Connect with us

Bussiness

After steering major deal, Shanahan, CEO of Boeing supplier, could be next Boeing boss

Published

on

After steering major deal, Shanahan, CEO of Boeing supplier, could be next Boeing boss

The complex three-way deal announced late Sunday night to split Spirit AeroSystems between Boeing and Airbus, returning to Boeing huge manufacturing facilities that it sold off two decades ago, was engineered by Spirit AeroSystems CEO Pat Shanahan.

Just four months after Boeing announced its intention to reacquire most of this critical supplier, Shanahan secured agreement through personal negotiations with the senior leadership of the two greatest rivals in the aviation world.

A former top Boeing executive and former acting Secretary of Defense under President Donald Trump, appointed Spirit CEO late last year, Shanahan was already considered a top contender to replace Dave Calhoun as CEO of Boeing.

As an engineer and a manufacturing Mr. Fix-It, Shanahan would be “an inspired choice,” veteran aviation analyst Adam Pilarski of consulting firm Avitas said in March.

After landing the Spirit agreement, Shanahan, 62, who spends weekends at his home in Seattle, is now positioned as perhaps the favorite to take over when Calhoun steps down later this year.

In an exclusive interview Monday with The Seattle Times, Shanahan deflected but didn’t deny interest when asked if he might be Boeing CEO.

“It’s not my place to comment on what Boeing might or might not do,” Shanahan replied. “I’ll be keeping my eye on getting this deal done at Spirit.”

Shanahan was brought in to take control of Wichita, Kan.-based Spirit in October when the previous CEO Tom Gentile was fired. Spirit was losing money, deep in debt and facing repeated revelations of quality defects.

A few months later, the midair blowout of a fuselage panel on a Boeing 737 MAX — a fuselage built in Wichita last September, before Shanahan took over — precipitated an ongoing crisis at Boeing over its quality management.

Part of Boeing’s response was to accept delivery of MAX fuselages at the final assembly plant in Renton only if they are largely complete and defect free.

Unfinished jobs and defects requiring rework had been gumming up the assembly process in Renton and contributed to the critical installation error that caused the Alaska blowout.

Work at Spirit was slowed drastically and every fuselage is now carefully inspected before leaving Wichita.

“Our teams have made critical improvements to the quality management system over the past six months,” Shanahan said Monday. “Those improvements will continue.”

“The work that we’ve undertaken is to make changes that are enduring, mistake-proofing a number of the critical operations,” he added.

And he contends the future for both companies will be more secure when Boeing takes back in-house those Spirit units that make the entire MAX fuselage and the forward fuselage of all its other jets, in addition to other major Boeing components.

“Bringing Boeing and Spirit together will enable greater integration. … It’ll bring together their safety and quality systems and make them better,” Shanahan said. “The new organization will be faster and more nimble.”

“This is a fabulous industry,” he concluded. “I’m proud of playing the role of making it stronger and better.”

Analysts warn there’ll be no quick fix

For its part of the deal, Boeing pays $4.7 billion in stock, or $37.25 per share, and also takes on Spirit’s net debt of about $3.6 billion.

Meanwhile Spirit will pay Airbus $559 million to take off its hands the money-bleeding facilities making A350 and A220 parts.

Financial analysts were skeptical Monday in their assessment of what the deal will mean for Boeing.

Rob Stallard of Vertical Research Partners summed it up as “good for Spirit, good for Airbus, and less good for Boeing.”

While Spirit shareholders get a 10% bump in the value of their stock compared to when the deal was first leaked back in April, and Airbus gets a hefty payoff, Boeing inherits a troubled supplier that will require substantial investment to fix.

Yet Stallard concludes in his note to investors that, for Boeing, “we think that it is worth taking the financial hit if this increases the chances of getting the 737 program back on track. … Bringing Spirit back in house should increase the chances of successfully ramping production.”

Stewart Glickman, deputy research director at CFRA Research, agreed the deal will be no panacea for Boeing.

Boeing’s “standing with regulators, and its delivery cadence for 737 MAX jets, will both be slow to recover,” Glickman wrote, adding that the jetmaker’s now-higher debt level and the near-term prospect of changing CEOs introduces risk.

Unless airplane production ramps up, credit agencies are likely to penalize Boeing, said Ben Tsocanos, Airlines Director, S&P Global Ratings, which for now is maintaining Boeing’s rating.

“We could lower the rating if the company fails to increase plane production and deliveries late this year,” Tsocanos wrote. “We do not believe there will be imminent improvement.”

The deal is expected to take about a year to finalize. So if Shanahan does leave to take the top job at Boeing, some of his lieutenants at Spirit will have to take over the company split-up.

To complete that, the deal must first undergo regulatory scrutiny. And the Boeing acquisition is also conditional on the Airbus part of the agreement being finalized.

Shanahan expressed confidence that the deal will be sealed. He doesn’t see a regulatory block, because “this is not anti-competitive.”

And in terms of getting the Airbus side of the deal done, he said “working with the senior leadership for all parties, everyone is aligned and interested in the smooth, quick transition to ensure production system performance.”

Assuming the deal is finalized, analysts said the job then of smoothly merging Spirit’s operations with Boeing’s is not straightforward because each faces its own internal production problems.

“The reintegration of Spirit into Boeing is unlikely to be a silver bullet for either company’s operational issues,” wrote Rob Spingarn of Melius Research.

“Spirit’s issues are due to the loss of institutional knowledge,” he added. “When the 737 MAX grounding and pandemic hit, Spirit reduced its head count by about 34% to preserve cash. … Many experienced employees retired or took jobs elsewhere.”

“It will take talent, training, and time to fix Boeing’s and Spirit’s operations rather than a deal,” Spingarn concluded.

Likewise, Peter McNally, global head of analysts at Third Bridge, an equity research firm, cited “the lack of a skilled workforce” at Spirit as compounding the same attrition problem at Boeing, for which the deal can bring “no quick fix.”

“The industrial logic of integrating the supply chain is sound, but the reality could prove more challenging,” he wrote. “For Boeing customers, this is unlikely to bring an immediate fix to the number of planes that can be delivered.”

Shanahan, naturally, is much more optimistic.

He said he has already put in place new technologies in the assembly plants to improve quality. These include cameras used for inspection and “automation or new types of tooling that allow people with less experience to do the job with precision.”

He said his team has already revamped many of the work procedures at Spirit and instituted “deeper training, not in the classroom but out supporting the mechanics” on the factory floor.

“I feel really good about the progress,” Shanahan said. “We’re getting back to being airplane builders, gearheads.”

Continue Reading