Spirit AeroSystems Production Quality In Focus Again (NYSE:SPR)

On Friday, January 5, 2024, an Alaska Air Group (ALK) Boeing (BA) 737 MAX 9 suffered an explosive decompression event while climbing out of Portland, Oregon en route to Ontario, California. The aircraft, which bears FAA registration N704AL, was delivered new to ALK on October 31, 2023. During the incident flight, one of the plugged emergency exits ripped from its frame and fell from the aircraft as the flight climbed through 16,000 feet. There were no fatalities although some objects were sucked out of the aircraft.

While the National Transportation Safety Board, the Federal Aviation Administration, and Boeing are investigating along with ALK, there are concerning indications regarding production quality that have surfaced on that particular aircraft and will be examined. The fuselage for the 737 is built by Spirit AeroSystems Holdings (NYSE:SPR) in Kansas and transported by rail to Boeing’s assembly facilities in Washington State.

The 737 emergency exit configuration

The emergency exit that failed is part of a design that Boeing has used in longer versions of the 737 for many years including currently on the MAX 9. The Boeing 737 – either as a MAX or in the same-size versions of the previous generation NG family of 737s – has two standard doors at the front of the aircraft including the door through which passengers board, another door on the opposite side of the aircraft and another set of doors at the rear of the aircraft, where most airlines place the rear galley. Flight attendant jumpseats are standard on aircraft adjacent to doors on all commercial aircraft. The 737 also has overwing exits, the number of which is dependent on the model of the aircraft. The MAX 9, like its predecessor, the 737-900ER, has 2 sets of overwing exits. Alaska Airlines 737 MAX 9 is configured with 178 passenger seats and uses the 2 sets of forward and rear emergency exit doors and 2 sets of smaller overwing exits as indicated by ALK’s seat map of that aircraft.

The MAX 9 and 737-900ER fuselage is built by Spirit AeroSystems to accommodate an additional set of emergency exits between the rear of the wing and the rear emergency exits. Based on the number of seats on ALK’s 737 MAX 9s, the supplemental emergency exits do not have to be active. Those exits are plugged from the factory so that passengers on the interior of the aircraft cannot tell that there is any difference between the row with the supplemental exit and any other non-emergency exit row. From the exterior, the shape of the door can be seen even though the exit is deactivated. The outline can be faintly seen in this picture but the changed spacing of the windows indicates the presence of that emergency exit, even though it is not in use.

A problematic aircraft

While federal investigators are trying to determine what happened, ALK has reported problems with this specific aircraft. An FAA database shows that this particular aircraft was written up on December 31 by a flight attendant because the L1 (primary passenger boarding) door was difficult to open. The aircraft was taken out of service, ALK maintenance checked the torque on the handle and it far exceeded prescribed levels so they disassembled the door and handle, lubricated it, and reinstalled the handle at the correct, lower torque.

In addition, pilots on this same aircraft reported pressurization problems on previous flights. After reviews by maintenance, the aircraft was restricted from flying out over the water – ALK uses its MAX 9s to fly to Hawaii, among other destinations. There was no indication of a structural issue with the aircraft and it was returned to service with route-specific limitations.

Alaska and United, the two current operators of the MAX 9 with the same emergency exit configuration, pulled aircraft from service for inspection. ALK pulled its entire MAX 9 fleet and as of midday Pacific time has returned about one-quarter of its aircraft to service after cancelling about 7% of its Saturday schedule. United pulled a smaller number of aircraft, likely based on information that allowed the airline to determine that the problem was not systemic to the entire MAX 9 fleet or to the 737-900ER which has the same exit configuration and options. United (UAL) is the largest U.S. operator of the MAX 9. No problems have, so far, been found on any other aircraft, making it likely this was an aircraft-specific defect. The FAA has ordered that 170 MAX 9 aircraft must be grounded for inspection.

Repeated Quality Control Issues

While the 737 MAX has suffered from a number of issues, this latest issue seems to question quality control, possibly from SPR. While Boeing is responsible for all content on its aircraft, defects can come from suppliers and not be apparent on the final assembly line. That type of issue was uncovered by Boeing and has required time-consuming X-ray inspections to determine if there are extra holes drilled in the rear pressure bulkhead, the component of the aircraft that helps pressurize the aircraft.

As previously noted, Spirit is responsible for constructing the 737 fuselage and then shipping it to Boeing. The doors and exits on the MAX are installed by Spirit at its plant in Wichita, Kansas before the fuselage is shipped by train to Boeing.

MAX production and Spirit’s strike

Spirit AeroSystems suffered a strike during the summer of 2023 as its workers, represented by the International Association of Machinists. The strike idled production of the MAX and ended when the company agreed to a new pact that eliminates mandatory weekend overtime and a sign-on bonus of $3,000 cash. It also includes a 9.5% pay raise in year one, a guaranteed increase of 23.5% for the life of the contract, annual bonuses, and a cost-of-living allowance, according to an announcement.

Because the production cycle for a 737 lasts approximately 12 months, including all suppliers, the Alaska aircraft that suffered the decompression event was likely at some point in production during 2023 and became Boeing serial number 67501 and line number 8789.

New management and increased production promises…. If…

SPR has tried to overcome its production and quality problems and shook up its management, including the departure of its EVP and COO at the end of November. Just a month before, Boeing and Spirit agreed to higher production levels for the 737 family of jets in return for a shift in payments from later this decade until 2025. Boeing is also assisting with financing of tooling needed to increase production. In return, SPR, which was a previous Boeing subsidiary, promises to increase quality.

While today’s news does not implicate SPR, questions about the quality of the work on their 737 components will continue to be an issue. Up to this point, no in-flight incidents have been directly attributable to Spirit.

SPR’s Turbulent Stock Price Will Continue

SPR stock was on a roller coaster for much of 2023, falling with every bit of bad news and gaining when some of those issues have been resolved, including with a new labor contract and increased production. While several airlines will undoubtedly experience schedule interruptions, Boeing and Spirit are likely to bear the brunt of investor concern with Spirit apparently most likely in the crosshairs.

A sell rating is warranted for SPR at this point.