For decades, Boeing was the first thought that comes to the minds of customers and investors when asked to name the largest global aerospace manufacturer. However, this reputation took a severe hit in 2017 when safety scandals and management failures began to erode confidence in the company. Since, the aerospace giant has been struggling to meet its financial requirements, steadily losing market share to Airbus, one of its main competitors. In hopes of regaining the throne, Boeing has focused on strengthening multiple facets of its operations, one of which is to hedge against the vulnerability of the supply chain through a $8.3bn acquisition of its old friend, Spirit AeroSystems

Boeing - Overview of the Company

The Boeing Company (Boeing) is an American multinational corporation, now headquartered in Arlington County, Virginia, United States. Boeing designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, and missiles worldwide, while also offering leasing and product support. Even since its foundation in 1916, the company has maintained its reputation as one of the largest global aerospace manufacturers and was named the largest defense contractor in the world based on 2022 revenue.

However, Boeing has been under great criticism since 2018 due to product quality issues, most notably issues with the 737 Program, and supply chain disruptions, along with flawed management decisions. The 737 Program, with the MAX series, is Boeing’s best-seller for narrow-body aircraft and was viewed as a direct competitor with the Airbus’s A320neo. However, due to some fatal crashes, the production of the line was halted, which damaged Boeing’s supply chain; after the Federal Aviation Administration's scrutiny and recertification of the 737 MAX, the program resumed. The model is in high demand as airlines are seeking solutions to meet the post-pandemic air travel recovery. Therefore, supply chain remains on top of the company’s to-do-list. Indeed, Boeing appointed Kelly Ortberg, its former executive with experience within the company’s supply chain, as the CEO, in hopes of also solving the problem of bad management.

In the Q3/2024 earnings call, Ortberg and other executives confirmed that the plan ahead is to stabilise the business by strengthening the supply chain and minimising the effects of ramp-up time (due to the strikes) on production and to protect investment grade (S&P: BBB; Moody’s: Baa3; Fitch: BBB-). Overall, revenue was $17.8 billion, down 1% from Q3/2023, mainly due to lower commercial widebody deliveries. The core loss per share was $10.44, reflecting the negative effects of the strikes and previously announced charges from contracts within certain commercial and defense programs. Free cash flow remains negative at $-2 billion and will be negative for the whole 2025 year according to the CFO. Boeing gains revenue through 3 primary channels:

• Commercial airplanes (BCA): This category contributes the most towards Boeing’s revenues (only except for the years 2021 and 2022 due to Covid-19); indeed, most recently, for Q3/2024, it generated $7.4 billion (down from $7.9 billion in Q3/2023 due to the strikes, previously announced charges, and higher period costs, including R&D), making up 41.6% of the total revenue in the same period. BCA is responsible for designing, manufacturing, and selling commercial aircraft worldwide.
• Defense Space and Security (BDS): BDS caters for the needs of government (the U.S. government is among the biggest customers) and commercial customers worldwide. According to the Q3/2024 earnings call, BDS made $8 billion from orders during the quarter with a $2.6 billion award from the US Air Force for two rapid prototype E-7A Wedgetail aircraft. Products range from military aircraft and weapons to satellites, rocket launch services, and related services. Revenues remained flat at $5.5 billion.
• Global Services (BGS): BGS provides aftermarket support, such as maintenance and upgrades, to customers who purchase equipment from BCA, BDS, or other manufacturers. Boeing recorded $4.9 billion worth of revenue in Q3/2024 and is committed to keep up the strong performance.

Exhibit 1: Boeing Revenues by Segments 2019-2023 (Boeing’s annual reports)

Exhibit 2: Boeing Revenues by Segments Q3/2023 (Boeing Q3/2024 report)

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Rivalry with Airbus and the Commercial Services Industry with Increased Travelling Demand

In terms of the commercial aircraft manufacturing market, there is almost a duopoly of Boeing and Airbus. Boeing had already established a reputation in the industry when Airbus was founded in 1970. Boeing continued to maintain its position in 2023 with $77.8 billion in revenues, while Airbus only booked €65.5 billion. However, looking from the market capitalisation angle, Airbus with €115.1 billion is leading Boeing with $95.38 billion (as of October 30th). Furthermore, Airbus received more aircraft orders than Boeing in 14 out of 18 years from 2006-2023.

Exhibit 3: Airbus and Boeing Gross Aircraft Orders 2006-2023 (Statista)

Despite the competitive nature of the commercial services industry, there is still room from which Boeing can still profit as the industry is expected to grow from $3.8 trillion in 2024 to $4.4 trillion in 2043, with 24% of the market in 2043 coming from North America which is the main market of Boeing. With the backlog of roughly $0.5 trillion and increased demand for travelling after Covid-19, Boeing possesses great opportunities to bounce back and retain its iconic prestige.

Exhibit 4: Aerospace Services Market Size by Region 2024-2043 (Statista)

Exhibit 5: Global Air Traffic, Scheduled Passengers 2004-2023, *2023 estimated (Statista)

Spirit AeroSystems

In 2005, Boeing spun-off its fuselage manufacturing at plants in Kansas and Oklahoma, which then became Spirit AeroSystems (Spirit), to save costs by outsourcing plane-building duties as part of a broader restructuring plan. Boeing made only $900 million out of selling Spirit to private equity owners.

​Spirit is the largest tier-one manufacturer and supplier of aerostructures and has been acting as the largest independent supplier of aerostructures to Boeing, producing 70% of the 737 MAX’s fuselage. Therefore, the company has been deeply involved in the making of Boeing’s scandals, including the January door plug blowout on an Alaska Airways 737 Max and other safety problems with Boeing. The manufacturer also sells its products to Boeing’s rival, Airbus, which is a critical point that will decide the fate of the company later.
Regarding financial performance, the company’s market capitalisation is $3.84 billion at $32.9/share (as of October 30th). In 2023, the company made $6 billion in revenue (80.8% of which came from Commercial), up by $1 billion from 2022.

Boeing Recent Faults and Controversies

2024 did not begin well for Boeing as Alaska Airlines was forced to ground its 737-9 Fleet over safety concerns following Alaska Airlines Flight 1282, a Boeing 737-9, experiencing an emergency door fly off the plane, which caused the flight to return to Portland only half an hour after take-off. Alaska Airlines voluntarily grounded all its 737-9 aircraft for safety, leading to the federal Aviation Administration to ground all 737-9 airplanes, stating that they have "determined the unsafe condition… is likely to exist or develop in other products of the same type of design." This investigation led to Boeing being forced to halt the production of its 737-9 model, with Boeing shareholders bringing a proposed class-action lawsuit against the manufacturer, significantly impacting investor confidence in the airline manufacturer.
 
Just over a month later, Boeing is again in the headlines as whistleblower John Barnett is found dead from an apparent self-inflicted gunshot wound shortly after testifying in a Boeing Investigation. He had testified against Boeing in ongoing investigations concerning quality issues in Boeing's production, particularly regarding safety concerns with the 787 Dreamliner. Barnett had alleged that production shortcuts and faulty components jeopardised aircraft safety. His testification brought significant attention and put the spotlight on Boeing regarding their transparency regarding the quality and safety of their models, something the company is meant to pride itself on, which was compounded by the Department of Justice revealing its investigation into the "blow-out" incident of Alaska Airlines Flight 1282, which disclosed that Boeing could not find the maintenance records for the plane in question.
 
All the developments against Boeing led to CEO Dave Calhoun announcing his resignation, effective in August, with Kelly Ortberg being named as his successor, who began her role on 8th August of the same year. The accusations against Boeing did not ease, though, as on 2nd May, almost 2 months after the first whistleblower, Joshua Dean, a whistleblower from Spirit AeroSystems, dies from a 'mystery infection' and becomes the second whistleblower to die in 2024. This prompted a third whistleblower, Santiago Paredes, to step forward. He claimed that during his work at Spirit AeroSystems's plant in Kansas, which supplied Boeing with airplane parts, he found hundreds of defects in fuselage shipped to Boeing. The existence of three whistleblowers against Boeing in the space of two months spooked investors, leading to a 20-dollar fall in the space of the next two weeks, from 200 dollars a share to 180 dollars a share. The month of May culminated in Boeing continuing with its Starliner program despite leak issues, which, a month later, led to the spacecraft malfunctioning, leaving astronauts stranded from 25th June until its safe return to Earth in September.
 
To reassure Investors and for a multitude of other reasons that will be explored later in the article, Boeing reacquired Spirit AeroSystems, its parts maker, on 1st July after spinning it off in 2005. The acquisition did not set the market alight, as the stock price peaked on 1st July at $186, but then sat around that value for the next month without much fluctuation.

​Strikes and Poor Quarterly Results
 
Whatever reassurance investors felt from the Spirit Aerospace deal was crushed when Boeing came out with its second-quarter financial result, which missed Wall Street's projections. Analysts had expected quarterly revenue of around $17.35 billion and a loss per share of $1.90; Boeing reported a 14.6% year-over-year revenue decline, down to $16.9 billion and a core loss per share of $2.90. By the end of the first week of August, the stock price had fallen by over $20 from $190 to $163.
 
September was plagued with strikes as the IAM (International Association of Machinists and Aerospace Workers) workers voted against Boeing's 25% wage increase offer and went on strike. They felt that the proposed wage increase was needed to meet the rise in the cost of living, combined with the record levels of productivity during challenging times for workers, especially during the pandemic. These strikes hit Boeing hard, especially Boeing's capability to meet its quotas, particularly Boeing's 737 MAX, which is now expected to see significantly fewer deliveries than projected for the year, with initial estimates of 400-450 deliveries reduced to around 325 due to the strike. Boeing and IAM have since reached an agreement that sees the workers receive a 35% general wage rise over four years and an enhanced 401k match by Boeing.
 
Finally, following Boeing's disappointing third-quarter results following the IAM worker strikes, which reported a 1% revenue decrease from 2023's third-quarter results, Boeing announced it would undergo a joint Common and Depositary stock offering on 28th October. It would offer 112.5 million shares of common stock at a public offering price of $143 per share, and $5 billion of depository shares, each representing a 1/20th interest in newly issued 6% Series A preferred stock, par value of $1 per share. The expected net proceeds from the Common Stock Offering will be approximately $15.81 billion, and net proceeds from the Depositary Shares Offering will be approximately $4.91 billion. What was surprising was that even though the new shares were offered at $143 per share, the share price of Boeing did not fall too far, remaining around the $150 to $155 mark in the last three weeks, even with all the speculation and reaction to the CSO.

Exhibit 6: Boeing's Stock Price Descent in 2024 (FactSet)

Boeing’s Recent M&A Activity

Boeing has acquired 34 companies, 6 of which from private equity firms, from its first acquisition of McDonnell Douglas in 1996, registering one acquisition per year for the past 5 years. The most targeted sectors are aerospace (30%) and software (27%) over 6 countries, mainly US and Canada, and the average amount paid is around $4.3 billion. Subsidiaries of the company include entities such as Spectrolab, a manufacturer of space solar cells and panels and part of the Boeing Defense, Space & Security division, as well as Jeppesen, which offers flight planning products and software and operations planning tools, or Insitu, that designs and manufactures unmanned aerial systems. In January 2022, a $450 million investment was announced in Wisk Aero, a developer of electric aerial vertical take-off and landing vehicles. Since May 2023, the business has been a wholly owned subsidiary of Boeing.

​Additionally, it recently became an early investor in Wagner Sustainable Fuels, an Austrial Company which produces sustainable aviation fuel (SAF). This investment is part of a strategy of supporting the development of SAF supply and global access since SAF is currently the most effective lever to decarbonise aviation.

This recent M&A activity has focused on strengthening its supply chain and expanding its fuel technology capacities. The main objectives of these acquisitions are related to reinforcing the operating stability of the company, but also showing its commitment to sustainable growth in fuel technology and aviation manufacturing.

Deal Structure

The deal was a stock-for-stock merger announced on the 1st of July 2024 at a $4.7 billion equity value at $37.25 per share in Boeing common stock, structured in this way to avoid Boeing facing the risk of a credit downgrade. The deal has an enterprise value of $8.3 billion with Spirit Aerosystems’ net debt reported at $3.6 billion and represents a 27% increase on Spirit’s closing price of $28.60 the day before talks between the companies were announced.

However, the merger has a floor and ceiling, with each share of Spirit common stock being exchanged for Boeing common stock at a ratio between 0.18 and 0.25 using a volume weighted average share price (VWAP). If the VWAP is below $149 per share or exceeds $206.94 then the exchange ratio is fixed at 0.25 and 0.18 respectively. With the current VWAP of around $155 being close to the floor, if the Boeing share price were to decrease, the company could ironically get a discount on their transaction.

As part of the deal, with Airbus also having manufacturing contracts with Spirit, Airbus paid a nominal $1 and received compensation of $559 million in order to take on loss-making manufacturing facilities producing Airbus parts.

​The deal is expected to close in mid 2025 with PJT Partners acting as lead financial advisor to Boeing and Goldman Sachs and Consello as additional advisors. Morgan Stanley is serving as lead financial advisor to Spirit, with Moelis & Company as additional advisor.

Deal Rationale

The main driver behind the acquisition was Boeing’s desire to overhaul their manufacturing process for safety reasons, recently facing damaging incidents such as the fuselage panel flying off the Alaska Airlines 737 Max. These incidents worsened an already poor market perception of the company’s safety levels, creating an important issue for sales. As Spirit Aerosystems’ primary role is manufacturing the fuselage for the 737, this outsourcing faces significant blame for safety issues, making it a priority for Boeing to fix. Through the acquisition, Boeing can integrate the fuselage manufacturing system, allowing for better quality control in the manufacturing process as well as safer air travel as well as an improved market perception. Another benefit is the strategic advantage that backwards vertical integration offers as there is the opportunity for increased efficiency as well as increased stability, thus lowering costs.

​However, initial integration costs are likely to be present too, potentially causing short-term difficulties. Additionally, and a point that is likely to be especially sour, is that Airbus not only getting control of their production but also compensation for the broken contracts means that Boeing’s arch-rival is strengthened as a result of the deal, making the competitive landscape more difficult.

Market Reaction

​The market reacted positively to the announcement of the acquisition. Boeing’s own shares saw a moderate increase, since investors considered it a strategic move to optimise production and strengthen its supply chain from manufacturing bottlenecks, especially for the 737 Max model.

Exhibit 7: Boeing’s Stock Performance from July 2024 (FactSet)

Spirit AeroSystems’ stock initially rose with the news, reflecting confidence in Boeing’s plan to address the supplier’s financial and operational issues, particularly those linked to labor strikes and production delays. However, the response has been cautious because concerns about integration costs and regulatory obstacles remain. The dependence on regulatory approvals could postpone the anticipated benefits of the deal, increasing uncertainty around the transaction and undermining market confidence. The mixed reaction is also caused by the short-term disruption that the two companies should go through to integrate production and achieve synergies. The integration process may impact delivery schedules due to temporarily slow production and logistical challenges.

Exhibit 8: Spirit AeroSystems’ Stock Performance from July 2024 (FactSet)

Conclusion

​In face of financial losses and serious supply chain disruptions, Boeing still has a treacherous path ahead to reign the industry again. However, along with the significant amount of backlog that can easily be converted into cash, the acquisition signals a potential turning point. Not only will the acquisition give Boeing the missing piece to its supply chain puzzle, but Spirit will also allow the company to meet robust demand from both commercial and military customers. While challenges remain, based on the positive reaction of the market the moment the deal was announced, one can be confident to say that Boeing is on the right track to take back its competitive footing in the aerospace industry.

​Sources

• Boeing
• Spirit AeroSystems
• FactSet
• Statista
• CNBC
• Financial Times

​Written by: Alex Murray-Bruce, Anh Tho Vu, Bianca Proverbio, Neil Pinto