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Spirit AeroSystems won’t ramp up production as planned on the Boeing 737 Max until after 2020 – even if the grounded jet returns to service and Boeing increases its own production rate soon.
“We do not anticipate that we will produce at a rate any higher than 52 per month in 2019” or in the following year “given production and storage levels,” Spirit CEO Tom Gentile said during the company’s second-quarter earnings conference call.
Spirit, which reported more than $2 billion in revenue over the past three months, had been on track to increase production on the Max to 57 a month this summer before a pair of fatal crashes led to the jet’s global grounding in March. As Boeing cut its production of the Max to 42 planes a month in April, Spirit worked out a deal to continue building 52 a month and store the extra planes in Wichita until Boeing is ready for them.
Asked what Spirit might do if Boeing shuts down production of the Max if there are setbacks in returning it to the air, Gentile said Spirit has “evaluated a range of scenarios,” including scaling back and temporarily pausing production.
But there’s no plan to do either at this point, he said, reiterating that the “current plan is to stay at rate 52 as we’ve agreed with Boeing.”
Spirit has already cut costs — including shortening the work week for thousands of employees and requiring others to take 10 days of unpaid furlough — to reduce the financial impact of the Max groundings. It’s unclear when the plane will be cleared to return to service.
So far, Spirit has shipped to Boeing about 130 aircraft since April’s compromise and has another 35 sitting in storage on a ramp adjacent to McConnell Air Force base, Gentile said. After they’re built, the 737s are covered with a specially designed three-layer wrapping to protect them from inclement weather, tethered to a cradle and stored for about 20 days before they’re unwrapped and sent to Boeing by train.
Gentile said the cost to wrap and store the planes will be minimal, about $3 million to $4 million this year.
“We remain proud to be a partner on the Max and very confident in the long-term outlook for the program. That said, we communicate with Boeing regularly and will coordinate our production rates with them on the timing of the Max returning to service,” Gentile said during the call.
Spirit, Wichita’s largest employer, makes 70% of the 737, including the fuselage. It accounts for about half of the company’s revenues.
Spirit reported second-quarter revenue of close to $2.02 billion, a nearly 10% increase over the same period last year, that beat Wall Street expectations. Analysts had forecast revenues of just under $2 billion.
Net income for Spirit’s second quarter was up to $168 million, a 16% increase, and reported earnings per share were $1.61, a 23 percent increase over last year. Spirit also reported $226 million in operating income for the second quarter, up from $218 million for the same period last year.
Spirit in a news release called the performance “solid” and said the revenue increase was driven primarily “by higher production volumes on the Boeing 777 and 787 programs, favorable model mix on the Boeing 737 program and higher revenue recognized on the Boeing 787 program.”
“Spirit’s backlog at the end of the second quarter of 2019 was approximately $46 billion, with work packages on all commercial platforms in the Boeing and Airbus backlog,” the news release said.
Meanwhile, cost-cutting measures Spirit took earlier this year to mitigate the financial impact of the Max grounding “are tracking to plan,” Gentile said during the conference call — but they won’t be realized until the second half of the year. Spirit sought to cut 5% of its fixed costs to offset the impact of the delayed production boost following April’s move to continue the 52-a-month rate, he said.
“These financial benefits will carry into the future as our resources become better aligned with our production rate and future schedule,” Gentile said.
He referred to the second quarter as “a transition quarter” because the company had staffing, materials and other elements already in place to produce 57 Max aircraft a month before officials decided to keep production rate flat.
“Making such a quick adjustment to the production schedule creates significant disruption in a complex production system like the 737. Having costs for rate 57 but producing at a lower rate had a short-term negative impact on margins,” he said.
“As we restructure our costs to align with the current outlook and benefit from a longer period of rate stability, we expect to see improved quality and production efficiency, as well as margin improvement, back toward our target of 16.5 percent. We will continue to take full advantage of this pause in rate increases to focus on improving quality, factory efficiency, and supply chain health.”
Spirit also cut overtime and contractors, froze hiring, offered a voluntary retirement package that about 200 workers accepted, deferred spending on capital improvements and shortened the work week for about 6,000 salaried employees — most who work at the Wichita plant — to help reduce costs.