Spirit AeroSystems (NYSE:SPR) has halted work on Boeing (NYSE:BA) commercial aircraft fuselages and furloughed more than 3,000 workers for 21 days following Boeing's decision to suspend final assembly due to the COVID-19 coronavirus pandemic.
The company, a onetime Boeing subsidiary that still relies on the plane maker for a significant portion of its revenue, had already suspended production of the 737 MAX fuselage. The latest move comes days after Boeing also shut down production of its larger 787 Dreamliner.
Spirit said that its factories will continue to produce components for defense contracts, including business with Boeing, and its Airbus (OTC:EADSY) commercial work will continue for now. Airbus is Spirit's second-largest customer but accounted for just 16% of 2019 sales.
Commercial aerospace is taking it on the chin
Commercial aerospace has been hit hard by the pandemic, with airline customers grounding planes and cutting capital expenditures to save cash after seeing travel demand evaporate overnight. Even if the pandemic is soon contained and economic activity begins to return to normal, airlines are likely to be conservative when it comes to new-plane orders.
Boeing execs have insisted the company can survive without a bailout but lobbied for $60 billion in federal assistance for the company and its supply chain. Boeing's suppliers tend to have thin margins, and the company can ill afford to see Spirit or any of its other significant subcontractors fall into economic distress.
Spirit has slashed U.S. executive pay by 20% until further notice and said that the furlough of about 3,200 Boeing-related production employees in Kansas and Oklahoma will extend for 21 calendar days. It has also deferred about $120 million in capital expenditures and has offered voluntary retirement plans to 850 hourly and salaried workers.
"Spirit has enacted a robust crisis management and response process as part of our enterprise risk management program to help us navigate the challenges we face due to the COVID-19 pandemic," CEO Tom Gentile said in a statement. "We are proactively taking steps to ensure the safety of our team as we maintain operations to support our customers, including the critical work we do on national security programs."
The company also warned that if production rates are cut beyond the current timetable, "Spirit will evaluate further cost reduction actions, including additional workforce actions."
Spirit AeroSystems still needs Boeing
Reliance on Boeing has been a long-term problem for Spirit, and one it has tried multiple times over the years to address. Not long after the two companies separated in 2005, Spirit attempted to diversify by buying up mostly low-margin and unprofitable businesses that were attractive mostly because it was work for new customers, but the strategy backfired when the 2008-2009 recession hit.
In recent years, Spirit has shed most of those unprofitable businesses, and still counts on Boeing for about two-thirds of its revenue.
The company restarted its push to diversify in 2018 when it announced plans to buy Airbus supplier Asco Industries for $650 million. Last November it said it would buy much of the aerostructures business of Bombardier for $1.09 billion, with more than half the total value made up of assumed pension and other liabilities.
Last year's grounding of the 737 MAX demonstrated the need to diversify, and the pandemic has put an exclamation point on the push. But Spirit learned the hard way in the 2000s that diversification at any cost is not a winning strategy either. Its latest push appears more calculated but is going to take time to pay off.
No time to jump in
Spirit AeroSystems is making all the right moves but is caught in a tough position. An impressive decade-long surge in commercial aerospace sales looked to be at risk of fading even before the pandemic, and even if the outbreak is contained relatively quickly, the order books at Boeing and Airbus seem certain to take a hit that will ripple down through suppliers.
Spirit is doing what it can to cut costs and preserve liquidity. As of April 2, the company had about $1.83 billion in cash and $3.04 billion in total debt on its balance sheet, with an $800 million revolving credit line fully drawn. The company in its statement said it has the ability to take out further costs as needed: "Spirit believes that it is well positioned to manage its liquidity through this challenging and unprecedented situation."
I am optimistic the company will remain solvent. I think Spirit AeroSystems is well managed and can get through this crisis. But even with the shares down more than 70% year to date, this is no point in the cycle to be buying into a commercial aerospace supplier. Spirit's fighting the good fight, but for now investors are best off watching from the sidelines instead of buying in.