Spirit, Airbus and Boeing: take-aways from analyst day
Spirit Aerosystems held an aerospace analyst day March 7 and several reports have already been issued. Given Spirit’s close association with Boeing 7-Series programs, we thought the following is useful information. Spirit is also a major supplier to Airbus on the A35, building sections of the composite fuselage at its North Carolina facilities.
- By most accounts, SPR is executing well on the 787-8 production program with costs at or below projected levels. Design work on 787-9 is also going according to schedule and both SPR and BA appear to be applying lessons-learned on the 787-8 program to the 787-9. SPR noted they achieved a cost reduction of $150k per shipset on the 787-9 as a result of design improvements.
- SPR’s 2014E sales guidance assumes both BA and Airbus adhere to their stated production rate schedules. While we think BA achieves 737 production rate increase of 42/mo and 777 rates of 8.3/mo on schedule, we assume BA doesn’t achieve 787 production rates of 10/mo until late 2014 vs. BA’s guidance of late 2013.
- SPR noted that there is little margin remaining on A350 development. As such, if there was another delay to the A350 program, that delay would translate directly to SPR. We think there is a strong likelihood that there is going to be another 6 month A350 program delay and see EIS towards the end of 2014 or possibly early 2015. We think another delay to the A350 is well within investor expectations and is already priced into SPR shares.
- SPR expects to be at a rate of 3.5/mth on its 787 content by the end of March and is currently facilitating the factory for 10/mth. Fiber placement remains the biggest challenge in terms of rate ramp, followed by automated fastening and then systems and testing, which one year ago would have been the most limiting factor, but SPR has matured in this area, reducing risk. Long-term, autoclave capacity (there is only 1 in Wichita) is the limiting factor for rates >13/mth. The biggest risk for SPR on 787 today is schedule slide by Boeing – currently it is planning to ship 40 787 units to Everett in 2012.
- While it appears booking above zero margin on 787 is still a few years out, we sensed a greater level of confidence from management that sustained profitability can be achieved in the first block of 500 units (we think perhaps ~2014 timeframe). On 747-8, margins should improve after this first rather short block of 56 units (that ends 4Q’12) providing better contribution in 2013 (current block is in a forward loss).
- 787: SPR has delivered ship set number 60 to Charleston, and is planning to deliver 40 ship sets in 2012.
- 787: SPR is working very closely with BA on the 787-9 and reports that the aircraft is currently on time and at weight. 25% of the engineering has been released on the -9 and management noted savings of $150K per ship set by switching to aluminum from titanium on certain structures. These savings are incremental to what is being built in to company projections.
- A350: Management noted that the wing design should be finalized by June of this year.
- The company was very confident about the risk reduction in the 787. The company still expects to turn positive from a cash standpoint on 787 unit 125-150, which we expect the company will cross in the summer of 2013.
- In our view the risk for additional charges in 2012 is focused on the A350 and the G280. The company expects a milestone in July on the A350 design efforts, which could lock down some of the design issues on the plane, which would be a significant milestone.
- As part of the settlement with Boeing, Spirit has substantial cost reductions that need to made on the 787. We saw unit #84 beginning the production process while Spirit has delivered only unit #60 to Boeing meaning there are over 20 units in some form of production (and therefore, inventory). By the end of March, Spirit expects all aspects of its 787 production to be in line with Boeing at 3.5 shipsets per month. Our sense from the factory visit (compared to our last visit 14 months ago) is that Spirit has made substantial progress and probably is running ahead of its cost reduction targets.