout, Boeing inherits a struggling supplier that will require substantial investment to fix.
Still, Stallard concludes in his note to investors that, for Boeing, “we believe it is worth taking the financial hit if it increases the chances of getting the 737 program back on track. (…) Bringing Spirit back in-house should increase the chances of successfully ramping up production.”
Stewart Glickman, associate director of research at CFRA Research, agreed that the deal would not be a panacea for Boeing.
“Boeing’s standing with regulators and its delivery rate of 737 MAX airplanes will be slow to recover,” Glickman wrote, adding that the planemaker’s now higher debt level and the near-term prospect of a CEO change introduce risks.
Unless aircraft production increases, rating agencies are likely to penalize Boeing, said Ben Tsocanos, director of airlines at S&P Global Ratings, which is maintaining Boeing’s rating for now.
“We could downgrade the rating if the company fails to ramp up its aircraft production and deliveries by the end of this year,” Tsocanos wrote. “We do not believe there will be an imminent improvement.”
The deal is expected to take about a year to finalize. If Shanahan does leave to lead Boeing, some of his lieutenants at Spirit will be responsible for the company’s breakup.
To do so, the deal must first undergo regulatory review. The Boeing acquisition is also conditional on the Airbus portion of the deal being finalized.
Shanahan said he is confident the deal will go through. He doesn’t see a regulatory bottleneck because “it’s not anti-competitive.”
And regarding the conclusion of the agreement with Airbus, he said: “Working with the senior management of all parties, everyone is aligned and interested in a rapid and smooth transition to ensure the performance of the production system.”
Assuming the deal is finalized, analysts said the task of smoothly merging Spirit’s operations with Boeing’s is not simple because each faces its own internal production issues.
“It is unlikely that reintegrating Spirit into Boeing will be a silver bullet to either company’s operational problems,” wrote Rob Spingarn of Melius Research.
“Spirit’s problems are due to the loss of institutional knowledge,” he added. “When the 737 MAX grounding and the pandemic hit, Spirit reduced its workforce by about 34% to preserve cash. … Many experienced employees retired or took other jobs.”
“It will take talent, training and time to fix Boeing and Spirit’s operations rather than making a deal,” Spingarn concluded.
Similarly, Peter McNally, global head of analysts at Third Bridge, an equity research firm, cited “the lack of skilled labor” at Spirit as exacerbating the same attrition problem at Boeing, for which the deal can provide “no quick fix.”
“The industrial logic of supply chain integration is sound, but the reality may be more complicated,” he wrote. “For Boeing’s customers, it is unlikely to provide an immediate solution to the number of airplanes that can be delivered.”
Shanahan, naturally, is much more optimistic.
He said he has already implemented new technologies in assembly plants to improve quality. These include cameras used for inspection and “automation or new types of tooling that allow less experienced people to do the job accurately.”
He said his team has already reorganized many work procedures at Spirit and implemented “more in-depth training, not in the classroom but in support of the mechanics” at the plant.
“I’m really pleased with the progress we’ve made,” Shanahan said. “We’re getting back to being airplane manufacturers, “Mechanical enthusiasts”