Preparing to SOAR - Shane Convery · “Preparing to SOAR” ... GE 9-Cell ... BCG Portfolio Matrix...
82
A Comprehensive Strategic Analysis Jonathan Romero Brooke Williams Alex Buschmann Shane Convery Chendong Yin “Preparing to ” SOAR
Transcript of Preparing to SOAR - Shane Convery · “Preparing to SOAR” ... GE 9-Cell ... BCG Portfolio Matrix...
A Comprehensive Strategic Analysis
Jonathan Romero
Brooke Williams
Alex Buschmann
Shane Convery
Chendong Yin
“Preparing to ” SOAR
P a g e | 1
Table of Contents
Company Summary and History ..................................................................................................... 4
Timeline .......................................................................................................................................... 5
Key Strategists and Personnel ......................................................................................................... 6
Organizational Structure ............................................................................................................... 12
Mission Statement ......................................................................................................................... 13
Goals ............................................................................................................................................. 13
Objectives ..................................................................................................................................... 14
Organization Culture ..................................................................................................................... 14
Leadership Style............................................................................................................................ 15
Industry and Competition ............................................................................................................. 16
Current Strategies.......................................................................................................................... 17
Grand ......................................................................................................................................... 17
Corporate ................................................................................................................................... 17
Business ..................................................................................................................................... 17
Functional .................................................................................................................................. 18
Marketing............................................................................................................................... 18
Finance................................................................................................................................... 18
Operations .............................................................................................................................. 19
Human Resources .................................................................................................................. 20
Information ............................................................................................................................ 20
Management .......................................................................................................................... 20
Marketing Audit ............................................................................................................................ 21
Product ...................................................................................................................................... 21
Price ........................................................................................................................................... 23
Promotion .................................................................................................................................. 24
Place .......................................................................................................................................... 24
Financial Statements ..................................................................................................................... 26
P a g e | 2
Financial Ratio Analysis ............................................................................................................... 29
Liquidity .................................................................................................................................... 29
Profitability................................................................................................................................ 31
Activity/Efficiency .................................................................................................................... 33
Solvency .................................................................................................................................... 35
Stock Valuation and Performance ............................................................................................. 38
Financial Summary and Outlook............................................................................................... 38
Value Chain .................................................................................................................................. 40
Inbound Logistics ...................................................................................................................... 40
Operations ................................................................................................................................. 41
Outbound Logistics ................................................................................................................... 42
Marketing and Sales .................................................................................................................. 43
Customer Service ...................................................................................................................... 44
McKinsey’s Seven S’s .................................................................................................................. 45
Four Levels of Competition .......................................................................................................... 48
Macro ........................................................................................................................................ 48
Industry...................................................................................................................................... 50
Porter’s 5 Forces ........................................................................................................................... 51
Industry Attractiveness .......................................................................................................... 51
Threat of New Entrants .......................................................................................................... 52
Power of Suppliers................................................................................................................. 52
Threat of Substitutes .............................................................................................................. 52
Power of Buyers .................................................................................................................... 53
Industry Rivalry ..................................................................................................................... 53
Direct ......................................................................................................................................... 54
Hall’s Competitiveness Model ...................................................................................................... 56
Strategy Evolution ........................................................................................................................ 58
Internal .......................................................................................................................................... 59
SWOT Analysis ............................................................................................................................ 59
Strengths .................................................................................................................................... 60
P a g e | 3
Weaknesses ............................................................................................................................... 61
Opportunities ............................................................................................................................. 62
Threats ....................................................................................................................................... 63
Hussey’s Directional Policy Matrix .............................................................................................. 65
GE 9-Cell ...................................................................................................................................... 66
Multinational Strategic Marketing Portfolio ................................................................................. 67
Strategy Options for Locals vs. Global Competitors .................................................................... 68
Ansoff’s Product/Market Grid ...................................................................................................... 69
Product Life Cycle ........................................................................................................................ 70
Porter’s Generic Strategies ........................................................................................................... 71
Market Lifecycle – Competitive Strength..................................................................................... 72
BCG Portfolio Matrix ................................................................................................................... 73
Main Problems .............................................................................................................................. 74
Cost Control .............................................................................................................................. 74
Lack of Customer Diversity ...................................................................................................... 74
Untapped Foreign Markets ........................................................................................................ 75
Alternative Strategies .................................................................................................................... 76
Final Strategic Choice ................................................................................................................... 79
Concentric Diversification into Military/Defense Sector.......................................................... 79
Implementation ............................................................................................................................. 80
Who, How, When ...................................................................................................................... 80
Bibliography ................................................................................................................................. 81
P a g e | 4
Company Summary and History
Headquartered in Wichita, Kansas, Spirit AeroSystems, Inc. is one of the largest,
independent non-original equipment manufacturers (OEM) aircraft parts designers and
manufacturers of commercial aero structures in the world (based on annual revenues). They are
also the largest independent supplier of aero structures to Boeing and Airbus, the two largest
aircraft OEMs in the world. Aero structures are structural components such as fuselages,
propulsion systems and wing systems for commercial and military aircraft. For the twelve
months ended December 31, 2013, Spirit generated net revenues of $5.9 billion, and had net loss
of $621.4 million.
Spirit manufactures aero structures for every Boeing commercial aircraft currently in
production. This includes the majority of the airframe content for the Boeing B737, the most
popular major commercial aircraft in history. As a result of its unique capabilities both in
process design and composite materials, Spirit AeroSystems was awarded a contract to be the
aero structures content supplier for the Boeing B787, Boeing's next generation twin aisle aircraft.
In addition, Spirit is one of the largest content suppliers of wing systems for the Airbus
A320 family. They are a significant supplier for the Airbus A380, and will be a significant
supplier for the new Airbus A350 XWB (Extra Wide-Body) after the development stage of the
program.
Revenues are derived primarily through long-term contracts with Boeing and Airbus. For
the 2013 year, approximately 84% and 10% of net revenues were generated from sales to Boeing
and Airbus, respectively. Due to the broad range of products supplied, the leading design, and
P a g e | 5
manufacturing capabilities using both metallic and composite materials, Spirit has significant
sustainable competitive advantages (SCAs).
Since Spirit's incorporation, the company has expanded its customer base to include
Sikorsky, Rolls-Royce, Gulfstream, Israel Aerospace Industries, Bombardier, Mitsubishi Aircraft
Corporation, Bell Helicopter, Southwest Airlines, United Airlines and American Airlines. Spirit
holds manufacturing facilities in Tulsa and McAlester, Oklahoma; Prestwick, Scotland; Wichita
and Chanute, Kansas; Kinston, North Carolina; Saint-Nazaire, France; and Subang, Malaysia.
Timeline
February 2005 Boeing Company’s Wichita Division is acquired by Onex and renamed
Spirit AeroSystems.
June 2005 Acquisition is complete and Tulsa becomes Aerostructures Business Unit.
April 2006 Acquired BAE Aerostructures unit facilities in Scotland, England.
November 2006 Spirit went Public in Initial Public Offering (IPO).
May 2007 Secondary Public offering of Class A Common Stock at $33.50/share.
May 2007 Wins 7 year contract to build major composite structure for CH-53k
heavy-lift helicopter.
March 2008 Selected to design and manufacture Nacelle Systems for Rolls-Royce
BR725
May 2008 Announces expansion and new facility in North Carolina.
July 2008 Wins contract for fuselage structure and wing leading edge for Airbus 350
XWB.
October 2008 Selected to design and build wings for Gulfstream G650 business jet and
G250 super mid-size business jet.
P a g e | 6
October 2009 Ground was broken for Spirit's new A350XWB facility in Saint-Nazaire,
France.
November 2009 Spirit opened a new maintenance, repair, and overhaul (MRO) center in
Asia.
March 2010 Spirit was named a member of the Boeing NewGen Tanker Supplier
Team.
May 2011 Spirit and Boeing enter into B787 Amendment.
May 2013 Larry Lawson joins as new Chief Executive Officer.
July 2013 Heidi Wood joins as Senior Vice President of Strategy, Mergers and
Acquisitions and Investor Relations.
September 2013 Philip Anderson joins as Senior Vice President Sanjay Kapoor joins as
Senior Vice President and Chief Financial Officer
Key Strategists and Personnel
Larry Lawson
Mr. Lawson joined Spirit as President and
Chief Executive Officer on April 6, 2013. Prior to
joining the firm, Mr. Lawson was Executive Vice
President of Lockheed Martin's Aeronautics
business segment. Mr. Lawson began his career
as a flight control engineer working on the F-15
Eagle at McDonnell Douglas. He has since held a
broad range of leadership positions in
engineering, advanced development, business development, and program management in a
P a g e | 7
career spanning more than 30 years. In his work at Lockheed Martin, Mr. Lawson has overseen
key aircraft production programs such as the F-35, F-22, F-16, C-130J, and C-5, including highly
classified programs in the world-renowned Skunk Works organization. Mr. Lawson holds a
bachelor's degree in Electrical Engineering from Lawrence Technological University, where he
also serves on the board of trustees, has a master's degree in Electrical Engineering from the
University of Missouri, and is a graduate of the Harvard Business School Advanced
Management Program and an MIT Seminar XXI Fellow.
Philip Anderson
Mr. Anderson became the Senior Vice President of Defense and Contracts of Spirit
Holdings effective September 23, 2013. Mr. Anderson previously served as Senior Vice
President and Chief Financial Officer of the company from February 12, 2010 to September
2013. From October 2009 to February 2010, Mr. Anderson served as Vice President and Interim
Chief Financial Officer. Mr. Anderson also served as Treasurer of Spirit from November 2006 to
July 2010. From March 2003 to November 2006, Mr. Anderson was the Director of Corporate
Finance and Banking for Boeing. Mr. Anderson began his career at Boeing in 1989 as a defense
program analyst and served in a variety of finance and manufacturing operations leadership
positions at Boeing Defense Systems and Boeing Commercial Airplanes. Mr. Anderson received
his Bachelor of Arts and Masters of Business from Wichita State University and holds a Six
Sigma Black Belt certification from the University of Michigan.
P a g e | 8
David M. Coleal
Mr. Coleal assumed the role of Executive Vice President/General Manager — Boeing,
Military, Business & Regional Jet Programs & Aftermarket in May 2013 after previously serving
as Senior Vice President /General Manager of the Fuselage Segment since July 2011. Prior to
joining Spirit AeroSystems, Mr. Coleal was Vice President and General Manager of Bombardier-
Learjet. He joined Bombardier Aerospace in March 2008 and was responsible for all engineering
and manufacturing operations, program change management, quality and material logistics for
the Learjet family of aircraft, including development of the pioneering all-composite Learjet 85
mid-size business jet. From 2001 to 2008, Mr. Coleal worked at Cirrus Design Corporation,
where he was initially responsible for operations, and he assumed positions of increasing
responsibility until being named President and Chief Operating Officer in 2005. Mr. Coleal
earned his Masters of Business Administration in Management Science from California State
University — Hayward in 1997. He graduated from California State University in Sacramento in
1990 with a Bachelor of Science degree in Mechanical Engineering Technology.
Sanjay Kapoor
Mr. Kapoor joined Spirit AeroSystems as Senior Vice President and Chief Financial
Officer on September 23, 2013. Mr. Kapoor joined Spirit from Raytheon where he most recently
served as Vice President of Integrated Air & Missile Defense for Raytheon Integrated Defense
Systems (IDS). Prior to this role, Mr. Kapoor was IDS Vice President of Finance and Chief
Financial Officer from 2004 to 2008. Mr. Kapoor also served as CFO at United Technologies'
Pratt and Whitney Power Systems Division. His tenure at Pratt and Whitney also included roles
as Director of Aftermarket Services for the Power Systems Business, controller for the Turbine
P a g e | 9
Module Center and business manager for new commercial programs. Mr. Kapoor received his
bachelor's degree in technology from the Indian Institute of Technology and a dual Masters of
Business Administration in finance and entrepreneurial management from The Wharton School
at the University of Pennsylvania.
Jon D. Lammers
Mr. Lammers was named Senior Vice President — Secretary of Spirit AeroSystems in
July 2012, and General Counsel in October 2012. Mr. Lammers brings more than 20 years of
legal experience, including 15 years at Cargill, Incorporated, where he served from July 1997 to
July 2012. He served as Cargill's Asia Pacific general counsel in Singapore from June 2006 to
June 2010 as well as Cargill's deputy North American general counsel in Wayzata, Minnesota
from July 2010 to July 2012. Mr. Lammers earned his Bachelor of Science in Business
Administration from the University of Southern California and his Juris Doctor degree from the
University of Virginia.
Samantha J. Marnick
Ms. Marnick became Senior Vice President — Chief Administration Officer in October
2012. From January 2011 to September 2012, Ms. Marnick served as Senior Vice President of
Corporate Administration and Human Resources. From March 2008 to December 2010,
Ms. Marnick served as Vice President Labor Relations & Workforce Strategy responsible for
labor relations, global human resource project management office, compensation and benefits,
and workforce planning. Ms. Marnick previously served as Director of Communications and
Employee Engagement from March 2006 to March 2008. Prior to joining the Company,
P a g e | 10
Ms. Marnick was a senior consultant and Principal for Mercer Human Resource Consulting
holding management positions in both the United Kingdom and in the United States. Prior to that
Ms. Marnick worked for Watson Wyatt, the UK's Department of Health and Social Security and
the British Wool Marketing Board. Ms. Marnick holds a Master's degree from the University of
Salford in Corporate Communication Strategy and Management.
John Pilla
Mr. Pilla became the Senior Vice President/General Manager — Airbus and A350 XWB
Program Management in May 2013. Prior to that, Mr. Pilla served as the Senior Vice
President/General Manager, Propulsion Systems Segment of Spirit since July 2009 and added the
role of Senior Vice President/General Manager of the Wing segment in September 2012. From
July 2011 to May 2013, he was also responsible for the Aftermarket Customer Support
Organization. From April 2008 to July 2009, Mr. Pilla was Chief Technology Officer of Spirit
and he served as Vice President/General Manager, a position he assumed at the date of the
Boeing Acquisition in June 2005 and held until March 2008. Mr. Pilla began his career at
Boeing Commercial Airplanes in 1981 as a stress engineer and was promoted to Chief Engineer
of Structures and Liaison in 1995. In 1997, Mr. Pilla led the Next-Generation 737 engineering
programs and ultimately led the Define Team on the 737-900 fuselage and empennage in late
1997 as well as the 777LR airplane in May 2000. In July 2001, Mr. Pilla became the Director of
Business Operations, a position he held until July 2003 when he accepted an assignment as 787
Director of Product Definition and Manufacturing. He received his Master's degree in Aerospace
Structures Engineering in 1986 and a Masters in Business Administration in 2002 from Wichita
State University.
P a g e | 11
Heidi Wood
Ms. Wood joined the firm as Senior Vice President — Strategy, Mergers and
Acquisitions and Investor Relations in July 2013. Prior to joining the Company, Ms. Wood was
Senior Vice President and Co-head of Global Sales at Avjet Corporation. From 1999 to 2013,
Ms. Wood served as Managing Director and global head of aerospace/defense analysis at
Morgan Stanley. She was responsible for leading North American, Europe, Latin American and
Singapore-based teams. Prior to assuming her employment at Morgan Stanley, Ms. Wood was an
analyst at Cowen & Company from 1992 to 1999. Ms. Wood holds a Bachelor of Arts degree
with honors from Brown University.
P a g e | 12
Organizational Structure
Sprit AeroSystems operates under a top-down, pyramidal organizational structure with
the Board of Directors and executive officers making the large, influential business decisions.
Their overall matrix structure combines the benefits of a divisional and functional structure.
This allows for rapid satisfaction of needs for strategic business units across a wide geographic
area. However, Spirit has noticed this structure occasionally creating power struggles among
middle management. With several new Senior Vice Presidents and important executives, it is
P a g e | 13
crucial that their leadership and people skills reach the employees on the bottom of the hierarchy
ladder.
Mission Statement
“Spirit AeroSystems, Inc. aims to create long-term value by providing industry-
leading aero structures and systems achieved through competitive cost and product
leadership, derived from our people, knowledge and technology.”
Goals
In its 2013 annual report, Spirit AeroSystems Holdings, Inc. outlined three specific goals.
They are as follows: Support Increased Aircraft Deliveries, Win New Business from Existing
and New Customers, and Research and Development Investments in Next Generation
Technologies. In order to achieve these goals, the company outlined specific initiatives for each
of its goals.
1. Support Increased Aircraft Deliveries. Spirit AeroSystems, Inc. values being the largest
independent aerostructures supplier to both Boeing and Airbus and core to their business strategy
is a determination to meet or exceed their expectations under their existing supply arrangements.
Spirit is constantly focused on improving their manufacturing efficiency maintaining their high
standards of quality and on-time delivery to meet these expectations. They are also focused on
supporting their customers’ increase in new aircraft production and the introduction of key
aircraft programs such as the Boeing B787 and the Airbus A380.
P a g e | 14
2. Win New Business from Existing and New Customers. Spirit AeroSystems have established a
sales and marketing infrastructure to support their efforts to win business from new and existing
customers. The firm believes that they are well positioned to win additional work from Boeing
and Airbus, given their strong relationships, their size, design and build capabilities and their
financial resources, which are necessary to make proper investments.
3. Research and Development Investment in Next Generation Technologies. Spirit invests in
direct research and development, or R&D, for current programs to strengthen their relationships
with their customers and new programs to generate new business. As part of their R&D effort,
they work closely with OEMs and integrate their engineering teams into their design processes.
Spirit believes their close coordination with OEMs positions them to win new business on new
commercial and military platforms.
Objectives
- Be the design build partner of choice
- Grow the business with a diversified portfolio
- Grow market share and volume to maintain #1 share position
Organization Culture
Spirit AeroSystems, Inc. has had a consistent culture for decades. Because of their long
term supply contracts with the biggest players in the aircraft manufacturing industry, Spirit has
shared in the successes throughout the development of the airline industry. Many of the
innovations and new technologies are product of genius in both the systems / structures
P a g e | 15
manufacturers’ and the aircraft manufactures’ personnel. Spirit’s market dominance has allowed
them to attract and recruit industry leaders and leadership to create the preeminent aeroSystems
manufacturer in the world with a focus on manufacturing on a global scale. It is what makes
Spirit competitive and why the biggest names in the industry are calling Spirit their “partner.”
For their employees, Spirit offers amenities, like onsite cafeteria, onsite medical staff,
onsite credit union, onsite Starbucks coffee, a tuition assistance program, health and wellness
programs, and the other appropriate benefits to fuel the creative fire and support the intuitive
minds responsible for their innovative product offerings. Spirit consistently employs ambitious
people who thrive in an environment of on-the-job training and continuous improvement.
Employees also get discounts at companies like Apple, major cell phone carriers, and Microsoft.
Leadership Style
Current employees were forced to bear some changes in leadership style when Larry
Lawson succeeded former CEO, Jeff Turner. Mr. Lawson, as a person, is quite respected
according to analysts within the aerospace and defense industry. When the board of directors set
out for a new CEO, they sought out someone, “with a strong record of operating and financial
performance on both mature and new aircraft programs with the ability to take Spirit to the next
level.”
With the acquisition of this position, Mr. Lawson obtains reward, and coercive powers.
He brought expert and personal power to the company and has potentially established some
referent power. The new individuals to fill these leadership positions were all hired as
“sustainers”. Their style allows for a participative and family aura among the organization.
P a g e | 16
However, each and every manager and leader is responsible for implementing the CEOs vision
adjustment without losing their origins.
Industry and Competition
Spirit AeroSystems falls within the “industrials” sector and “aerospace and defense”
industry. The company is traded in the New York Stock Exchange and is sometimes associated
with the “commercial aircraft” sub-industry. Expert analysts are forecasting significant revenue
and earnings growth, with record setting production levels within the commercial aerospace
industry. However, the defense aspect of the industry is expected to decrease in the coming
years.
Competitors within this industry fall under two categories: non original equipment
manufacturers, and original equipment manufacturers (OEMs). The most prevalent competition
comes from the internal divisions of OEMs and third-party aerostructure suppliers. Spirit is
considered a third-party non-OEM aerostructure manufacturer.
Spirit AeroSystems’ principal competitors among OEMs include: Airbus, Boeing,
Dassault Aviation, Embraer, Gulfstream (General Dynamics), Hawker Beechcraft, United
Technologies, and Bell Helicopter. These OEMs may chose to outsource production of certain
aerostructures due to their own direct labor and overhead considerations and capacity utilization
at their own facilities.
Their significant competitors among other non-OEM aerostructures suppliers are:
Aircelle S.A., Alenia Aeronautica, Fuji Heavy Industries, GKN Aerospace, Goodrich
Corporation, Kawasaki Heavy Industries, Mitsubishi Heavy Industries, Sonaca, Snecma,
Triumph Group, Premium Aerotech, and Nexcelle.
P a g e | 17
Current Strategies
Grand
Spirit AeroSystems, Inc. is currently pursuing a maintenance / turnaround strategy. Spirit
is attempting to maintain current partnerships with the leaders in the aircraft manufacturing
industry while working to restructure and refine its cost structure to help Spirit focus on rate
increases, consolidate resources, and create efficiencies to reach its goals of future growth. This
refine focus will hopefully reduce profit loss and allow for a consistent future net profit.
Corporate
Through redefinition of the corporate management structure, Spirit has added three top
executives with industry leaders who have proven success and experience, a VP of Strategy,
Mergers and Acquisitions, and Investor Relations, Senior VP of Operations, and a new Chief
Financial Officer. By replacing executives in positions with the greatest need for change, Spirit
hopes that this newly acquired talent will attract other individuals within the organizations that
will allow them to make strategic change toward profitability and growth.
Business
Spirit AeroSystems Inc. is the leading supplier of aerostructures such as fuselage systems,
propulsions systems, and wing systems to the world’s two largest aircraft manufacturers, Boeing
and Airbus. Their products are primarily used in the production of large commercial airplanes,
business and regional jets, as well as military aircraft, including helicopter and plane design.
P a g e | 18
Functional
Marketing
Spirit holds a strong market position in a very competitive market environment. The
company holds about 16% share of the global aerostructures market. It is the largest independent
suppliers of aerostructures to Airbus and Boeing, the two largest aircraft OEMs. Thus, strong
market position enhances its brand image of the company itself, and further increases the
bargaining power of the company. The sales directors establish and maintain relationships with
customers and are supported in their campaigns by sales teams within specific product specialties
and a market research team performing various analyses related to those products and customers.
The comprehensive sales and marketing teams work closely to ensure a consistent, single
message approach with customers both domestically and internationally.
Finance
The company divides its business into four segments: fuselage systems, wing systems,
propulsion systems, and other. As a result they are not reliant on any one segment of the business
for the entirety of their income. In addition to the diversified product portfolio, the company has
a well-balanced revenue mix and their net sales have continued to grow over the past four years.
Spirit relies on current and continued business with Boeing and Airbus, which combined made
up 94% of Spirit’s total sales revenue in 2013. In the past two years, Spirit has seen diminishing
profit margins while increasing sales, becoming less solvent. This may be a product of poor/over
investment in new product/designs, or the expensive ownership of certain SBUs not essential to
revenue-generating business.
P a g e | 19
Operations
Spirit runs a simple product design strategy with three main parts segments: (1) Fuselage
Systems, (2) Propulsion Systems, and (3) Wing Systems. Revenue breakdown based on each of
the three business segments is listed below.
Operation 2013
Fuselage Systems 48.00%
Propulsion Systems 27.00%
Wing Systems 25.00%
Other >1%
Total 100.00%
Their strong partnership/relationship with Boeing is attributed to 84% of their overall
business that they put out each year. In such, Spirit designs, tests, and manufactures parts for its
customers based on specific needs. Investing in new product development and relying heavily
on R&D teams creates and maintains their strong competitive advantage in the industry. Much of
this investment involves increasing product volume for current aircraft contracts as well as into
the design and creation of new products for future aircraft projects.
P a g e | 20
Human Resources
Based on significant research into Spirit’s HR environment, employees of the company
are rewarded with competitive salaries and benefits, and a healthy, energizing work environment
in multiple sectors such as engineering, manufacturing, shipping, etc. Ratings of 4/5 or above
are consistent among most company reviews. The importance placed on new-product creation
and development lends a creative, competitive work environment that is challenging to all
employees of the company.
Information
The firm is constantly looking to implement systems that lower their production costs and
improve relationships with suppliers and customers. Spirit AeroSystems’ Information
Technology capabilities were built around the Infor/Exceed Warehouse Management System.
The majority of their information systems have been outsourced to a 3rd
party logistics company
called DB Schenker. Improvements in manufacturing efficiency, or lack thereof, can also be
attributed to Spirit’s motivated Research and Development Department.
Management
Spirit’s functional strategies concerning management include replacing top-level
executives with experienced individuals with vast knowledge of the industry. With over 16,000
employees globally, the new leadership is trying to reach everyone through a more efficient
middle management structure. Department heads within the different strategic business units
(SBUs) are in charge of implementing the most recent changes set forth by Mr. Larry Lawson
and his fellow executives.
P a g e | 21
Marketing Audit
Spirit AeroSystems, Inc. has an established sales and marketing infrastructure which
supports efforts to expand business with new and existing customers in three sectors of the
aerostructures industry: (1) large commercial airplanes, (2) business and regional jets and (3)
military/helicopter. The sales directors establish and maintain relationships with individual
customers and are supported in their campaigns by sales teams within specific product specialties
and a market research team performing various analyses related to those products and customers.
The comprehensive sales and marketing teams work closely to ensure a consistent, single
message approach with customers both domestically and internationally.
Product
As noted before, Spirit AeroSystems, Inc. is one of the largest independent non-OEM
aircraft parts designers and manufacturers. Aerostructures are structural components which
Spirit produces for both commercial and military aircrafts. These aerostructures are organized
into three principal segments: (1) Fuselage Systems, which includes forward, mid and rear
fuselage sections, (2) Propulsion Systems, which includes nacelles, struts/pylons and engine
structural components; and (3) Wing Systems, which includes wing systems and components,
flight control surfaces and other structural parts. These products are result of many SBUs within
the company, including Research and Development, Manufacturing, and Engineering
departments which allow for complete control over the production, installation and service
processes.
P a g e | 22
Sales of these commercial aircraft structures, some of which have military applications,
represent 99% of the revenues accrued by Spirit AeroSystems, Inc. in 2013. The table below
represents the net revenues for 2010-2012 as divided between each product segment.
Spirit AeroSystems, Inc. stands as the largest independent supplier of aerostructure parts
to Boeing Company, BA, the world's largest aircraft manufacturing company, and Airbus, the
world's second largest aircraft manufacturing company. These two contracts make up a combined
94% of sales from the 2013 calendar year and just as significant revenue percentage from said
contracts. Development of new products for state-of-the-art Boeing and Airbus aircrafts, the
B787 and the AX350 XWB will prove to be a significant portion of Spirit's new product
offerings in the future. Below is a diagram of popular parts, shaded in blue, produced for
different types of aircrafts.
P a g e | 23
Price
Spirit AeroSystems, Inc. has a relatively consistent pricing strategy with each of the two
carriers mentioned above. The contracts consist of price agreements between the contractor and
contracted while products for each aircraft are tested and while volume increases over time;
newest contracts are program specific and last between 5 and 10 years. Prices for parts are
subject to adjustment for abnormal inflation (above a specified level in any year) and for certain
production, schedule and other specific changes, including design changes from the contract
configuration baseline for each model. Research, materials, and labor cost changes are but a few
associated with an adjustment. Prices are paid and adjusted after the end of the first quarter each
year. If the contracted were to terminate an agreement with Spirit, that company will be liable to
Spirit for costs incurred with any orders issued prior to the date of the termination notice and
may also be liable for certain termination costs and for compensation for any tools, raw materials
or work-in-process requested by the company in connection with the termination.
P a g e | 24
Promotion
Spirit AeroSystems, Inc. has long-term contracts with Boeing and Airbus on many of
their major aircraft development programs, such as the B737, B787, A320, A350 XWB and
A380. OEMs generally desire to minimize costs by retaining established aerostructure suppliers
Spirit’s sales and marketing team continues to maintain strong relationships with these OEMs to
position Spirit for future business opportunities with these manufacturers by maintaining regular
contact with key Boeing and Airbus decision-makers.
Spirit maintains a customer contact database to maximize interactions with existing and
potential customers. In the time that Spirit has existed as an independent company, they have
been successful in building a positive identity and name recognition for the company brand
through advertising, trade shows, sponsorships and Spirit customer events. In order to diversify
and win new customers globally, Spirit markets their expertise in the design and manufacture of
major aerostructures and advanced manufacturing capabilities, all with both composites and
traditional metals processes. This ensures Spirit is on the cutting edge of aerostructure
technology.
Place
Aerostructures and systems developed by Spirit AeroSystems, Inc. very clearly cannot be
purchased online or in a retail store. Many of their products reach contracted customer directly
from the manufacturing centers. Though Spirit does participate in industry trade shows and hold
customer events to advertise new products, most developments are demand-driven. As holder of
contracts from the two largest aircraft manufacturers in the world, Spirit's research and
development, design, manufacturing, and testing processes are organized around the needs of
P a g e | 25
those customers, Boeing and Airbus. Private meetings and test demonstrations prove to be the
location of most points of sale for Spirit.
P a g e | 26
Financial Statements
2010 2011 2012 2013
ASSETS
Current assets:
Cash and cash equivalents 481,600 177,800 440,700 420,700
Total cash 481,600 177,800 440,700 420,700
Receivables 200,200 267,200 411,600 550,800
Inventories 2,507,900 2,630,900 2,410,800 1,842,600
Deferred income taxes 47,600 52,200 57,100 26,900
Prepaid expenses 9,900
Other current assets 47,500 27,700 35,200 103,200
Total current assets 3,294,700 3,155,800 3,355,400 2,944,200
Non-current assets:
Gross property, plant and equipment 2,009,900 2,285,500 2,518,000 2,771,900
Accumulated Depreciation (539,900) (669,800) (819,500) (968,600)
Net property, plant and equipment 1,470,000 1,615,700 1,698,500 1,803,300
Equity and other investments 4,300 4,500 5,100 1,400
Goodwill 2,900 2,900 3,000 3,000
Intangible assets 18,100 13,900 10,100 4,700
Deferred income taxes 55,000 55,700 192,000
Prepaid pension benefit 172,400 118,800 78,400 252,600
Other long-term assets 84,600 75,100 72,800 98,000
Total non-current assets 1,807,300 1,886,600 2,059,900 2,163,000
Total assets 5,102,000 5,042,400 5,415,300 5,107,200
LIABILITIES AND SHAREHOLDER EQUITYCurrent liabilities:
Short-term debt 9,500 48,900 10,300 16,800
Accounts payable 443,500 559,400 659,000 753,700
Taxes payable 3,100 7,200 27,000 26,300
Accrued liabilities 190,700 193,600 189,300 194,300
Deferred revenues 302,600 34,600 25,300 161,900
Other current liabilities 215,400 69,800 156,100 182,600
Total Current Liabilities 1,164,800 913,500 1,067,000 1,335,600
Non-current liabilities:
Long-term debt 1,187,300 1,152,000 1,165,900 1,150,500
Deferred taxes liabilities 8,100 5,000 42,200
Deferred revenues 29,000 156,500 981,000 139,100
Pensions and other benefits 72,500 84,200 75,600 69,800
Minority interest 500 500 500 500
Other long-term liabilities 829,400 766,500 128,900 889,000
Total non-current liabilities 2,126,800 2,164,700 2,351,900 2,291,100
Total liabilities 3,291,600 3,078,200 3,418,900 3,626,700
Stockholders' equity:
Common stock 1,400 1,400 1,400 1,400
Additional paid-in capital 983,600 995,900 1,012,300 1,025,000
Retained earnings 900,700 1,093,100 1,127,900 508,700
Accumulated other comprehensive income (75,300) (126,200) (145,200) (54,600)
Total stockholders' equity 1,810,400 1,964,200 1,996,400 1,480,500
Total liabilities and stockholders' equity 5,102,000 5,042,400 5,415,300 5,107,200
SPIRIT AEROSYSTEMS HOLDINGS, INC. (SPR)
Fiscal year ends in December. USD in thousands except per share data.
BALANCE SHEET
P a g e | 27
2010 2011 2012 2013
Revenue 4,172,400 4,863,800 5,397,700 5,961,000
Cost of revenue 3,607,900 4,312,100 5,245,300 6,059,500
Gross profit 564,500 551,700 152,400 (98,500)
Operating expenses:
Research and development 51,500 35,700 34,100 34,700
Sales, General and administrative 156,000 159,900 172,200 200,800
Other operating expenses (146,200) 30,300
Total operating expenses 207,500 195,600 60,100 265,800
Operating income 357,000 356,100 92,300 (364,300)
Interest Expense 59,100 77,500 82,900 70,100
Other income (expense) (100) 1,700 2,000 3,600
Income before taxes 297,800 280,300 11,400 (430,800)
Provision for income taxes 78,200 86,900 (24,100) 191,100
Other income (700) (1,000) (700) 500
Net income from continuing operations 218,900 192,400 34,800 (621,400)
Net income 218,900 192,400 34,800 (621,400)
Net income available to common shareholders 218,900 192,400 34,800 (621,400)
Earnings per share
Basic 1.56 1.36 0.24 (4.40)
Diluted 1.55 1.35 0.24 (4.40)
Weighted average shares outstanding
Basic 137,900 139,200 140,700 141,300
Diluted 141,000 142,300 142,700 141,300
EBITDA 476,900 491,900 250,500 (199,400)
SPIRIT AEROSYSTEMS HOLDINGS, INC. (SPR)
Fiscal year ends in December. USD in thousands except per share data.
INCOME STATEMENT
P a g e | 28
2010 2011 2012 2013
Cash Flows From Operating Activities:
Net income 218,900 192,400 34,800 (621,400)
Depreciation & amortization 120,000 134,100 156,200 161,300
Amortization of debt discount/premium 8,000 5,600 14,600 6,700
Deferred income taxes 48,500 21,600 (120,100) 202,800
Stock based compensation 28,800 11,200 15,300 19,600
Accounts receivable (41,600) (66,300) (151,100) (128,500)
Inventory (300,300) (121,600) 228,300 666,000
Prepaid expenses 239,600
Income taxes payable (82,200)
Other working capital 63,300 (206,300) 126,000 83,700
Other non-cash items (20,500) (18,000) 800 (47,400)
Net cash provided by operating activities 125,100 (47,300) 544,400 260,600
Cash Flows From Investing Activities:
Investments in property, plant, and equipment (288,100) (249,700) (249,000) (272,600)
Property, plant, and equipment reductions 500 1,600 700
Sales/Maturities of investments
Other investing activities (800) 500 (1,400) 3,700
Net cash used for investing activities (288,400) (249,200) (248,800) (268,200)
Cash Flows From Financing Activities:
Debt issued 450,000 30,000 717,600
Debt repayment (177,600) (38,000) (571,000) (10,400)
Excess tax benefit from stock based compensation 5,000 1,300 1,200 600
Other financing activities (182,400) (4,100)
Net cash provided by (used for) financing activities 277,400 (6,700) (34,600) (13,900)
Effect of exchange rate changes (1,500) (600) 1,900 1,500
Net change in cash 112,600 (303,800) 262,900 (20,000)
Cash at beginning of period 369,000 481,600 177,800 440,700
Cash at end of period 481,600 177,800 440,700 420,700
Free Cash Flow:
Operating cash flow 125,100 (47,300) 544,400 260,600
Capital expenditure (288,100) (249,700) (249,000) (272,600)
Free cash flow (163,000) (297,000) 295,400 (12,000)
SPIRIT AEROSYSTEMS HOLDINGS, INC. (SPR)
Fiscal year ends in December. USD in thousands except per share data.
STATEMENT OF CASH FLOW
P a g e | 29
Financial Ratio Analysis
A thorough financial analysis is essential to fully grasp the health and performance of a
company. In this section, Spirit AeroSystems, Inc. will be dissected so that conclusions can be
made according to their financial reports. Four fiscal years were analyzed in the ratio analysis:
2010, 2011, 2012, and 2013. The ratios calculated depict the company’s liquidity, profitability,
activity/efficiency, and solvency.
Liquidity
A company’s liquidity speaks volumes to the health of that company. These ratios show
Spirit AeroSystems’ ability to pay off its short-term debt obligations. Creditors look at these
numbers very closely as it shows how easily a company can turn its assets into cash to cover
debt.
Current Ratio: This ratio is calculated by dividing current assets by current liabilities and
expresses the company’s ability to pay off current obligations. Creditors usually like to see a
high number for this ratio so that they are confident in loaning the money. They are much more
likely to get their money back from a company with a current ratio of 4.0 as to a company with
more liabilities than assets. However, shareholders may like to see this number lower, which
shows the assets are potentially working to grow the business.
In the four years analyzed, Spirit AeroSystems had a current ratio of 2.83, 3.45, 3.14, and
2.20. These values fall within a very good range and suggest the company is very liquid and
more than able to cover its short-term debt with its total current assets. Their current ratio is
slightly above the industry average. For example, over the four fiscal years analyzed in this
P a g e | 30
section, Boeing had an average current ratio of 1.22. Airbus Group averaged 0.95 and Lockheed
Martin Corporation averaged 1.15. All in all, looking at this ratio only, Spirit is very liquid.
Quick Ratio: This ratio signifies the true ‘working capital’ relationship of the company’s
cash, accounts receivables, and notes receivables available to meet its short-term obligations. It
is calculated by subtracting inventories from current assets and then dividing by current
liabilities. Therefore, if a company has a substantial amount of slow-moving inventory, the
current ratio could overstate the firm’s ability to pay current debt. An ideal quick ratio value for
this industry is right at 1.0.
In 2010, 2011, 2012, and 2013, Spirit Aerosystems had quick ratio values of 0.62, 0.49,
0.81, and 0.73 respectively. These values suggest that without their inventories, the firm would
not be able to cover its short-term liabilities. This calculation shows a large discrepancy between
the current and quick ratios. In 2011, Spirit inventories made up over 83 percent of their total
current assets. However, when comparing these values to the industry, the firm was not far off.
Their competitors all had quick ratios under 1.0 for the years 2010-2013.
Net Working Capital: Management can use their net working capital numbers to
determine if they should become more liquid or invest more in the business. The objective is to
have a positive working capital number. In accordance to the current ratio, the net working
capital for Spirit was greater than 2 billion dollars in years 2010-2012. In 2013, it dropped to 1.6
billion. It is important to keep in mind when looking at these high net working capital values
that the majority of Spirit AeroSystems’ current assets is made up of inventory.
Cash Ratio: In 2010, 2011, 2012, 2013, the firm had cash ratio values of 0.41, 0.19, 0.41,
and 0.31 respectively. This ratio is calculated by dividing “cash and cash equivalents” by the
P a g e | 31
company’s current liabilities. It focuses on the most liquid of monetary values. Accounts
receivable and inventories are not included in this ratio and thus it is not a comprehensive
measure of a firm’s liquidity. However, it does show us that in 2011, Spirit AeroSystems had a
shortage of cash and cash equivalents. They had over $200 million less cash in this year relative
to the other 3 years analyzed. This ratio suggests that cash and cash equivalents represent a
small portion of Spirit’s total current assets.
OVERALL LIQUIDITY GRADE: B+
Profitability
A company’s profitability is important in determining its performance and success for a
given period of time. Spirit Aerosystems’ profitability was analyzed by using the following
ratios: gross profit margin, net profit margin, return on total assets, earnings per share, and
operating income. These calculations will provide insight as to how well the firm is generating
earnings relative to their incurred expenses.
Gross Profit Margin: This value measures what proportion of revenue is converted into
gross profit. Managers of the firm can use gross profit margins to analyze trends in the cost of
production and determine profit gains or losses. It is calculated by dividing the gross profit
(Revenue - Cost of Goods Sold) by total revenues. Spirit Aerosystems is really struggling to
generate a quality profit margin. The percentage fell consistently and significantly the past four
years. In 2010, they had a mediocre gross profit margin of 13.5%. However, in 2013 they had a
net loss of 98.5 million dollars and suffered a -1.65 profit margin. The biggest drop was from
2011 to 2012, where it dropped from 11.3% to 2.8%. Regardless of the industry these values are
not ideal and must be addressed.
P a g e | 32
Net Profit Margin Ratio: This ratio is calculated by dividing net income by revenues. It
is an efficiency measurement use to determine the percentage of profits earned per dollar of
sales. Like the gross profit margin, Spirit Aerosystems experienced a consistent downward trend
in this measurement which is forecasting serious, potential financial problems. In 2013, the net
profit margin reached an all-time low of -10.42%.
Return on Assets: One of the most important ratios in determining the efficiency of a
company’s investments/assets is the return on assets ratio. It can be used in nearly every aspect
of business and is calculated by dividing the net earnings by the firm’s total assets. In other
words, it shows analysts how well the company’s assets are creating income for the business. In
2010, 2011, 2012, 2013, Spirit Aerosystems had a return on assets percent of 4.57%, 3.79%,
0.67%, and -11.81% relatively. The same declining trend is noticed in this calculation as well.
Ideally, the higher this measure, the better because it suggests the company is making more
revenue on fewer investments.
A deeper analysis of their ROA numbers must be performed. These downward trends are
largely due to an almost unmanageable rise in cost of goods sold. From 2010 to 2013, Spirit
Aerosystems’ cost of revenue has increased nearly 3 billion dollars. This, in turn, affects the
gross profit and ultimately the net income. Their total assets have stayed pretty consistent at
about 5 billion for each fiscal year. Overall, these ROA values are less than desirable, especially
in 2013.
Earnings Per Share: The EPS figure shows what portion of a company’s profits are
allocated to each outstanding share of common stock. It is calculated by subtracting preferred
dividends from net income and then dividing by the average number of common shares
P a g e | 33
outstanding. In 2013, Spirit Aerosystems operated at a loss and therefore had a negative EPS
figure. Investors saw the best EPS values in 2011 and 2012 with 1.55 and 1.35 respectively.
Operating Income: This calculation is used to compare companies within an industry
because it eliminates the effects of financing and accounting decisions. It is simply the firm’s
total revenue minus expenses (excluding interest, taxes, depreciation, and amortization). There
is often times much discretion as to what is included in this calculation, which is why this ratio is
not a GAAP approved measure. However, in Spirit Aerosystems case, it shows that taxes and
interest expenses are not the reason for their declining numbers. They generated a positive
operating income three of the four years analyzed. In 2013, a disappointing 364 billion dollar
operating loss was experienced.
OVERALL PROFITABILITY GRADE: D-
Activity/Efficiency
A large part of a company’s success is determined by how effectively is uses its
inventory and other assets. In this section, Spirit Aerosystems’ efficiency will be measured using
various activity ratios. It will provide a closer look at what role their large inventory numbers
play within the business. The ratios in this analysis include: accounts receivable turnover,
inventory turnover, asset turnover, fixed asset turnover, and sales to net working capital.
Accounts Receivable Turnover: This ratio depicts how soon your sales will become cash
by the firm’s ability to collect outstanding receivables. The faster Spirit Aerosystems can turn
over their A/R, the more liquid they will be. Accounts receivable turnover can be found by
dividing total credit sales divided by average net receivables. In 2010, they firm’s ratio was
P a g e | 34
23.14 but fell to 12.39 in 2013. These figures are used mostly by creditors. Overall, Spirit
Aerosystems’ receivable turnover numbers are healthy. However, if the ratio continues to drop,
they may need to re-assess their credit policies in order to ensure the timely collection of credit.
It took the firm 15.8, 17.5, 22.9, and 29.4 days, on average, to collect their outstanding
receivables in the four years analyzed.
Inventory Turnover: Inventory turnover shows how many times a company’s inventory
is sold and replaced over a period of time. This calculation is derived by dividing cost of goods
sold by the average inventory. Generally speaking, a high inventory turnover ratio is a good
thing because inventories are the least liquid type of asset. The ratios for the fiscal years 2010-
2013 were 1.53, 1.68, 2.08, and 2.85 respectively. The industry average is relatively low at
approximately 2.0 because these type of companies often times they have significant assets tied
up in inventory. Spirit Aerosystems is right where they need compared to the industry they fall
in.
Asset Turnover: Asset turnover ratio shows the firm’s ability to generate sales through
the use of its assets. This computation is most used by shareholders and is calculated by dividing
net sales over the average total assets. The higher the company’s asset turnover, the lower its
profit margin tends to be. Throughout all four years, Spirit Aerosystems’ asset turnover ratio
remained very consistent, ranging from 0.90-1.10. These figures are right in the middle of the
average asset turnover numbers for this industry. Its highest asset turnover occurred in 2013,
which is attributable to the company’s low profit margin. This calculation is ineffective when
comparing to unrelated firms. However, when compared to Spirit Aerosystems’ competitors,
they are in good position.
P a g e | 35
Fixed Asset Turnover: Fixed asset turnover is computed by dividing net sales and total
fixed assets. It describes how efficiently a company uses its plant, equipment, and other fixed
assets to generate sales. A declining trend suggests expansion or preparation for future growth.
The results of this ratio were 3.04, 3.15, 3.26, and 3.4 for fiscal years 2010, 2011, 2012, 2013
respectively. The higher the value, the better the company is at creating sales from its fixed
assets. Relative to Spirit Aerosystems’ industry, they are slightly below average. Some of the
big players in the industry, like Boeing and Lockheed Martin, have ratios around 9 or 10.
However, Airbus Group’s fixed asset turnover was in accordance with Spirit Aerosystems’ at
approximately 3.5. It does appear that the firm’s major fixed assets are generating more sales in
2013 relative to 2010.
Sales to Networking Capital: This ratio determines the company’s ability to use cash to
generate sales. It can be computed by dividing net sales and net working capital. Spirit
Aerosystems’ sales to networking capital ratio was 1.9, 2.2, 2.4, and 3.7 in the years analyzed.
The spike in this ratio from 2012 to 2013 was largely due to the company’s decision to hold on
to more inventory.
OVERALL ACTIVITY/EFFICIENCY GRADE: A-
Solvency
To get an overall understanding of how healthy the company is, solvency ratios must be
computed to determine is long-term ability to stay in business. The term solvency refers to the
firm’s ability to meet its long-term financial obligations. The following ratios are used to
calculate the financial leverage of Spirit Aerosystems: debt ratio, debt-to-equity, long-term debt-
P a g e | 36
to-equity, and times interest earned. Investors and creditors pay close attention to these figures
so it is important to be solvent and within industry averages.
Debt Ratio: The debt ratio is a measurement that determines the proportion of assets a
company has relative to its debt. This tells the company possible risks in terms of the debt-load,
as well as an idea of the leverage of the firm. It can be computed by dividing total liabilities by
total assets. 0.5 or 50% is considered an ideal figure by most long-term creditors. Spirit
Aerosystems had a debt ratio of 0.65, 0.61, 0.63, and 0.71 in 2010, 2011, 2012, and 2013
respectively. Overall, their debt ratio for the past four years is very acceptable and not too far off
from the ideal value.
Debt-To-Equity: This ratio is a measure of a company’s proportion of equity and debt
the company is using to finance its assets. The debt-to-equity ratio is equal to total liabilities
divided by shareholder’s equity. A higher ratio suggests the company has been aggressive in
financing its growth with debt. However, a ratio that is too high could lead to bankruptcy and
future solvency issues. If a firm was financed by an equal amount of debt and shareholder
equity, the ratio would be equal to 1.00. Over the past four years, Spirit Aerosystems’ ratio
resulted in values of 1.82, 1.57, 1.71, and 2.44. These numbers suggest that the majority of the
company’s assets are derived from debt compared to shareholder equity. Solvency issues could
be on the horizon for Spirit Aerosystems because these ratio calculations are slightly above the
industry average and going up.
Long-Term Debt-To-Equity: Another ratio long-term creditors look at carefully is the
long-term debt-to-equity ratio. It shows them how much money a company should safely be able
to borrow over long periods of time. Lower values of this ratio are ideal because they are
P a g e | 37
associated with less risk. This value can be determined by dividing a firm’s long-term
obligations by its shareholder’s equity. The industry average for Spirit Aerosystems is 0.6,
which suggests most company’s assets are financed more through long-term debt rather than
equity. Spirit Aerosystems’ ratio results were 0.66, 0.59, 0.58, and 0.78 in years 2010, 2011,
2012, and 2013 respectively. Even though these figures are above the ideal 0.5, they are well in
line with the industry average. However, it appears the company is still managing its debt
properly as long term debt actually stayed very consistent throughout all four years. The spike in
2013 ratio was due to a large drop in retained earnings, which, in turn caused a decrease in total
stockholder’s equity.
Times Interest Earned: Times interest earned ratio measures how many times a company
can cover its interest charges on a pre-tax basis. A value above 1.0 is ideal as that suggests that a
company has enough earnings before interest and taxes (EBIT) to cover their interest obligations.
If the ratio falls below 1.0, the company cannot cover its interest expenses and is not earning
enough revenue before interest and taxes. The same devastating trend can also be seen in this
ratio. In 2010, 2011, 2012, and 2013, Spirit Aerosystems had a times interest earned ratio of
6.04, 4.59, 1.11, and -5.20 respectively. They could pay their interest expense over 6 times in
2010, which could indicate an undesirable lack of debt or paying down too much debt. The ratio
for 2013 is just another indication of their weak EBIT value for that year. They simply did not
have enough operating income to cover their interest expenses.
OVERALL SOLVENCY GRADE: C-
P a g e | 38
Stock Valuation and Performance
As of December 31, 2013, Spirit’s corporate credit rating was affirmed at BB and placed
on negative outlook by Standard and Poor’s. It was affirmed at Ba2 and place on negative
outlook by Moody’s Investor Services. In early 2014, the firm realized it may be facing a
possible downgrade. A beta of 1.43 suggests that the stock is relatively volatile. As an investor,
Spirit Aerosystems is not the wisest investment for short term profitability. It is currently selling
at $28.56 with no dividend.
Financial Summary and Outlook
Liquidity Grade: B+
Profitability Grade: D-
Activity/Efficiency Grade: A-
Solvency Grade: C-
PUNCHLINE: Spirit Aerosystems is on a downward financial trend due to its diminishing
ability to create consistent profit margin and relying on large amounts of debt and costs
associated with new programs.
In this competitive industry, Spirit Aerosystems is headed the wrong direction
financially. The firm’s inability to manage inventory and expenses are the driving force behind
the net loss. Investments in new programs have resulted in high amounts of debt, but will
hopefully lead to sustained growth in the coming years. Nearly every profitability ratio from
2012 on was not within ideal range.
Strategic changes must be implemented to turn the spiraling numbers back in the correct
direction. The future health of the company is in jeopardy with less than impressive solvency
P a g e | 39
ratios. The performance of the firm and its assets need the most consideration as the company
cannot continue to survive operating at a negative margin.
5 Year Compound Annual Growth Rates (CAGR)
Spirit Aerosystems = 9.6%
Airbus = 7.6%
Fuji Heavy Industries = 4.0%
Boeing = 1.9%
Mitsubishi Heavy Industries = (2.5%)
P a g e | 40
Value Chain
Inbound Logistics
Spirit Aerosystems has a very desirable relationship with a wide variety of suppliers
including: outside production, fastening hardware, purchased equipment, raw material providers,
engineering services, capital equipment providers, and processing suppliers. Their Supplier
Satisfaction Survey has enabled them to improve their supply chain methods and ensure
efficiency.
Their manufacturing facilities are globally scattered in the following locations: Wichita,
Kansas, Tulsa, Oklahoma, McAlester, Oklahoma, Kinston, North Carolina, Prestwick, Scotland,
Samlesbury, England, Moscow, Russia, Xiamen, China, and Subang, Malaysia.
Spirit Aerosystems and DB Schenker (DBS) recently signed a 10-year contract extending
DBS’ role as fourth-party logistics (4PL) manager for inbound logistics and manufacturing
P a g e | 41
support. The two companies continue to work closely to insure operational efficiencies and
continuous improvement. The contract relationship started in August 2006 following Spirit’s
spin-off from Boeing in late 2005.
This Visual Line-side Management (VLM) technology allows for parts to arrive on an as-
needed basis and shrinks unnecessary inventory at each assembly control center. The
implementation of VLM has reduced backorders by 79% and work in process by 72%.
Estimated yearly savings are over $600,000. Overall, logistics unit costs have been lowered
systemically for Spirit and process improvements continue to keep them under control on an
ongoing basis.
OVERALL INBOUND LOGISTICS RATING: CHECK PLUS (7)
Operations
Internally, this is no doubt Spirit Aerosystems’ weakest of the five links. The operations
aspect of their business is a large contributing factor to the company’s declining net margin.
Operating income is crucial to a company’s performance and profitability. Spirit Aerosystems’
overwhelming cost of goods sold has been the driving force in the threatening decrease in
operating margins. They need to find a way to reduce the costs associated with the new
programs and contracts they are committing to. Key strategists within the company realize the
firm is not operating at an ideal standard. Duane Hawkins was hired as the new Senior Vice
President of Operations in 2013 to turn this segment of the business from a weak link to an
internal strength.
With a global footprint of 15.4 million square feet, Spirit facilities can be found in the
United States, the United Kingdom, France, Russia, Malaysia and China. Spirit employs more
P a g e | 42
than 16,000 skilled and professional workers at its facilities in North America, Asia and Europe.
Their main operating and manufacturing facility is located in Wichita, Kansas where it houses
approximately two-thirds of the company’s employees (over 10,000).
OVERALL OPERATIONS RATING: MINUS (3)
Outbound Logistics
Not only do they have quality suppliers feeding each location, but Spirit Aerosystems
also has award-winning outbound logistics. Well-known global aerospace and defense
technology firm, Northrop Grumman, recently named Spirit Aerosystems’ their Research and
Development Supplier of the Year. To be considered for this award, they had to deliver their
products at a consistent quality.
Spirit Aerosystems’ numerous global locations allow them to distribute appropriate
manufactured parts to their destination quickly and efficiently. However, due to the high volume
of inventory and the physical size of certain parts, it is difficult for them to be effective on the
manufacturing floor. The Wichita, Kansas complex stretches over two miles wide and one mile
long, covering 600 acres. Getting finished product through the factory and on to the customer is
a very detailed, time-consuming process, which is why they are rated right at average for this
industry.
OVERALL OUTBOUND LOGISTICS RATING: CHECK (5)
P a g e | 43
Marketing and Sales
Overall, Spirit Aerosystems internal approach to marketing and sales is solid with room
to improve. There are multiple facets in striving for perfection within this link of the value
chain. Net sales figures are only a part of how the company is marketing their product and who
they are generating those sales from. Below is a chart that depicts Spirit Aerosystems’
consistently increasing sales numbers.
However, the company as a whole was given a check with a small minus due to its
inability to market to new customers. They are putting too much dependency on two companies.
A diversified customer base starts with Spirit Aerosystems’ marketing team. Therefore, even
though net sales are increasing from year to year, devastating losses could be seen if something
where to happen to Boeing or Airbus.
OVERALL MARKETING AND SALES RATING: CHECK MINUS (4)
2010 2011 2012 2013
$4,172
$4,864
$5,398
$5,961
Net Sales
(USD in millions)
P a g e | 44
Customer Service
In August of 2010, Spirit Aerosystems implemented the first ever Supplier Satisfaction
Survey designed to better understand suppliers’ perceptions of doing business with Spirit. The
ultimate goal was to find ways to improve collaborative efforts with those companies and
explore opportunities for improvement. This comprehensive survey has allowed Spirit to
improve the working relationship with both its suppliers and customer base.
Spirit Aerosystems’ superior customer service is evident in its relationship with its two
main clients: Boeing and Airbus. For Boeing to be 84% of the entire company’s revenue stream,
the business to business communications and service must be maintained at a very high level.
Their customer service is easily one of their strongest lings in the company’s value chain. This
internal strength has allowed them to maintain and negotiate contracts with some of the biggest
original equipment manufacturers. Quality communication with its limited customer base is vital
for continued success because there is no room in this market to burn a bridge with a powerhouse
like Boeing or Airbus.
OVERALL CUSTOMER SERVICE RATING: CHECK PLUS (8)
P a g e | 45
McKinsey’s Seven S’s
Style
- Employees are very well educated and are encouraged to keep learning.
- The management team has successfully expanded their business and established the stand-
alone operations of the business, and is actively working to reduce costs.
- Executives and senior managers have lengthy experience working with their primary
customers, including Boeing and Airbus, which provides them with detailed insight into how
they can better serve their customers.
- Immediate manager is the primary resource to report issues or respond to internal concerns.
P a g e | 46
Staff
- 1,500 degreed engineering and technical employees, and access to approximately 800
engineers from other engineering firms.
- More than 3,000 employees and family members volunteered a total of 10,000 hours of
service in their communities in 2013.
- Employees and the company also donated more than $4.4 million to charities.
Strategy
- Growth via new contracts with existing and new customers.
- Maintain their “leadership role” in the competitive market of aerosystems.
- Focusing on what differentiates them within their market; their ability to design-build
aerostructures with a low cost structure.
Systems
- Implementation of the Visual Line-Side Management (VLM) Technology System.
- Three main business segments for production: (1) Fuselage Systems, (2) Propulsion Systems,
(3) Wing Systems.
- Maintain a customer contact database to maximize interactions with existing and potential
customers.
- Management team possesses inherent knowledge of and relationships with Boeing and
Airbus that may not be matched to a corresponding degree between other suppliers and these
two OEMs.
Structure
- Centralized and Uniform.
P a g e | 47
- Top-down Structure.
- Experienced and proven management team with significant aerospace and defense industry
experience.
- There is not a lot of hiring from within for upper management.
Skills
- The most engineers on staff of any OEM/Non-OEM company in the market.
- Industry leading knowledge in a multitude of sectors within the business.
- Strong relationships/communication skills with Boeing and Airbus, (two of the industry
leaders in OEM’s).
- Over 80 years of experience designing and manufacturing large-scale, complex
aerostructures.
- Strong technical expertise in bonding and metals fabrication, assembly, tooling and
composite manufacturing, including the handling of all composite material grades and
fabricating large-scale complex contour composites
Shared Values
- Employees are expected to:
o Use good judgment in all aspects of the company.
o Advance the company’s legitimate business interests.
o Conduct business honestly, fairly, impartially, and ethically.
o Protect the assets of the company and assets entrusted to them by others.
- Obeying applicable laws, regulations, and rules is a must throughout the firm.
- Reporting illegal or unethical conduct or business is highly encouraged
P a g e | 48
Four Levels of Competition
Macro
Political – check minus
Governmental regulations that have come about since September 11, 2001 have the
potential to affect declines in air traffic. Also, political unrest could decrease passenger air travel
to certain countries causing a decline in demand for airplanes and the aerostructures that Spirit
manufactures. Spirit Aerosystems’ success would be adversely affected if they lose their
government, regulatory, or industry approvals. If more stringent government regulations are
enacted, the firm would experience greater costs associated with conforming to the new laws
along with the potential termination of current programs.
The Federal Aviation Administration (FAA) prescribes and monitors the standards and
qualifications requirements for the aerostructural industry. Failure to obtain required licenses or
loss of current licenses will prohibit the sale of that product line.
Internal
Direct
Industry
Macro
P a g e | 49
Economic - check
The economy has almost fully recovered from its collapse back in 2008. However, the
unemployment rate is still relatively high and the lower class is still not using air travel as much
as individuals who are financially stable. The United States high has prices provide an incentive
for Americans to use air travel for longer trips.
Spirit’s commercial business is dependent on the demand from passenger airlines and
cargo carriers. The economic conditions play a large role in consumer behavior and this derived
demand. Because the economy is always fluctuating, Spirit noted that its commercial business is
largely cyclical due to sensitive airlines’ profitability.
Socio-Cultural – plus
Some analysts predict passenger air travel is expected to increase 25 percent in the next
decade. This socio-cultural preference to fly rather than drive will positively affect the demand
for Spirit’s products. People’s perception of airplane safety is improving as well. The majority
of the population now realizes that numbers suggest flying is technically safer than driving. This
type behavior puts the firm in a good light and associates their products with a sense of quality
and safety.
Technological – check plus
Information Technology systems have had substantial development in the past decade
and will continue to improve. Advancements in technology will help cut production costs and
make the process more efficient. Technological developments, if used appropriately, create an
opportunity for Spirit to gain an even bigger edge on other aerostructure suppliers.
Environmental - minus
Operations are subject to extensive environmental, health, and safety regulations set forth
by the country the manufacturing facility is located. With the rising importance of Corporate
P a g e | 50
Social Responsibility, more expectations are being placed on businesses to reduce their carbon
footprint and be more “green.” Firms are being fined and penalized for failing to comply with
certain environmental regulations. The costs associated with the environment are minimal, but
must be considered carefully. However, with numerous large-scale manufacturing facilities
across the globe, is crucial that contamination is monitored and waste is disposed of
appropriately. The “going green” environmental trend is not necessarily feasible for a company
such as Spirit Aerosystems.
Global – check plus
Spirit Aerosystems receives a large portion of its revenues from foreign manufacturing
facilities. Thus, it must consider the various risks associated with operating in those countries
and in a global market. Passenger air travel is increasing globally, with more people flying from
less developed countries. Also, being globally diverse allows Spirit to supply its customers in
foreign land to a satisfactory level. With many OEMs having locations outside the United
States, it is important that the company tap into a portion of these markets.
Industry
With an estimated 16% share of the global aerostructures market in both 2011 and 2010,
this market remains highly competitive and fragmented. Porter’s 5 Forces analyzes the overall
attractiveness of the aerostructure supply industry. Direct competition comes from other third
party non-OEM competitors. However, indirect competitors can be found in within the internal
operations of large OEMs.
P a g e | 51
Porter’s 5 Forces
Industry Attractiveness
Spirit enjoys a modest position within the aerostructures market at 16%. This market
share does not directly represent the market position Spirit holds. Though industry competition is
high, Spirit enjoys large current and future contractual agreements with the two largest OEMs in
the world, giving them significant advantage over others in the industry. Though these
relationships are not permanent, and the rivalry within the industry is high, for now, Spirit enjoys
a solid position in the aerosystems and structures industry.
Intensity of Rivalry
Threat of New Entrants
Power of the Buyer
Threat of Substitutes
Power of the Supplier
P a g e | 52
Threat of New Entrants
Spirit enjoys partnerships with the two largest original equipment manufacturers in the
aircraft industry, Boeing and Airbus. Their long history of contracts with these companies and
agreements towards new product development is strong promise of stable market share in the
future. Due to the high dollar value of their products, high volume of products needed from
suppliers to manufacturers of aircrafts, and the long term contract agreements, entrance into the
market is very difficult. In the aerosystems market, though new entrants are not a threat,
innovation within the market is a significant due to the high level of competition.
RATING = Check Plus Plus
Power of Suppliers
Spirit has a very large supply chain with a very structured supply chain management
system. Their suppliers must meet many self-proclaimed standards in order to be a part of supply
agreements on Spirit projects. Without a doubt, many suppliers battle to meet these expectations
in order to be a part to a contract agreement with Spirit due to their significant relationship with
the biggest players in the game, Boeing and Airbus. This lends supplier power to be relatively
low, a positive for Spirit. In coordination with this rating, Spirits innovation and design really
drives the value of their products up, not the materials used to make the products themselves.
This further supports the claim above.
RATING = Check Plus
Threat of Substitutes
Aircraft carriers large and small cost a significant amount of money to both design and
build into a lasting, working machine. Their value is great, and the profit potential for
P a g e | 53
aerostructures and systems manufacturers is great. Spirit does 94% of its business with the two
largest aircraft manufacturers in the game, but this does relationship has continued because Spirit
leadership knows without affordability and innovation, Boeing or Airbus. Unfortunately for
Spirit, their business represents only 16% ownership of the highly competitive market for these
structures. This lends the threat of parts substitutes on Spirit to be high, a difficult reality for
Spirit.
RATING = Check Minus Minus
Power of Buyers
Boeing and Airbus are large and powerful companies with significant market dominance
in the aircraft market. Each could easily reach out to Spirit’s other competitors for the long term
contracts made on the production of aircrafts, their parts and systems. With such a significant
amount of money going into the production of their new aircrafts, many suppliers of their parts
would benefit greatly from any of the contracts Spirit holds with them. Being in such a
competitive market with dominance bent on cost efficiency and product innovation and
development, power of the buyers is significantly high, which puts much pressure on Spirit.
RATING = Check Minus Minus
Industry Rivalry
Though threats of substitute aerosystems producers and other competition is high, Spirit
has and continues to enter into long term contractual agreements with Boeing and Airbus, and
their continued market innovation and development in coordination with these long term
contracts has given a good hold in the market. Though these relationships are not permanent, and
P a g e | 54
the rivalry within the industry is high, for now, Spirit enjoys a solid position in the aerosystems
and structures industry.
RATING = Check
Direct
Within this competitive industry, Spirit faces many direct competitors. Boeing and
Airbus are not independent aerospace structure suppliers, but do have the capabilities and choice
not to outsource production of their aerostructures for their aircraft. OEMs may choose to
produce in house based on a variety of factors, like labor costs or capital utilization. This is an
important consideration as Spirit has ensured that traditional factors of competition such as price
and quality is attractive to the OEMs to encourage their outsourcing the production. Its biggest
competitors in both areas of the direct environment are plotted below on Hall’s Competitiveness
Model.
Fuji Heavy Industries (Aerospace) – is a Japanese multinational corporation and
conglomerate primarily involved in aerospace and ground transportation manufacturing, known
specifically for its line of Subaru automobiles. Their aerospace division serves as a defense
contractor to the Japanese government, manufacturing Boeing and Lockheed Martin helicopters
and airplanes under license along with being a global development and manufacturing partner to
both companies.
Mitsubishi Heavy Industries (Aerospace) – is a Japanese multinational engineering,
electrical equipment and electronics company headquartered in Tokyo, Japan. Their products
include aerospace components, air conditioners, aircraft, automotive components, forklift trucks,
hydraulic equipment, machine tools, missiles, power generation equipment, ships, and space
P a g e | 55
launch vehicles. Through its defense-related activities it is the world's 23rd-largest defense
contractor measured by defense revenues, and the largest based in Japan.
Boeing – Boeing is considered an original equipment manufacturer because it is the
company that actually puts all the pieces of the aircraft together. The firm has multiple long-
term contracts with Spirit as a third-party supplier. However, Boeing outsources certain parts of
the aerostructure to Spirit due to cost effectiveness. Boeing product development department is
always looking ways to lower its delivered cost and if they are able to do what Spirit does for
less money, Spirit will no longer be needed.
Airbus – Airbus competes with Spirit in the same regard as Boeing. Even though the two
companies do business with each other, the race to the best quality product at the lowest cost is
always at the forefront. Airbus cannot deliver the same low cost aerostructures that Spirit can
because it is an original equipment manufacturer.
Overall, Spirit Aerosystems is a in a great spot relative to its direct competitors. There
are many threats to the firm if it does not continue to maintain its low cost structure. Boeing and
Airbus are too differentiated to keep the lower delivered cost that non-OEMs who specialize in
parts production can keep.
P a g e | 56
Hall’s Competitiveness Model
Hall’s Competitiveness Model allows for competitors to be a compared based on their
relative differentiation and relative delivered cost. Spirit Aerosystems currently falls under the
left side of the zone of competitive battle. Spirit has a competitive advantage in terms a
relatively low delivered cost and as a result they lack the differentiation experienced by a
company like Boeing who has much more differentiated product offerings.
Boeing and Airbus cannot manufacture the aerostructures that Spirit, Fuji and
Mitsubishi can produce at the low delivered cost in which they produce. Specialization in
products, as well as economies of scale, play into this realization for the OEMs. This is why the
two OEMs are located to the right of the third party non-OEMs. Fuji and Mitsubishi also
produce a wide variety of products, not solely aerostructures, and have a lower operating margin
Boeing Airbus Spirit Fuji Mitsubishi
P a g e | 57
than Spirit Aerosystems. Their scale and product mix allows for lower operating costs, but their
broader focus does not give them the cost advantage Spirit holds by focusing solely on parts for
aircraft.
This low cost leadership does not mean Spirit has wide margins. Spirit is currently
pursuing the turnaround and maintenance strategies in hopes of improving operating efficiency.
In the financial analysis, rising costs of goods sold have been noticed in the past couple of years.
The firm claims it is the price leader for this industry, however, if they do not manage their
delivered cost they will have to pursue greater differentiation. Spirit has the potential to be in the
delivered cost power alley because it offers crucial structures to OEMs that cannot afford to
produce themselves.
P a g e | 58
Strategy Evolution
Abell’s strategic evolution models places the company based on their reactive or
proactive approach and the future conditions of their industry. Spirit Aerosystems falls into the
“anticipate and initiate” quadrant.
The next step in commercial transportation is decades away. The demand for airplane
structures has been consistent over the years. Airplane engines, fuselages, and propulsion
systems are products that are very expensive to produce and innovate. Thus the fluctuation in
this industry is projected to transform slowly
Spirit is more proactive than its competitors due to their long term contracts with two of
the biggest airplane OEMs in the world. There pre-emptive approach to starting new programs
P a g e | 59
for different types of planes and helicopters is what ultimately placed them to the right of the
center line.
Internal
SWOT Analysis
The overall position of Spirit Aerosystems Inc. is indicated in the four quadrant SWOT
analysis shown above. Even though the company has strong relationships with Boeing and
Airbus and has a strong product name it still faces a great threat of being left behind if they do
not continue to grow. They rely heavily on their research and development teams to stay ahead
of the competition and remain one of the leading commercial aerostructure companies. Even
though the company is doing a lot of things right, they still fall into the fourth quadrant of Pivotal
Strategies at this time. If they can produce more growth through more contracts and subcontracts
P a g e | 60
with Boeing, Airbus, and other plane companies then they can make that push up into the
Growth quadrant where they need to be in this competitive market.
Strengths
General - Spirit Aerosystems Inc. is one of world’s leading product manufacturers and
holds a leading position in the growing commercial aerostructures market. It has a strong
relationship with both Boeing and Airbus, two of the world’s largest companies who build
planes, giving them a strong, stable base business. They have high volume and major growth
platforms that give them a strong competitive position in the aerostructures market.
Marketing – Spirit holds a strong market position in a very competitive market
environment. Spirit Aerosystems is one of the largest independent non-OEM aircraft parts
designers and manufacturers of commercial aerostructures in the world. The company holds
about 16% share of the global aerostructures market. It is the largest independent suppliers of
aerostructures to Airbus and Boeing. Boeing and Airbus are two of the world’s largest aircraft
OEMs. Thus, strong market position enhances its brand image of the company itself, and further
increases the bargaining power of the company.
Finance – Spirit has many diversified revenue streams. Spirit Aerosystems has
diversified operations in terms of its business segments. The company divides its business into
four segments: fuselage systems, wing systems, propulsion systems, and other. As a result they
are not reliant on any one segment of the business for their entire income. In addition to the
diversified product portfolio, the company has a well-balanced revenue mix and their net sales
have continued to grow over the past four years.
Operations – Spirit runs a simple product design strategy with three main parts: (1)
Fuselage Systems, (2) Propulsion Systems, and (3) Wing Systems. Their strong
P a g e | 61
partnership/relationship with Boeing is attributed to 84% of their overall business that they put
out each year. Investing in new products and relying heavily on their research and development
teams creates and maintains their strong competitive advantage in the industry.
Management – In 2013, new CEO Larry Lawson came into the picture bringing with
him years of experience and skills from Lockheed Martin Aeronautics. He quickly added three
senior industry executives to his leadership team, while placing key talent in positions that best
suit their strengths. This experienced new management team is leading the strategic
organizational changes within the company to continue to make it a competitive threat in the
market.
Weaknesses
General – Although Spirit Aerosystems is a market leader and innovator, they are very
limited with their customer base. Boeing and Airbus are the two largest customers of the
company. Approximately 84% of the company’s revenues come from its business with Boeing,
and 10% from Airbus, respectively. With Boeing and Airbus being the two largest aircraft
OEMs in the world, this places a high dependency on limited customers.
Financial – Spirit Aerosystems holds a substantial amount of debt due to prior
investments and new programs being integrated. If debt is not managed properly, future
solvency issues could arise. They have been operating at a declining profit margin the past few
years as well.
Marketing – Spirit depends heavily on the US market for its revenues. The company
derives a large portion of its revenues from its domestic market. Overdependence on one
geographic region makes the company susceptible to changes associated with the economic and
political situation of the country. Therefore, a higher dependence on the US market may prove
P a g e | 62
to be an obstacle challenge in the company’s efforts to boost its topline.
Operations – Spirit needs to insure that their investments in their new programs result in
a turn-around of their operating margins. In 2013 they operated at a $364 million dollar loss.
Their cost of goods sold has almost doubled from 2010 to 2013, and this number has to improve
in order for their operations to grow. Due to their dependency on Boeing and Airbus, the
company’s sales, cash flows from operations, and results of operations would be impacted if
either Boeing or Airbus reduces the number of products it purchases or if either experiences
business problems.
Opportunities
General – Spirit Aerosystems has a multitude of opportunities they can work towards
and grow. Creating new contracts with foreign Air companies, such as their deal in 2011 with
Air Europa’s fleet of Boeing 737 and 767 aircrafts, are crucial for generating incremental
revenues. In addition to new supply agreements, both domestically and internationally, the
company can also expand its business presence through opening new business centers in various
locations across the world or furthering their presence in the defense market.
Economic – The rise of new airline business models and rapid growth of air travel in the
world’s emerging economies are stabilizing worldwide demand for airplanes. According to the
Bombardier Commercial Aircraft Market Forecast, demand for twenty to one-hundred twenty
nine seat capacity commercial aircraft is expected to reach around twelve thousand new aircrafts
in the next twenty year period. With this information, the forecasted delivery demand is valued
at around six-hundred billion dollars. With Spirit being one of the largest independent non-OEM
aircraft parts designers and manufacturers of commercial aerostructures, this growing demand is
pivotal for their success economically. Therefore, this growing demand for commercial airplanes
P a g e | 63
could boost the demand for Spirit Aerosystems’ products and services, which in turn could
translate into strong topline growth for the company in the future.
Technological – With an already strong Research and Development program,
technological advances can improve their efficiency and products in the years to come. Staying
ahead of their competitors technologically is key to their success in this competitive market.
Social – Sociocultural dependency on air travel is expected to increase 25% in the next
decade. With people flying more and driving less, this creates an increased demand in air travel.
This increases the needs and services that companies such as Boeing and Airbus depend on from
Spirit Aerosystems.
Threats
General – The global aerostructures market is highly competitive and fragmented. Spirit
Aerosystems’ primary competition currently comes from either work performed by internal
segments of OEMs or third-party aerostructures suppliers, but the direct competition continues to
grow.
Economic – Spirit is very dependent on the US market and its small customer base. Any
drastic changes in the US economy or US regulations could greatly affect them. Alternative
costs of travel could influence the airline business as whole, thus effecting Spirit who creates all
of the parts for these planes. Government regulations on supplies that are vital to their
production process would also greatly affect the company. With the pressing matter of increased
labor costs rising, causing the threat of potential labor disputes to rise, work stoppages could also
greatly affect Spirit Aerosystems.
Technological – A highly competitive environment in aerostuctures and systems should
encourage quick and significant technological advancements within the industry, at which Spirit
P a g e | 64
may not be the leader in innovation. As new production demands increase from their top two
customers, (Boeing and Airbus), the threat of not being able to keep up with demands in a cost
effective way rises.
Social – The potential threat of a decline in passenger air travel could negatively affect
the demand for Spirit’s products.
Political/Legal – Spirit Aerosystems operations are subject to extensive regulation under
environmental, health, and safety laws and regulations in the US and other countries in which it
operates. The company can be subject to potentially significant fines or penalties, including
criminal sanctions, if it fails to comply with these requirements. In addition, the company’s
operations involve the use of large amounts of hazardous substances and regulated materials and
generate many types of wastes, including emissions of hexavalent chromium and volatile organic
compounds, and so-called “greenhouse gasses” such as carbon dioxide. Environmental
regulations could have a material adverse effect on Spirit and any other proposed changes in
applicable laws or regulations could impact its business or financial condition.
P a g e | 65
Hussey’s Directional Policy Matrix
Spirit Aerosystems is one of the industry’s leaders in non-OEM parts manufacturing.
Because of their business relationship with Boeing and Airbus, we have placed them into the
Maintain Leadership quadrant. The aerostructures industry is competitive, large, and profitable.
Because of their success being closely tied with their two top customers, (Boeing and Airbus),
we have placed them closer to the Proceed with Care quadrant as well. Spirit’s business with
these two clients’ accounts for 94% of their business, so any bad decisions or choices regarding
those two companies would be detrimental to their entire company. Even with all of these
factors, they are still an industry leader and need to focus on maintaining their good business
relationships to stay at their competitive leadership role in the market.
P a g e | 66
GE 9-Cell
The aerostructures industry is highly competitive and for the companies already involved
it is attractive to break into new segments of the market. Spirit AeroSystems is the competitive
leader in the market and holds a strong competitive position. Their business strengths are
numerous, from the top engineering minds in the industry to strong business relationships. Their
biggest weakness is their dependency on Boeing and Airbus. Because of their leadership role in
the industry, they therefore have a high level of competitive strength. According to the GE 9-
Cell model, Spirit Aerosystems should focus on protecting their position as the industry leader,
while investing wisely into new markets they see fit without affecting their existing business
operations.
P a g e | 67
Multinational Strategic Marketing Portfolio
Harrell and Kiefer’s model addresses the potential strategy of entering into a certain
country by weighing the country’s attractiveness and the company’s compatibility with that
country. We selected China to strategically decide if our company would flourish in such a
country. Based on Porter’s Dynamic Diamond, we determined that the attractiveness was slightly
above average for our business operations and potential customers. Beings that OEMs operate in
large scale across the globe, new demand for Spirit’s products would be present.
The firm’s compatibility with China, we determined, is below average. Even though
China is largely a manufacturing based country, Spirit Aerosystems products are extremely
complex. They are not the typical shoes, clothing, and toys that China is used to producing. This,
among other reasons, is why we placed Spirit Aerosystems in the “It Depends” section of Harrell
and Kiefer’s model.
P a g e | 68
Strategy Options for Locals vs. Global Competitors
This model is not currently the most useful to Spirit AeroSystems because they already
have locations in other countries including: France, Scotland, and Malaysia. However, if the
industry or Spirit’s competitive capabilities were to change, this model would be helpful in
determining its relationship with local and global competitors. It could also come in handy when
deciding where to expand even further in to untapped countries.
Due to the widespread nature of commercial and military aircraft manufacturers, Spirit
would be falling behind if it were solely located in the United States. Therefore, with a relatively
high industry pressure to globalize, they find themselves currently competing globally with their
transferrable competitive strengths and capabilities.
P a g e | 69
Ansoff’s Product/Market Grid
Using Ansoff’s Model, we placed Spirit Aerosystems in the concentrated growth
quadrant, leaning towards the product development quadrant. What this placement is saying is
that Spirit should focus on their existing products within their existing market, while still
working towards developing new products. The market is fairly saturated with aerostructure
suppliers. Therefore Spirit is trying to penetrate the market with quality products while
maintaining a low cost based structure. Spirit already has strong products and relationships
within their market. Building on their strong relationships, they should continue to use
communication to fulfil their customer’s product demands to the highest quality. Their main
focus should be to continue their leadership role in their existing market.
P a g e | 70
Product Life Cycle
PRODUCT LIFE CYCLE
SALES
REVENUE
$
TIMEINTRODUCTION GROWTH MATURITY DECLINE
6
Spirit Aerosystems is under contract to provide aerostructures products for approximately
98% of the aircraft that comprise Boeing’s and Airbus’ commercial aircraft backlog as of March
29, 2011. The significant aircraft order backlog and their strong relationships with Boeing and
Airbus should enable the company to continue to profitably grow their core commercial
aerostructures business.
Spirit derives a high proportion of their Boeing revenues from Boeing’s high volume
B737 program and a high proportion of their Airbus revenues from the high volume A320
program. The B737 and A320 families are Boeing’s and Airbus’ best-selling commercial
airplanes. Spirit has also been awarded a significant amount of work on the major new twin aisle
programs launched by Boeing and Airbus, the B787 and the A380. All in all, the firm’s product
life cycle is considered to be in early maturity.
P a g e | 71
Porter’s Generic Strategies
As noted throughout this analysis, Spirit’s competitive advantage is their ability to offer
quality design-build structures at a lower cost than their competitors. This automatically puts
them in either the cost leadership or focused cost quadrants. Upon further research, the market
that Spirit Aerosystems supplies is very small and concentrated. The barriers to entry into this
industry are very high and further support that the competitive scope of the business is more
niche than mass marketed. Therefore, Spirit’s generic strategies are pursuing focused cost as can
be seen above.
P a g e | 72
Market Lifecycle – Competitive Strength
Based on research performed in this case study, we found Spirit Aerosystems to be in the
‘invest selectively’ section of Hofer’s Market Lifecycle – Competitive Strength Model. The
market itself is in early maturity but has slowed its growth overall. They fall just below the ‘grow
aggressively’ line. Despite the company’s widespread strengths, Spirit Aerosystems is not in a
position financially to make acquisitions or grow aggressively. They are near the top of the
‘invest selectively’ section because we believe wise investments in manufacturing capabilities
will ultimately be the most beneficial to long-term success. The market itself is in early maturity
but has slowed its growth overall, probably due to economic factors alluded to earlier in the
report.
P a g e | 73
BCG Portfolio Matrix
We placed Spirit AeroSystems in the DOG quadrant of the BCG Portfolio Matrix. Even
though they have a strong industry position, most recent figures suggest that Spirit only
possesses approximately 16% of the market share available. However, because they are the
majority supplier for the two largest commercial aircraft manufacturers, the firm is very close to
the CASH COW line.
Spirit was place below the x axis because this is not a market with a large growth rate.
Spirit AeroSystems and nearly all of its competitors noticed compound annual growth rates of
less than 10%.
P a g e | 74
Main Problems
After performing extensive strategic analysis, there are several key problems which are
specific to Spirit and have implications to their future success. Upper level management and
other strategic players should consider addressing these issues to allow Spirit to become
profitable and improve market share.
Cost Control
In 2013, Spirit saw a $364 billion loss, largely due to rising costs of new programs and
initiatives as prescribed by the buyers Boeing and Airbus. Despite consistently growing net sales,
the firm cannot maintain market position if their operating costs are not adjusted and maintained.
A gross profit cannot be achieved when the COGS outweighs revenues.
In order to keep its strategic competitive advantage, Spirit must keep their costs to
produce low and within reason, not overleveraging, which leads to many different strategic
implications.
Lack of Customer Diversity
Spirit undoubtedly has strong relations with its two main buyers, Boeing and Airbus. This
relationship has proven to be a strength for Spirit in its sustainability over time though long term
contracts and R&D for future product development. This relationship could also be a potential
threat. Boeing and Airbus’ continued contractual relationship with Spirit also comes with
pressures to lower cost while increasing innovation, culminating in a state-of-the-art product
time after time. A more competitive environment for Spirit products sold without binding
contracts, or greater portfolio diversity will relieve much pressure off of Spirit’s operations and
costs. 94% of revenues come from the sale of products to these two buyers. If Boeing or Airbus
P a g e | 75
were to reduce the number of products purchased, either from drop in market demand for new
aircraft or other internal difficulties the OEMs may be experiencing, Spirit would be significantly
affected.
Untapped Foreign Markets
Spirit currently operates predominantly in the domestic market for Boeing with most of
its production facilities in the US. They also have facilities near their buyer Airbus in the UK.
This is the only global outreach Spirit has. There are significant opportunities in other foreign
markets where affluence allows for air travel, such as Japan or China, where aerostructure
producers do not have the low cost advantage.
It has been noted that Spirit products also have appropriate and specific military
applications, a market which Spirit has only recently tapped. Planes, jets, and helicopters with
military applications lend great potential for the firm to move into a new market and diversify its
product offerings to acquire alternative streams of revenues.
P a g e | 76
Alternative Strategies
1. Partner with Lockheed Martin to pursue growth options within the defense sector of
the market.
CEO, Larry Lawson, left an executive position in the aeronautics division of the military
defense leader to further his career with Spirit Aerosystems. Old connections with his former
company could be there way in to this untapped market. While with Lockheed Martin, he was in
charge of numerous different aircraft production programs. Concentric diversification strategies
may be appropriate for Spirit in this cross roads stage. By adapting Spirit’s current product lines
to fit the aeronautical defense needs, an untapped market for Spirit technologies, the commercial
aero structures industry powerhouse could achieve the growth Lawson is looking for.
PROS: Contracts with Lockheed Martin ultimately can lead to greater market share and
an even bigger presence as the aerostructures leader. This strategy would also help diversify
Spirit’s customer base, helping them decrease their dependency on the two major commercial
original equipment manufacturers. Because Spirit Aerosystems already has a small contract to
produce defense structures for Bell Helicopters, transitioning over to this industry is logical and
manageable.
CONS: The new programs that would be enforced by working with such a large defense
manufacturer could increase the already high costs of doing business. If the strategic plan is not
implemented appropriately and efficiently, Spirit Aerosystems could get in over their heads and
be unable to keep up with the demand necessary to supply such a dominant defense
company. Another potential downfall of this selection is if Spirit puts too much focus on
P a g e | 77
growing their defense aerostructures for Lockheed Martin, the firm’s current customer base may
not receive the same customer service/product quality as it is used to.
2. Invest in manufacturing facilities in countries where Fuji Heavy Industries and
Mitsubishi Heavy Industries make up a large percent of the market share.
As seen in the Hall's Competitiveness Model, Spirit is the low cost leader in this
industry. If they were to enter into countries like Japan and China, where these two competitors
have a strong foothold, Spirit could undercut their pricing and establish itself comfortably in
these foreign countries.
PROS: This growth strategy would allow Spirit to enter into a potential gold mine of
untapped market. Undercutting its competitors in these new markets could allow for significant
growth in terms of new programs and net sales. New customers will arise, increasing Spirit
Aerosystems’ limited target market and, as a result, decreasing the bargaining power of these
OEMs. Often times, raw materials for Spirit’s products are less expensive in countries like Japan
and China. Along with cheaper labor, the firm could experience far less overhead and much
better operating margins.
CONS: Can't be as cost effective in other countries. Socio-cultural differences prohibit
Spirit from competing in Fuji and Mitsubishi's niche market countries. Costly capital injections
by the parent company would be necessary in achieving this global reach. New production
facilities and resource wells would have to be present to ensure successful foreign transition.
P a g e | 78
3. Retrench certain business segments in an effort to create desirable financial stability
necessary for future growth
According to financial data offered in 2013, Spirit’s least revenue-generating business
segment is the wing systems segment, providing about 25% of Spirit’s total revenues. These
systems are predominately produced in the US in Tulsa and McAlester, OK. Data shows that
these wing systems and the parts produced in the Oklahoma facilities are some of the most
expensive products Spirit creates. Possible retrenchment through liquidation of this business
segment could allow Spirit to preserve its current relationships with the industry leaders in
aircraft production on a more stable financial ground and a possible increase in profitability.
PROS: Liquidating costly business segment may allow the parent company to decrease
overhead costs and redirect funds into more profitable segments. This reallocation of funds could
allow for more significant technological advancements through a financial injection into the
R&D and engineering departments of other business segments. This could allow for Spirit to
manage key assets and segments to increase profitability.
CONS: Departing with a business segment could negatively affect Spirit by reducing the
switching costs associated with the relationships currently held between Spirit and Boeing or
Spirit and Airbus. The liquidation of this segment could also mean loss of important personnel
who are responsible for technology advancements and potential growth for the company in said
segment. Risks in divesting may outweigh the benefits associated with it.
P a g e | 79
Final Strategic Choice
Concentric Diversification into Military/Defense Sector
Spirit has a significant opportunity to reimagine, redesign, and repurpose their current
product offering to suit the needs of US military’s aeronautical divisions. Many of the systems
and structures Spirit already creates have military applications. If Spirit could channel R&D
funds into designing improved systems for military aircraft such as planes and helicopters, new
contracts with the Department of Defense or private defense contractors could ensue.
By rebalancing their portfolio and rebranding current product offerings, Spirit could not
only see a smooth and manageable transition, but also increased profits from tapping a new part
of the aircraft manufacturing market in the defense sector with minimal costs to do so.
Alternative strategies, such as global expansion and retrenching the wings systems
segment may have severely negative effects on Spirit’s success. Expanding into other countries
is only possible with significant financial injections to support the development of new facilities.
In glancing at Spirit’s current financial health, it would be extremely risky to finance such
expansion with their currently high long term debt. Retrenching and liquidating the least
profitable segment, wing systems, lends significant risk to Spirit, and may not have any
significant effect on increasing operating income.
P a g e | 80
Implementation
Who, How, When
Who – As a former high ranking executive, Mr. Larry Lawson, has several friends and former
colleagues associated with Lockheed Martin. These decision makers for this defense company
include Marillyn A. Hewson, the President and CEO of Lockheed Martin as well as Orlando
Carvalho, Executive VP of Aeronautics. These two individuals will play a major role in the
potential partnership between these two industry powerhouses. Another key player in this
growth strategy is Phillip Anderson. Mr. Anderson became the Senior Vice President of Defense
and Contracts in September 23, 2013. This group of executive management will need to
collaborate to get new defense programs up and running.
How – Spirit Aerosystems must use its R&D and engineering team to work with Lockheed
Martin’s defense needs. Lockheed has aeronautics facilities located in California, Georgia,
South Carolina, Texas, and Canada. Being that Spirit is primarily based in the central United
States, logistics between these two companies would flow relatively easily. There would be a
rather long trial, error, and test period before new products/programs hit the production
lines. However, the future benefit for both partners would be tremendous if the strategy is
implemented efficiently.
When – The top executives at Spirit Aerosystems are all fairly new to their position, many of
whom were hired in early 2013. Therefore, this strategy will take significant time to implement.
Towards the end of 2014, talks about potential new contracts would need to take place so that the
products can begin their life cycle at some point in 2015. The goal of this diversification strategy
would be to have new programs and contracts up and running by late 2015.
P a g e | 81
Bibliography
http://makeitfly.aero/SpiritAeroSystemsAnnualReport/2013AnnualReport/index.html
http://spiritaero.com/investor.aspx?baseID=1117&id=11&p=irol-reportsAnnual
http://www.spiritaero.com/assets/0/305/335/f64281a6-6f36-498a-8af0-d31d37951065.pdf
http://www.spiritaero.com/assets/0/305/335/d676f606-5e76-4c8a-b782-448e39a3c302.pdf
http://www.dbschenkerusa.com/file/1521336/data/usa_news2.pdf
http://www.kansas.com/2013/03/19/2722893/spirit-aerosystems-names-larry.html
http://www.wikinvest.com/stock/Spirit_Aerosystems_Holdings%20(SPR)/Competition
http://www.reuters.com/finance/stocks/companyNews?symbol=SPR
http://www.indeed.com/q-Spirit-Aerosystems-jobs.html
https://twitter.com/SpiritAero
http://articles.kwch.com/keyword/spirit-aerosystems
http://www.glassdoor.com/Reviews/Spirit-AeroSystems-Reviews-E39219.htm
