Boeing’s key 737 supplier to tie CEO pay closer to quality
The key supplier that builds most of the fuselage for Boeing Co.’s 737 Max aircraft plans to more closely link compensation for its top executives to the quality of its products in the wake of a near-disaster last month.
“It will be significantly different, and the heaviest weighting will be on quality,” Spirit AeroSystems Holdings Inc. Chief Executive Officer Pat Shanahan said of the company’s compensation plans on Tuesday. “We’re changing it fundamentally, and we’re now making sure that what we put in place works well and drives the right kind of behavior.”
Shanahan didn’t disclose specifics, but the overhaul underscores how Spirit and its top customer Boeing are redoubling efforts to rebuild their reputations after a fuselage panel blew off a 737 Max 9 operated by Alaska Airlines.
Speaking to analysts after reporting fourth quarter earnings, Shanahan said that Spirit was taking a “hard look” at its processes after the blowout and a string of supplier missteps that hamstrung Boeing’s cash cow 737 Max over the last year.
Spirit took a number of steps within days of the Jan. 5 accident, adding inspections with Boeing patterned on those performed by airlines returning an aircraft to service, Shanahan said. The company also undertook a detailed review of the mid-entry door plug assembly and installation process with its largest customer. The National Transportation Safety Board reported preliminary findings in its probe of the accident on Tuesday.
The next phase will center on addressing the possibility for human errors, issues with product safety and expanded inspections across the 737 manufacturing operation, Shanahan said.
Spirit will look at how to address the potential for error in the most manual areas of work while it waits to bring in more automation, Shanahan said. He added that Spirit will have to train more, test more and carry out more observations of its production process.
The focus is on “where most of the manual work is, in the forward and rear sections of the airplane,” Shanahan said. “If you were a mechanic working in there, you’d almost have to be a gymnast.”
Spirit Aero is now under the microscope as regulators pore over manufacturing at Boeing and its contractors. While reports have suggested that the fuselage panel was removed and reassembled by Boeing engineers after it left Spirit’s factory, the supplier still has to account for broader quality lapses on the Max program. This past weekend, Boeing reported more mistakes with holes drilled into 737 fuselages by Spirit.
Shares of Spirit Aero closed at $28.04 on Tuesday, a gain of about 5%. The stock had fallen 11% this year, while Boeing has dropped 19%.
Spirit withheld its financial guidance for this year as it waits for clarity on production-rate plans for the 737 Max model, and as talks with Airbus over renegotiating A220 and A350 contracts continue.
The former Boeing unit relies on the U.S. planemaker for the bulk of its revenue, leaving Spirit Aero vulnerable to fluctuations in output of the high-volume narrowbody airliner. The Federal Aviation Administration has barred Boeing from increasing the production rate on the 737 until quality improves.
A global grounding of the 737 Max in 2019 following two deadly crashes and the pandemic that followed damaged Spirit Aero’s finances.
It underwent a management shakeup last year, bringing in Shanahan, a former Boeing executive who renegotiated Spirit’s contract with the planemaker last year. He said in November he was having similar discussions Airbus.
Fourth-quarter revenue was $1.81 billion, above the Bloomberg consensus estimate of $1.73 billion, driven by higher production, favorable new pricing on the 787 Dreamliner program, and the reversal of a potential claim tied to a Spirit glitch on 737 vertical tail-fin attachments.
Profit came in at $58.7 million, versus a loss of $243.1 million in the same period a year earlier, as Spirit delivered 398 shipsets, including 104 for the 737.
Shanahan said Tuesday that negotiations with Airbus are centered on price and what level of productivity the European planemaker is willing to pay for.
—With assistance from Julie Johnsson.
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