High-ranking officials Boeing (NYSE: BA) will face tough questions from investors about the potential consequences of the recent labor agreement reached by Spirit AeroSystems (NYSE: SPR) on aircraft production costs when the American aircraft manufacturer releases its second-quarter financial results on Wednesday.
Spirit AeroSystems, which produces a portion of the fuselage for every Boeing passenger jet, reached an agreement with its machinists’ union on June 29, a week after employees at its headquarters in Wichita, Kansas, voted to go on strike. Full operations resumed on July 5.
Analysts are uncertain whether the agreement, which includes a wage increase of at least 23.5% over four years, could lead to price hikes for Boeing products.
“What the Spirit strike has shown us is that the cost of skilled labor has skyrocketed,” said Nick Cunningham, an aerospace analyst at Agency Partners.
Aircraft manufacturers typically have contractual escalation clauses to protect themselves from inflation by passing increased costs to airlines. However, these clauses have limitations, and Spirit, which expects to incur losses in 2023, may not have the financial capability to absorb rising labor costs, according to AeroDynamic Advisories analyst Richard Aboulafia.
“What are you going to do, say, ‘You have to reduce your profit margin’? They don’t have profit margins,” Aboulafia said.
Investors will also seek details on whether the two-week work stoppage delayed the production of Boeing’s most popular model, the 737. Bank of America (NYSE: BAC) analyst Ron Epstein noted on July 12 that 13% of the 49 narrow-body 737s delivered in June came from Boeing’s inventory, compared to 5% in April and May, which may indicate a slowdown in fuselage deliveries from Spirit.
Problems at Spirit have significantly disrupted Boeing’s aircraft production and deliveries in 2023.
Data analysis errors by the aerostructures manufacturer forced Boeing to temporarily halt deliveries of the 787 Dreamliner earlier this year, and the company continues to make adjustments to 737 narrow-body planes where Spirit incorrectly installed two brackets.
Investors will also scrutinize Boeing’s defense business after the indefinite postponement of the first crewed launch of its Starliner spacecraft in June.
Boeing Defense CEO Ted Colbert stated later that month that the performance of the company’s defense unit would be similar to the first quarter, during which the company’s margins were negative due in part to charges related to the KC-46 program.
“It’s another quarter where things were supposed to improve by now, but they haven’t,” Cunningham said.
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