By Dan Catchpole

Feb. 6, 2024 © Leeham News: Quality more than quantity will drive Spirit Aerosystems executives’ compensation when the company unveils its new formula when it files its proxy statement in March, the company’s CEO Pat Shanahan told Wall Street analysts on Tuesday.

“It will be significantly different, and the heaviest weighting will be only quality,” he said during a conference call discussing Spirit’s fourth quarter earnings report.

The panel blowout on Alaska Airlines Flight 1282 last month highlighted ongoing quality problems at Spirit and Boeing. Unlike the violent decompression on the 737 MAX 9, the quality problems typically just create financial headaches and public embarrassment for the two companies.

Spirit recorded $59M in net income, 48 cents adjusted earnings per share, and $42M free cash flow in the fourth quarter of 2023, its first profitable quarter since the beginning of 2022.

The company’s performance was boosted by a contract renegotiation and financing deal signed with Boeing in October. Spirit is getting close to signing a similar deal with Airbus, Shanahan said.

Summary

• Quality metrics for exec compensation
• Short term, long term plans for improving quality
• Negotiations with Airbus

Quality payday

Quality plays only moderately affects Spirit executives’ annual pay, and it has no role in calculating how much they get paid years from now. That is changing, Shanahan assured analysts during the call.

“Right now, I’m working to design it so the system can’t be–you know, manipulation is probably too strong a word–but I want to make sure that it drives the right behaviors, and that we can measure true performance,” he said.

For calculating executive pay at investor-owned utilities, Shanahan said, “in their quality metric, there’s a significant penalty” for certain defects.

“We’re really trying to look at how do we measure defect reduction, but also, you know, what if there is any type of escape,” he said.

Quality problems have plagued the 737 program in recent years. Spirit builds the fuselages for the airplane family in Wichita, Kan., and ships them to Boeing’s factory in Renton, Wash. Last year, incorrectly drilled holes on aft pressure bulkhead roiled 737 production. Loose or missing bolts on the door plug on AS 1282 appear to have caused the blowout.

Now, mis-drilled holes in 737 fuselages from Wichita could delay delivery of about 50 aircraft.

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The company is taking a closer look at the 737 program through a product safety lens, not just quality review. Through that lens, it is doing a detailed review of about 200 of the 2,300 steps in assembling a 737 fuselage.

In the short term, the answer to improving quality is “less manual, less interpretation and more inspections,” he said. In the medium- to long-term, the company plans to use “more human-assisted equipment and technology, more automation.”

Part of Boeing

Spirit and Boeing are working more closely together than they have in some time, and they have rebuilt trust and feedback loops to what they once were, Shanahan said.

“We’re behaving as if we were part of Boeing,” he said. “So, if you sat in one of our meetings and people took off their badges, you would not be able to which company they worked for.”

Until 2005, Spirit was Boeing’s Wichita division. The airplane maker sold off its operations there, but Spirit remains one of Boeing’s biggest suppliers.

Shanahan credited the memorandum of understanding signed between the two companies in October with helping restore their relationship. The arrangement gave Spirit a cash infusion and revised loan repayment terms, and 737 and 787 prices to give the supplier more money to improve production quality.

The deal was signed shortly after Shanahan took over as Spirit’s interim CEO. He formerly was Boeing’s vice president of supply chain and operations, Boeing’s vice president of commercial airplane programs, and he headed up the 787 program. He had a “Mr. Fix-It” reputation at the company. After retiring from Boeing, he joined the Department of Defense, where he served as acting Secretary of Defense for six months in 2019.

Spirit can go to producing 42 airplanes per month for the 737 program when Boeing is ready, and it has been fine tuning its supply chain management to avoid holding a lot of components that it doesn’t need yet, he said.

Expecting to go to 42/month last year, the company already has substantial parts inventory, which gives it buffer space in raising production rates this year.

Airbus deal expected soon

Boeing and Spirit’s chummy relationship is not causing a rift with Airbus, Spirit’s other major customer. The supplier should sign a similar MOU with the European aerospace giant this month, Shanahan said.

The two deals would help Spirit dig itself out from beneath $4B debt that it is under.

“Our focus has been on price,” he said. “The focus has really been on understanding between two companies what is right level of productivity that should be achieved that they’re willing to pay for, and what is cost that we’re all aligned on that is real and needs to be reflected in the price.”

The two also are clarifying what Airbus expects from Spirit on its A220 and A350 programs in 2024.

In the fourth quarter of 2023, Spirit booked nearly $58M in forward losses on the A220 program and $76M on the A350 program. It delivered 196 shipsets to Airbus–20 on the A220, 150 on the A320, nine on the A330, and 17 for the A350.

An Airbus spokesman declined in January to comment on whether there have been quality issues with A350 panels from Spirit’s Kinston, N.C.-plant.

Shortly after the Alaska Airlines accident, Airbus CEO Guillaume Faury told reporters that it has “been working very closely with Spirit over the last years. Spirit is indeed an important supplier to Airbus on different programs.”

Airbus is “monitoring very closely everything that comes out of the ongoing investigation (of AS 1282). And obviously we will be taking each and every learning, and we would expect Spirit to do exactly the same. So, that’s where we are at that stage following the incident,” Faury said.