Spirit AeroSystems, a key player in Boeing's supply chain, recently announced its Q1 2024 earnings, revealing a concerning situation that has flown under the radar of most analysts. The company reported a massive $495 million in net forward losses, primarily from its Airbus A350 and A220 programs. These losses, totaling $281 million and $167 million respectively, are the result of unsuccessful attempts to secure a commercially viable agreement with Airbus. Factors contributing to these losses include reversed pricing benefits, future performance obligations beyond 2026 (which Spirit must account for as a standalone entity), and escalating production costs.

While Spirit's earnings transcript mentions ongoing negotiations with Airbus, the magnitude of these losses, comprising 80% to 85% of the company's total forward loss reserves, is alarming. This isn't a minor setback but a significant challenge to Spirit's financial stability, casting a shadow over its potential acquisition by Boeing.

Imagine a high-stakes poker game where one player has already lost most of their chips to another. Would you be eager to buy them out, knowing their dwindling stack and uphill battle? This is Boeing's dilemma with Spirit.

Spirit's Q1 cash flow plummeted to -$444 million compared to -$69 million in the same quarter last year, mainly due to 737 production and delivery delays. The Airbus losses compound this problem, highlighting a shaky financial foundation.

Furthermore, Spirit faces substantial investments to support Airbus' ambitious production ramp-up plans for the A350 and A220. The company's CFO, Mark Suchinski, confirmed the need for significant capital expenditures at their Belfast facility, including costly equipment like autoclaves. Workforce expansion poses another challenge, with the Belfast facility aiming to double its workforce in the coming years.

These investment requirements, coupled with Airbus' pressure on its supply chain to absorb costs, create a difficult situation for Spirit. The company is being squeezed: bleeding cash on current contracts while facing heavy financial burdens to support future production.

Potential Acquisition Risk for Boeing

The potential acquisition of Spirit, with its Airbus programs and mounting losses, presents a major risk for Boeing. Inheriting a financially unstable company tied to commercially unfavorable contracts with a direct competitor raises a crucial question: why would Boeing, already facing its own challenges, willingly take on Spirit's Airbus baggage? While supply chain optimization and access to Spirit's engineering expertise are appealing, do they outweigh the financial risks?

Boeing's decision to slow down 737 production to address quality and safety concerns further complicates the situation. This pause in deliveries, though necessary, has severely impacted Spirit's cash flow. Although Boeing provided a $425 million advance (to be repaid in Q3), it's a temporary fix for a much larger problem.

The Airbus Losses Haunt Spirit

The substantial forward losses and future investment needs associated with Airbus programs create a precarious financial outlook for Spirit AeroSystems. The proposed acquisition by Boeing, initially seen as a strategic move, now appears fraught with financial danger.

Delivery Delays and Production Slowdown

Boeing's implementation of a new product verification process for the 737, while crucial for quality assurance, has created delivery delays. This has led to a buildup of undelivered units in Spirit's facilities, impacting cash flow. The chart below illustrates the discrepancy between 737 units produced and delivered in Q1 2024.

A Pivotal Decision Awaits

The question remains: will Boeing absorb Spirit's Airbus losses or walk away from a deal that could turn into a financial quagmire? The future of both companies hangs in the balance, awaiting this crucial decision.

"Fun Fact: Spirit AeroSystems built the distinctive nose section of the iconic Boeing 747, one of the most recognizable aircraft in aviation history."