Aerospace supply chain readers have obviously been following our ongoing commentaries related to the financial stress being placed on certain major suppliers when a major aircraft program, such as the Boeing 787 Dreamliner, falls behind original customer shipping milestones by years. Under the umbrella of its Partnership for Success program, Boeing has been pressuring suppliers for greater cost savings to offset its increased program costs, even though customer deliveries of completed aircraft continue at a reduced rate.
Spirit AeroSystems a spin-off from Boeing in 2005, is one of the largest suppliers of aircraft sub-structures for both Airbus and Boeing. This week, the company caught Wall Street in surprise by reporting significant pretax charges for the final three months of 2013, including $385 million directly related to work performed on the Boeing 787. That announcement, coupled with a reported fourth-quarter loss of nearly $587 million, compared to a year earlier profit of $60 million, wiped out one-fifth of the supplier’s market value.
News of a 4.8 percent increase in revenues and a 7 percent rise in order backlog was overshadowed by that related to charges and write-offs. Spirit’s CEO declined to rule out additional charges.
As a major airframe supplier, Spirit was deep in the crosshairs of OEM’s effort to outsource major component design and production further down the value-chain to share risks and costs. A new CEO assumedleadership of Spirit in early 2013 and immediately initiated a strategic review of existing businesses and subsequently dealt with business aircraft related component programs that ran-up considerable charges. Two production facilities were subsequently put up for sale.
In its reporting of this week’s announcement, the Wall Street Journal (paid subscription required) characterized this development as “raising concerns about the ability of jet maker Boeing Co. to maintain momentum in reducing costs on its flagship 787 program” and further noted that while Spirit’s stock was punished, Boeing’s stock rose by 1 percent. Spirit had previously recorded pretax charge of $184 million related to its work on the 787 program in October of 2012.
Business media continues to point out that Boeing has yet to sign-up the majority of suppliers to its cost control programs. That should not be a surprise to our reading audience. In last week’s commentary, Collaboration According to Boeing, we observed how this same supplier cost reduction program is being influenced on the 777x program, Boeing’s newest twin-aisle aircraft development program.
Is it any wonder that recent research surveys among procurement leaders continue to indicate that while improving cost savings remain among the top strategic objectives for many firms, incremental cost savings are much more difficult to achieve. When major customers insist of increased innovation but singularly shift the burdens of cost overruns down the value-chain, the results are obvious.
Old ways seem to die hard and aerospace supply chains must deal with the consequences.
Bob Ferrari
