Airbus-Boeing Acquisition Of Spirit AeroSystems Is Far From Over

Of the many ways to look at Boeing’s acquisition of Spirit AeroSystems, consider this: Boeing essentially will pay about $9 billion—including $559 million to archrival Airbus—and possibly considerably more in the end to buy and fix a failing supplier that it owned 20 years before. Compare that with SpaceX and Blue Origin, whose billionaire owners have said they are spending about $10 billion each to launch their respective fleets of advanced rockets. Or how Embraer developed the entire family of E2 Jets for as little as $5 billion, while Bombardier introduced the C Series (now the Airbus A220) for about $6 billion.

For that $9 billion, Boeing will not get anything new except more proverbial headaches. That is because in coming years the OEM and large defense prime likely will have to pay more to fix the ailing aerostructures supplier and bolster their joint workforce. Spirit’s adjusted loss per share of $3.93 during the first quarter was far worse than analysts’ consensus estimate of a $0.59 per-share loss, and Spirit reported cash burn of $444 million, roughly fourfold more than many had forecast.

Neither company knows exactly how much more must be spent to fix their airliner manufacturing systems. But that is almost irrelevant, as there are greater risks at stake, and the deals are seen as imperative. 

• Airbus, Boeing and others to pick apart Spirit AeroSystems
• Deals could take a year to close
• More short-term pain, long-term gain expected

“This is an opportunity to bring back critical airplane manufacturing work on Boeing airplanes into our factories—where Boeing and Spirit world-class engineers and mechanics can work seamlessly together, focused on a common mission to build safe and quality airplanes for our customers,” Boeing CEO and President David Calhoun told Boeing employees upon the deal’s announcement.

The July 1 announcement that Boeing had reached terms whereby it would buy most of Spirit had been expected since the companies revealed in March that they were talking about recombining 19 years after the airframer spun off the Wichita-based operation. What surprised many industry observers was how much Boeing is paying for Spirit and that Spirit is paying Airbus to take on its related Spirit assets.

Boeing’s and Spirit’s definitive agreement calls for an all-stock deal worth about $4.7 billion, or $37.25 per Spirit share. Those terms mark a 30% premium to Spirit’s closing stock price of $28.60 on Feb. 29, the day before Spirit and Boeing issued press releases confirming they were in discussions regarding a potential transaction. Since Boeing is taking over Spirit’s debt, too, the enterprise value of the transaction reaches around $8.3 billion.

It was not immediately known if the $425 million in cash advances Boeing provided Spirit in April are included in their definitive agreement. The separate payment to Airbus, reached under a binding term-sheet, is so far identified as $559 million, but some financial analysts think it could increase by $120-140 million by the time an Airbus-Spirit deal closes.

“Some investors are disappointed in the price, but Spirit’s leverage was mitigated by its strained balance sheet,” say TD Cowen analysts, led by Cai von Rumohr. “Boeing investors may be disappointed, given the Airbus payment is higher than expected.”

Boeing is buying “substantially all” Boeing-related commercial and additional commercial, defense and aftermarket operations from Spirit, including its Wichita, Dallas and Tulsa, Oklahoma, operations. According to a presentation for Boeing investors, the assets would add around $1 billion of annual revenue from commercial, defense and aftermarket assets.

There would be some payback in the form of skipping Spirit’s operating profit. According to Melius Research, at a mature production rate of 50 737s a month, Spirit should make around $1.5 million of cash gross profit per aircraft. Eliminating that profit could save Boeing about $900 million in pretax cash flow annually, which is about ninefold the enterprise value implied in their deal.

Boeing recorded almost $78 billion in revenue in 2023. Spirit recorded more than $6 billion, with nearly two-thirds coming from Boeing and one-fifth from Airbus.

The Airbus takeover includes the production of A350 fuselage sections made in Kinston, North Carolina, and Saint-Nazaire, France; the A220’s wings and midfuselage made in Belfast, Northern Ireland, and Casablanca, Morocco; and the A220 pylons made in Wichita.

Meanwhile, Spirit will try to divest other operations in Subang, Malaysia, and Prestwick, Scotland, which support Airbus programs, plus non-Airbus work in Belfast, as that facility supports a number of other programs. Smaller Spirit sites in Biddeford, Maine, and Woonsocket, Rhode Island, also will be carved out.

The Belfast facility includes a sizable maintenance, repair and overhaul business that performs Airbus repairs, which means it is on the “divestiture list for Spirit,” says Kailash Krishnaswamy, senior vice president of Spirit’s aftermarket division. “A lot of what’s happening with the Spirit divestiture is happening on the site level, so each site either goes to Boeing or Airbus, as previously disclosed, or it will go to a third party.”

Spirit acquired Bombardier’s operations in Belfast in 2020 as part of a vast diversification effort. The purchase of the former Short Brothers site gave Spirit significant work on Bombardier Global and Challenger jets and doubled its aftermarket capabilities. At one point in recent years, Spirit had planned to grow its business aviation work markedly. That segment, however, represents less than 1% of its total revenue today, says Joe Buccino, a Spirit spokesperson.

Shortly after Spirit’s 2021 internal realignment, the aftermarket piece was only 2-3% of the company’s total revenue, but it has steadily grown by double digits in the past few years through expanding its capacity and capabilities to be closer to its customers. “I think most of the aftermarket will stay together,” Krishnaswamy says.

For its part, Bombardier has confidence in the outcome. “Bombardier expects its supply contracts to be maintained to the highest standards of quality and performance,” it says in a statement. “The company remains actively engaged with Spirit as part of the ordinary course of business under existing contracts.”

Until parts are sold off, Spirit will operate as an independent company, Spirit CEO Pat Shanahan told employees in a separate message. “This news might bring mixed emotions, and I want to express my genuine appreciation for every moment of hard work and dedication you are showing,” he added.

Nevertheless, analysts have begun writing the history of Spirit. “To us, Boeing’s announcement of its agreement to acquire Spirit AeroSystems for [an] $8.3 billion enterprise value is an admission that divesting Spirit in 2005 was an unforced strategic error,” say Melius analysts, led by Rob Spingarn.

Boeing has been marketing the Spirit acquisition—something it repeatedly dismissed as a possibility until this year—as central to its safety and manufacturing recovery after the Jan. 5 Alaska Airlines door-plug blowout on a 737-9. But Spingarn’s team says Spirit never was set up properly to stand on its own.

Since going public in 2006, Spirit has reported positive annual free cash flow only seven times (see chart). As an aerostructures business with little to no aftermarket exposure, Spirit was overly leveraged to the new-build airliner cycle, they say.

In addition, Boeing saddled Spirit with an “onerous” contract on the 787 program, leaving the 737 as Spirit’s primary cash generator—with no guarantee that the 787 would become a moneymaker once the 737 sunsets. To Spingarn and company, Boeing’s integration of Spirit is reminiscent of its acquisition of Vought Aircraft’s South Carolina facilities 15 years ago, when 787 development was significantly over budget and behind schedule. “In both cases, Boeing became overreliant on outsourcing and had to course-correct by bringing troubled suppliers in-house,” the analysts stress.

For both Airbus and Boeing, practically no one believes ingesting the respective Spirit assets will cure the airframers’ production ramp malaise immediately. “The real work is still ahead,” say analysts at Vertical Research Partners, led by Robert Stallard.

“The Spirit acquisition is expected to take around a year to close, and so there are naturally limits to what Boeing can do in the short term, as it doesn’t directly control Spirit,” his team says. “However, resolving Spirit’s future is likely to bring much-needed clarity to the situation and hopefully improve cooperation on aircraft programs, particularly the 737 MAX. This should also indirectly help Airbus, as the deal takes Spirit off the financial life-support system that it has been on for the last few years.”

Yet several analysts say any payoff for Boeing—and Airbus too—will depend on how well they can make the Spirit assets work. Boeing has increased its net debt greatly to more than $50 billion this year, and its stock will see a roughly 4% dilution from the shares expended to buy Spirit. “The biggest swing factor is likely to be how well Spirit can be operated under Boeing,” Jefferies analysts say.

“While we think integrating Spirit into Boeing is helped by their shared legacy, there is still risk involved, and it is likely to take some time to sort out Spirit’s issues,” Stallard’s team says. Plus, his Vertical group notes that Boeing has a long list of other challenges, including a U.S. criminal case, appointing a new CEO by year-end, the FAA’s 737 rate cap, political investigations and whistleblower allegations, as well as defense and space program losses.

To be sure, there are upsides to taking over Spirit, including bringing in around $500 million worth of annual defense and space revenue, assuming the contracts transfer.

In its diversification effort, Spirit created a thriving defense business that produced $789 million in sales and a 5.6% operating profit in 2023, including key roles on programs owned by Boeing’s competitors in the defense market. By buying Spirit, Boeing ostensibly becomes a subcontractor for the Northrop Grumman B-21 Raider bomber, Bell Textron V-280 Valor tiltrotor and Lockheed Martin Sikorsky CH-53K helicopter.

To that effect, the deal appears to fit into a new strategy for Boeing’s Defense, Space and Security business, which embraces an expansion of subcontracting work on military aircraft. “We are opening up the aperture and instances where it makes sense for us to look at having somebody else being the lead and us sort of taking a ‘sub’ position,” Bernd Peters, vice president for Defense, Space and Security business development and strategy, told reporters in St. Louis on June 25. “I think there’s more opportunity for us to do that.”

“The helicopter work restores a position that Boeing could have had if Lockheed Martin had won the Future Long-Range Assault Aircraft competition,” analyst Byron Callan of Capital Alpha Partners says. “Boeing was a subcontractor on the B-2 bomber program (Northrop Grumman prime), and Spirit restores this role via the B-21. Spirit has niche roles on hypersonic weapon and other defense programs, and it may have roles on aircraft programs in development.”

As with all mergers and acquisitions, government regulators get to decide if it passes muster. But analysts expect the deals to be allowed. As counterpoints to concerns about industrial consolidation, Callan notes that Spirit used to be part of Boeing, and it derives the supermajority of its revenue from the OEM. In other words, not much is changing. Additionally, everyone involved wants to see a successful conclusion to Spirit’s dissolution.

Spirit says the definitive merger agreement with Boeing and the term sheet with Airbus were unanimously approved by its board of directors. Closing with Boeing is subject to the completion of the divestiture of the Airbus businesses by Spirit and is subject to other closing conditions, including approval of the definitive merger agreement by Spirit shareholders and receipt of regulatory approvals. The closing of the Airbus transaction will be subject to the “substantially concurrent” closing of the Boeing acquisition of Spirit and will be subject to other closing conditions, including regulatory approvals, according to Spirit.

Closings of all these transactions are expected to occur by mid-2025.