Spirit seeking to expand work as it negotiates new contract with Boeing
03/06/2013 5:19 PM
08/08/2014 10:15 AM
Spirit AeroSystems is in the midst of renegotiating its master contract with Boeing, its biggest customer, for fuselage sections and other parts as the current contract’s June 1 expiration date approaches.
Spirit has long-term supply agreements with Boeing, which makes Spirit the exclusive supplier for certain products to the company.
It also has long-term agreements with Airbus, its second-largest customer.
The contract with Boeing covers products such as fuselage and fuselage sections, struts, pylons, nacelles and wing components for Boeing’s 737, 747, 767 and 777 commercial aircraft programs.
The agreement is for the life of the programs and includes any commercial derivative models, such as the Boeing 737 Max, an upgraded 737 with new engines, and the Boeing 767 tanker to the Air Force.
Last year, Spirit derived 84 percent of its net revenue from sales to Boeing and 9 percent from Airbus, according to a filing with the Securities and Exchange Commission.
In 2012, Spirit recorded $5.4 billion in net revenue and $34.8 million in net income.
About 47 percent of that revenue came from sales of components for Boeing’s popular 737 single-aisle jet.
“We are their biggest supplier, and Boeing is our biggest customer,” said Spirit AeroSystems spokesman Ken Evans. “We have a shared destiny.”
The current supply contract with Boeing was forged when Boeing sold its Wichita commercial airplane division in 2005 to Onex Corp., which became Spirit AeroSystems.
Spirit builds parts of every commercial airplane Boeing has in production.
An industry expert said that Spirit would like to increase its scope of work with Boeing under the new contract.
For example, Spirit now “stuffs” the 787 nose before delivery to Boeing. It could do that kind of work on other Boeing airplanes for a lower cost, the expert said.
Pricing on the current contract is set through May. It’s adjusted each year based on volumes.
Average prices per unit are lower with higher volumes and higher at lower volumes, the filing said.
Spirit hopes to finalize a new contract with Boeing before the current one expires, Jeff Turner, Spirit CEO and president, told analysts in a conference call about the company’s fourth-quarter results.
“We are very active in that conversation (with Boeing) and hopeful we’ll be able to close it,” Turner said in the call.
There are agreements in place should a deal not be finalized by the time the current one expires.
“There is wording in the original contract that contemplates that if it isn’t closed, there’s continuity of business agreement,” Turner said. “We are diligent with Boeing … and hope to have it closed, but it may or may not.”
Cai von Rumohr, an aerospace analyst with Cowen and Co., said he thinks finalizing a contract may be delayed until a successor for Turner is in place.
Turner announced in November that he intended to retire early this year. A search is under way.
“Would you want the current leadership to do something this important, or would you want the new CEO to weigh in” on the new contract, von Rumohr said.
Under the existing contract, Boeing is obligated to buy from Spirit all that it needs on products covered under the agreement.
Boeing is prohibited from manufacturing the product itself, the SEC filing said.
The length of the new contract is to be agreed upon by the two parties, it said.
It did not say how long that period may last.
Pricing negotiations on the next contract with Boeing will be made in good faith and will be based on prevailing market conditions, the filing said.
If the parties are unable to agree upon pricing before the contract expires, prices will be determined by the pricing in effect at the expiration of the eight-year contract, the filing said.
It will be adjusted using the “then-existing quantity-based price adjustment formula and annual escalation until such time as future pricing is agreed,” it said.
Spirit also has a supply agreement with Boeing for its twin-aisle 787 Dreamliner, which covers the life of the program and includes commercial derivatives of the 787.
Pricing on the Boeing 787-8 now in production is generally established through 2021, the filing said.
Spirit also has agreements with Airbus for the life of its commercial airline programs, with pricing in place through 2015, except for the Airbus A350 XWB and the A380.
Instead, long-term contracts for the A350 and A380 cover a fixed number of units at established prices, the filing said.
Spirit builds the center fuselage sections and wing structures for the A350.