Spirit AeroSystems first quarter earnings certainly made for good news after the two month strike that crippled production at Boeing’s Everett and Renton plants and saw the company halt deliveries and go on short-time work.
With no sign of any meaningful travel recovery, market consensus on Spirit’s earnings per share were estimated at around $0.40, the company reported EPS of $0.45 on earnings of $887m, down 14% from the same time last year despite delivering 30 fewer units as the company sought to get back to pre-strike production levels.
Boeing’s first quarter results indicated around 60 deferrals so far in 2009 along with a production adjustment on the money-spinning 777 family, all eyes have been cast around the equally, if not more popular 737 line and the marketplace is braced for cuts in production here too. Estimates range wildly from anywhere between 20-40% for 737 production rates to come down – with all 2009 deliveries financed and a much lower rate of production in contrast to Airbus’ A320 line, the over-selling on the 737 has assisted both Boeing and Spirit to tinker with production in concert with the uncertainty over the state of the wider global economy and airline industry.
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A more accurate figure for 737 production cuts would be closer to 15%, bringing monthly output down to around 26/27 airplanes a month. In an investors note, analyst Rob Stallard was amongst the first to share agreement with this view by stating “Boeing is currently planning to maintain flat production on the 737, but we think extensive airline deferrals will lead to a rate cut from 31/month to 25/month from the middle of 2010.“
Materially, this may impact Boeing given the expected deferrals for the next 24 months or unless the current traffic falls causes more cash-strapped airline casualties. Critically, with production of the 787 Dreamliner expected to ramp up much more significantly as 2010 approaches, deliveries on the first examples for customers would likely yield lower payments given the compensation handed out due to the series of delays that have blighted the airplane for almost two years.
Perhaps the saving grace for Spirit in the second half of this year and for the next twelve months is the contract prices it negotiated for subassembly work on Boeing airplanes, in particular the 787 and 777, which yield greater margins than on the higher volume 737 line. This was evident in the decline of Spirit’s backlog in contrast to the higher output on the back of returning to pre-strike level production, coupled with the sudden slowdown in new airplane orders for the first quarter of 2009.
As the second quarter approaches the mid-way point, all eyes on the anticipated first flight of the 787 will likely factor a nudge upwards for both Boeing and Spirit’s stock price. The real test of Spirit’s resolve is to come if, as expected, the airline industry still has yet to find the bottom of the trough its in – the strike at Boeing may not have been easy to navigate through, but any 737 cut alongside a slower-than-expected increase in 787 deliveries from 2010 onwards may make last autumns woes seem like a walk in the park.
