After nearly four years of fruitless negotiations with Boeing, Spirit AeroSystems executives are finally conceding that an agreement on pricing for billions of dollars of parts for Boeing aircraft might need a dispute resolution process.
“The fact is there is still a gap between us really on the 737 side and the 787 side,” says Spirit chief executive Tom Gentile. “We’re working very hard to close but there’s still a gap.”
In his remarks addressed to analysts on a first quarter earnings call on 3 May, Gentile departed from a more optimistic tone that had long characterised his company’s descriptions of the negotiations with Boeing’s on a new master pricing agreement. Instead, Gentile acknowledged the possibility the discussions could fail, forcing Spirit to take “appropriate steps to remediate those issues”, he says.
Spirit’s supply contract include standard provisions for dispute resolution if negotiations break down, says Gentile, who declined to elaborate. Gentile’s remarks suggest the nearly-four-year-old saga could soon enter a new phase involving legal options.
Spirit was formed in 2005 after Boeing spun-off its commercial aircraft operations in Wichita, Kansas, and Tulsa, Oklahoma. The company embarked on a drive to diversify its operations beyond Boeing aircraft. Spirit launched an ill-executed foray into business aviation, which led to billions in forward losses on contracts to supply wings for the Gulfstream G280 and G650. The company also picked up a major role on the Airbus A350 programme, supplying the Section 15 centre fuselage from new factories in Kinston, North Carolina, and St. Nazaire, France.
But Boeing still remains Spirit’s largest customer, with work that includes 70% of the 737, the nose section and engine pylons for the 787 and major structures for the 747, 767 and 777.
The original master pricing agreement established during the 2005 spin-off expired in 2013, just as Boeing launched a campaign to lower prices across the supply chain by 15%. As negotiations between Boeing and Spirit dragged on, the master agreement was first replaced by a temporary agreement that was extended through 2015. As that deal expired on 1 January 2016, both parties resorted to an interim pricing structure until final terms can be reached.
The interim pricing terms allow Spirit to achieve its 2017 targets for earnings and revenue conversion to free cash flow, Gentile says. “Those are satisfactory for now,” he adds. But “it would be better to get to a final commercial settlement”.
Despite the impasse, Spirit remains committed to meeting its obligations to Boeing with parts that meet expectations for cost, quality and schedule, he says.