Boeing investors to scrutinize cost of new Spirit AeroSystems labor deal

By Valerie Insinna

WASHINGTON (Reuters) – Boeing (NYSE:) executives will face hard questions from investors about whether a recent labor deal reached by Spirit AeroSystems (NYSE:) could raise aircraft production costs when the U.S. planemaker releases its second-quarter financial results on Wednesday.

Spirit, which produces part of the fuselage of every Boeing passenger jet, reached an agreement with its machinists union on June 29, a week after employees at its Wichita, Kansas-based headquarters voted to strike. Operations fully resumed on July 5.

Analysts said they will seek answers about whether the agreement, which boosts wages by at least 23.5% over four years, could also result in raised prices for Boeing.

“What (the strike at) Spirit actually told us is what’s happened to the cost of skilled touch labor – which is that it has just gone through the roof,” said Nick Cunningham, an aerospace analyst at Agency Partners.

Aircraft producers are typically able to shield themselves from inflation through contractual escalation clauses that pass rising costs to airlines. However, those clauses have ceilings, and Spirit — which expects to burn cash in 2023 — may not be financially capable of absorbing higher labor costs, said AeroDynamic Advisories analyst Richard Aboulafia.

“What are you going to do, say, ‘You’ll have to cut your profit margins?’ They don’t have profit margins,” Aboulafia said.

Investors will also seek details about whether the two-week work stoppage delayed production of Boeing’s bestselling 737. Bank of America (NYSE:) analyst Ron Epstein wrote in a July 12 note that 13% of the 49 narrowbody 737s delivered in June came from Boeing’s inventory compared to 5% in April and May – potentially signifying a slowdown of fuselages from Spirit.

Problems at Spirit have rattled Boeing’s aircraft production and deliveries several times in 2023.

A data analysis error by the aerostructures manufacturer forced Boeing to halt deliveries of the 787 Dreamliner for several weeks earlier this year, and Boeing continues to rework 737 narrowbody planes where Spirit incorrectly installed two brackets.

Boeing’s defense business will also come under the microscope after the indefinitely delayed the first crewed launch of its Starliner spacecraft in June.

Boeing Defense CEO Ted Colbert told reporters later that month that performance of the company’s defense unit will look similar to the first quarter, when margins at the company were negative due in part to a charge on the KC-46 program.

“It’s just another quarter where things should have got better by now, but they haven’t,” Cunningham said.