Bill Carey

Boeing and Spirit AeroSystems—its biggest supplier—are negotiating a new master contract agreement to guide their future working relationship. The companies have produced Boeing airliners under “interim arrangements” since the previous master agreement expired in 2015, said Spirit’s incoming CEO Tom Gentile.

 


“There’s been a lot of transparent exchange of information, a lot of constructive dialogue,” Gentile told reporters during a press trip Spirit hosted June 23 at its headquarters in Wichita. “Both companies would like to get a deal done so we that have a permanent framework under which to operate going forward.”

 


Spirit produces 70 percent of the Boeing 737 airframe in Wichita and ships two fuselages by rail each day to Boeing’s narrowbody assembly plant in Renton, Wash. The aerostructures company also builds the forward fuselages, engine pylon and wing sections of the Boeing 787, 767 and 747 widebodies. Boeing, its former corporate parent, accounts for 85 percent of Spirit’s annual revenue, which last year was $6.6 billion.

 


Spirit also produces sections of the composite center fuselage of the Airbus A350XWB in Kinston, N.C., and ships them to its facility in Saint-Nazaire, France, for assembly before delivery to Airbus in Toulouse. It produces A350 front spar segments in Kinston and ships them to its facility in Prestwick, Scotland, for assembly. The Prestwick location also produces the leading and trailing edges of Airbus A320 wings.

 


Gentile joined Spirit in April as executive v-p and COO; he was previously president and COO of GE Capital. Earlier this month, in an announcement that caught analysts by surprise, Spirit said that current CEO Larry Lawson will retire, effective July 31, and that Gentile will succeed him.

 


Among his marching orders from Spirit’s board of directors is to close master contract negotiations with both Boeing and Airbus, Gentile told reporters. When Canadian private equity firm Onex acquired Boeing’s Wichita division and Oklahoma operations in July 2005 for $1.2 billion—renaming them Spirit AeroSystems—the transaction included a 10-year “sustaining agreement” to guide the ongoing working relationship. Later work on the 787 Dreamliner was governed by a separate agreement. The relationship is now based on interim arrangements, said Gentile, who declined to say how close the parties are to reaching a permanent agreement, but added that Spirit feels no rush to conclude one.

 


“From our standpoint, we would like to get a deal but we have interim arrangements in place that establish pricing for the 737 and the Max and also the 787 and all of its various derivatives,” he said. “Those interim arrangements have satisfactory economics. We can operate under them indefinitely if need be. We’d prefer to get to a permanent arrangement, but we don’t feel under any pressure to do a deal just for the sake of doing a deal.”

 


The negotiations are complex and require participation by Spirit’s finance, program, engineering, operations and legal departments. “The essence of the agreement has to be—what should Boeing pay us for the work that we do?” Gentile said. “It seems like a very simple thing but it’s obviously very involved.”

 


For example, the re-engined Boeing 737 Max differs from the 737 NG in that its Leap-1B engine has a 69-inch diameter whereas the CFM56 engine on 737 NGs is 64 inches, “so obviously the nacelle has to be different, the pylon is different because it’s holding a different-size engine,” he explained. “The question is: what’s the delta in the cost for those changes versus what they’ve been paying us for the NG, which is the existing program?”

 


Gentile added: “Both organizations want to get to a deal that works for both sides. Boeing is our biggest customer; their success is our success. We want to do everything we can to make them more competitive.”

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