ANALYSIS: Spirit AeroSystems must continue strategy, but avoid costly stumbles

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As Spirit AeroSystems searches for a new leader for the first time in its seven-year history, it must find a talent capable of refining the expansionist legacy of outgoing chief executive Jeff Turner while avoiding the pricing and execution stumbles that cost the company so dearly in the last quarter.

Turner has decided early next year to step down as president and chief executive less than a month after the company posted a $590 million combined write-down caused mostly by four aerospace programmes.

It was a result that Turner himself described as "extremely disappointing" in a conference call with financial analysts earlier this month. Few aerospace executives have done more to define their business than Turner, who started working for Boeing in Wichita in 1973. He rose to become vice-president and general manager of the Wichita site in 1995, and stayed on as president and chief executive when the division was acquired by Spirit Holdings in 2005.

Turner guided the standalone company from its previous role as an exclusive aerostructures supplier to Boeing's commercial aircraft division to a much broader portfolio of customers throughout the aerospace industry.

For the most part, the Spirit AeroSystems strategy worked. By early 2012, Spirit AeroSystems - augmented by the acquisition in 2006 of BAE Systems' aerostructures business - claimed a 16% global share of the aerostructures market, with 97% of its work for Airbus and Boeing reserved as the structure's sole supplier. It also branched into new segments of the aviation market, winning major positions on private jets and Sikorsky aircraft.

Even as the company grew, its leaders demonstrated a remarkable flexibility despite the adversity of plunging market demand in a global recession. The company also showed it could act quickly in the face of what was nearly a catastrophe. The sprawling Wichita factory was struck on 14 April by a massive tornado. Parts of the company's 42 buildings on the site remain damaged, but Spirit AeroSystems has still never missed a load date - a performance that garnered a personal thanks from Boeing's supplier management leaders in June.

The rapid expansion of the company forced its leaders to exercise a new set of skills. In the new business strategy, it was not enough to be intimately familiar with the pricing preferences and risk exposure of Boeing alone. Spirit AeroSystems would have to adapt to new ways of managing programmes used by Airbus and other major aerospace manufacturers. The write-down proved disconcertingly that management has not learned those skills fast enough.

"In many ways the company is still transitioning from being a cost line in someone else's company to its own profit and loss centre," says Richard Aboulafia, an aerospace consultant for the Teal Group. "Figuring out the costs and risks of bidding new work is a difficult skill, and far more challenging than just bringing in new business."

Turner acknowledged the criticism in his responses to analysts' questions about the reasons for the third quarter write down, which drove a net loss of $143 million for the three-month period.

Turner described "design issues" that arose on newly-won aerospace programmes, which increased costs beyond the expectations calculated into their bids to win the work. As Turner's management team entered unfamiliar supply chains, they also discovered their expectations for dramatic cost reductions over time were too optimistic.

"We had forecast the ability to come down at a [certain] cost curve and we have not been able to achieve that - the aggressive curve we had set," Turner says. "We are coming down a good cost curve, but not to the extent we had forecast."

But Turner's successor will inherit a company with at least as many advantages as downsides. The company's stake on the 737 programme, the highest-selling commercial aircraft in history, will continue driving profits as production rates accelerate to 42 per month in 2014 and even higher as Boeing transitions to the 737 Max variant in 2017.

Spirit AeroSystems has struggled mostly with wing components on the 787, but its position on the Section 41 forward fuselage has performed better.

Meanwhile, it is ramping up its role in the Airbus A350 XWB programme, where it produces the composite Section 15 centre fuselage and the wings. So far, Spirit AeroSystems has acknowledged the development phase of the A350 wing is operating as a forward-loss, but the production phase is still expected to be profitable, as are the development and production blocks of the centre fuselage section.

In the near-term, Spirit AeroSystems new executive team will be focused on re-grouping and implementing lessons learned on the company's next wave of programmes entering into production - the 787-9 and A350-900, in particular. But the company's long-term strategy remains dependent on finding new work in more unfamiliar supply chains. How well Spirit AeroSystems can execute on the 787-9 and A350 may be a key indicator of how much they have learned.

"Hopefully," Aboulafia adds, "they can learn from this, and manage risks better".