Boeing Co. is close to settling one of its thorniest supplier issues by provisionally agreeing on a discount-promising, long-term deal for plane parts with Spirit AeroSystems Holdings Inc.
Continue Reading Below
Negotiations between Boeing, the world's No. 1 plane maker by deliveries, and Spirit, its biggest supplier, have run for years and been contentious at times as the two sides sparred over parts pricing. Spirit in April said there was a "significant" gap on terms.
On Wednesday, Boeing said the breakthrough was an "important step forward" in its so-called Partnering for Success program in which the plane maker has asked suppliers for concessions in return for work. Boeing in recent weeks struck similar agreements with suppliers Kawasaki Heavy Industries and Triumph Group Inc.
The effort is aimed at helping the Chicago-based plane maker compete against European rival Airbus SE and to meet a commitment to boost earnings margins to the midteens from around 10% now.
Spirit Chief Executive Officer Tom Gentile said the memorandum of agreement "reduces much uncertainty that has long existed with our largest customer." Talks since April "ebbed and flowed," he said, and gained traction in recent weeks. Final details should be ironed out by October and provide for a "healthier relationship" going forward, Mr. Gentile said.
Shares in Spirit, which was spun off from Boeing's Wichita, Kan., and Tulsa, Okla., units in 2005, surged 16% in recent trading as investors breathed a sigh of relief that a nagging concern over future profit and cash flow was nearing an end. Boeing shares were about flat.
Continue Reading Below
The deal covers production through 2022 of major structures on Boeing airliners including the ubiquitous 737 single-aisle plane and the 787 Dreamliner long-range jet, Spirit said.
The supplier agreed to price concessions at predetermined points on two larger Dreamliner versions, the 787-9 and 787-10. Those models of the composite plane weren't covered under an earlier accord. In return, the deal will cover production of more of the planes. Boeing and Spirit had a deal covering production of 1,003 Dreamliners. That would be expanded to 1,300 Dreamliners with provisions for up to 1,405 planes.
Cutting costs to build Dreamliners is critical to Boeing and its future earnings as it tries to shed more than $26 billion in deferred production costs on the program.
The accord comes as Boeing considers developing a brand new airliner. The plane maker has signaled it may not work with suppliers that don't accommodate its needs for greater efficiency. Mr. Gentile said Spirit has no guarantees it would be on the new plane if it gets built, but "what this agreement does is it enables us to compete."
The contract terms forced Spirit to recognize a $353 million forward loss through 2022 on the 787 program. Even so, the company boosted guidance for 2017 free cash flow by $50 million to a range of $500 million to $550 million. It also raised its full-year profit outlook for up to $5.25 adjusted earnings per share.
Boeing has billed its Partnering for Success program as more than just a cost-cutting exercise and said it would work with partners to boost efficiency. Spirit said it had agreed with Boeing to jointly study advanced plane parts and manufacturing processes. The agreement also provides for joint 787 cost-reduction initiatives with financial incentives and productivity discounts on the 737, where Spirit builds the fuselage, contingent on volume commitments.
Write to Robert Wall at firstname.lastname@example.org and Doug Cameron at email@example.com
(END) Dow Jones Newswires
August 02, 2017 13:46 ET (17:46 GMT)