Boeing supplier Spirit Aero flags $31 million hit from 737 fuselage defect

By Valerie Insinna and Abhijith Ganapavaram

WASHINGTON (Reuters) -Spirit AeroSystems Holdings Inc said on Wednesday it expects a $31 million hit to full-year gross profit from disruptions and rework related to a Boeing (NYSE:) 737 MAX fuselage production problem, and that more related costs are anticipated.

Boeing Co last month said it had paused deliveries of some 737 MAXs due to a problem involving two fittings that join the aft fuselage made by Spirit to the vertical tail, which were not attached correctly.

“Additional costs are expected, including costs Boeing may assert to repair certain models of previously delivered units in their factory and warranty costs related to affected 737 units in service,” Spirit said.

“However, the company cannot reasonably estimate the remaining potential costs at this time,” it added.

Spirit now expects cash burn of about $100 million to $150 million in 2023 due to the risk of lowered 737 fuselage deliveries. Spirit initially expected 420 deliveries this year, but may deliver only up to 390 fuselages for 737s, CEO Tom Gentile told investors during an earnings call.

Despite the potential decrease to deliveries, Gentile said Spirit intends to ramp up 737 fuselage production to 38 per month in August and 42 per month by the end of the year as Boeing increases monthly MAX production to 38 jets in 2023.

Rework costs for affected 737 fuselages at Spirit’s Wichita, Kansas-based production facility are projected to amount to $5 million, an expense of about $100,000-$150,000 per plane.

Overall, “it looks like the cost of 737 rework could be below some of the most dire estimates,” said J.P. Morgan analyst Seth Seifman in a note to investors. “The implication is that rework is a fraction of the cost, with the bulk being factory disruption.”

Repair work to fuselages in Spirit’s factory is expected to be completed by the end of July. The company has also started to build and deliver production-conforming 737 fuselages under a revised process, it said.

About 500 in-service 737s are suspected of being affected by the bracket defect, Gentile said. Because the problem is not a flight safety issue, impacted jets will be inspected and fixed during maintenance, but Boeing and the Federal Aviation Administration have not yet determined the timing for inspections, Gentile said.

Spirit Aero shares were down 6.6% at $27.99 on Wednesday afternoon.

As a result of the disruption at its factories due to the 737 manufacturing issue, Spirit logged $12 million in unfavorable cumulative catch-up adjustments.

The company also announced $110 million in forward loss charges on the Airbus A220, Airbus A350 and Boeing 787. Losses on the A220 amounted to about $81 million, including $46 million in nonrecurring supply-chain costs that were due to a “distressed supplier,” Gentile said.

Spirit reported a first-quarter adjusted loss per share of $1.69, wider than analyst expectations of a 30-cent loss per share, as per Refinitiv data. It reported $1.4 billion in revenue, missing the analyst consensus of $1.5 billion.

Cash burn was $69 million in the first quarter, compared with a cash burn of $298 million a year ago.

Analysts polled by Refinitiv expect a 2023 loss of 5 cents per share on revenue of $6.34 billion.

Boeing CEO Dave Calhoun last week called the 737 manufacturing defect “gnarly” and “difficult to find,” but noted that Spirit and Boeing had quickly identified affected planes and begun the rework.

Spirit expects to receive a $180 million cash advance from Boeing in the second quarter, which Gentile said would provide “additional surplus and cushion.” Boeing said last week it was contributing “manufacturing and engineering resources” to Spirit after the company discovered the 737 bracket issue.