🔷 Spirit

Spirit Aero is going away

Boeing has agreed to buy Spirit AeroSystems for $4.7 billion in a move to enhance the quality of its production.

The move comes amid ongoing safety concerns following the 737 MAX door plug blowout, a dumpster fire that was traced to Spirit's quality control issues coupled with Boeing's lack of oversight.

The Backstory

Spirit Aero is the world’s largest standalone aerostructures company, but it isn’t that old. It was born in 2005 when Boeing spun it off into its own business to cut costs and boost profits.

A byproduct of this out-sourcing strategy was that it ceded quality control and production oversight.

But there was another byproduct: it also freed the newly-formed and independent Spirit Aero to accept contracts from other manufacturers. Unsurprisingly, Spirit Aero expanded and now has global agreements with Airbus, Bombardier, and Mitsubishi.

Following the Boeing-Spirit announcement, archrival Airbus said it would take over core activities at 4 of Spirit’s plants in the US, Northern Ireland, France, and Morocco.

So What

Less known is that Spirit Aero also expanded into defense aerostructures. Roughly 13 percent of its revenue is defense-related, which doesn’t sound like much, but this is a huge company—that works out to be $800m out of its $6.1B annual revenue. 

Here are Spirit’s noteworthy defense programs:

• Bell Helicopter V-280 Valor (Army)

• Boeing KC-46A tanker (Air Force)

• Boeing P-8A Poseidon (Navy)

• Lockheed/Sikorsky CH-53K King Stallion (Marine Corps)

• Northrop Grumman B-21 Raider (Air Force)

That’s right, Spirit Aero builds the aerostructure for the B-21 stealth bomber. OBTW, they are also in the hypersonic weapons game.

Number Crunch

Bringing Spirit back into Boeing’s fold will bring more oversight and consistency in the manufacturing process, which is crucial for restoring trust and reliability in its products.

But it’s also going to saddle Boeing with more financial problems. Compared to 2019, Spirit’s revenue is down 36%, gross profit is down 95%, and it’s carrying $4.1B in debt—primarily due to the 737 MAX groundings following 2 crashes that killed 346 people.

What Now

The 737 MAX issue is important because of a looming legal situation. Boeing can either go to trial and risk paying a gigantic $24.8B fine or accept a plea deal that would make it guilty of criminal fraud related to misleading the FAA about the 737 MAX’s configuration changes.

If Boeing foregoes the trial and pleads guilty—which is what the Justice Department wants—it could jeopardize its status as a federal contractor because it would be grounds for suspension or debarment under the Federal Acquisition Regulation (FAR). If this happens, it could throw dozens of other defense programs into uncharted territory.

Who knows how it’ll play out, but the good news is that the legal situation should be resolved before the Spirit acquisition closes in mid-2025, so at least the programs listed above should be safely outside the blast radius.

In That Number

AIM-174

The Navy’s SM-6 missile adapted for air-to-air use broke cover. The so-called SM-6 Air Launched Configuration (ALC) is designated the AIM-174, and the Navy confirmed it is now operationally deployed, making it the longest-range US air-to-air missile ever.

In a related event, a F/A-18E Super Hornet was spotted loaded with 2 AIM-174 missiles.

Check out the side-by-side comparison of the AIM-174 to the AIM-120 to get a better idea of how much larger it is.

TRIVIA

General Mills is the food company behind Betty Crocker, Pillsbury, and many cereal brands. However, it also used to innovate with other technology. Which of the following did General Mills NOT create?

A) a submarine
B) military trucks
C) spy balloons
D) pigeon-guided bombs

On the Radar

Kratos’ XQ-58 Valkyrie drone can now take off from runways. The company developed a Launch Trolly System that lets the XQ-58 roll down a runway like a conventional airplane. The system permits take-offs with more fuel and larger payloads than its normal rail-launch rocket-assisted launch method.

• The Merge’s Take: This is a big deal. The XQ-58’s greatest strength—launching and recovering without a runway—was also its greatest weakness. The 4 expendable rocket boosters to get it airborne make its operational cost exorbitant—some estimates peg it as high as $200K+ per flight. This is one of the main reasons it only flies occasionally and has not been procured in volume. This Launch Trolly System introduces optionality and eliminates those rocket boosters, which should cut operating costs by ~80%. Maybe this is what the Marine Corps has been waiting for.

NATO has delayed a debate on defense spending mandates until next year. The issue concerns raising the current 2.0% GDP target to 2.5 percent. Of the 32 NATO nations, 23 are expected to hit the 2.0% goal this year. By comparison, ten years ago, only three nations (one being the US) hit that target.

• The Merge’s Take: Russia’s invasion has definitely affected the spending calculus, with 22 members increasing their defense outlays since 2022, and 2.5% should be a palatable target. For reference, the US out-spends all other NATO countries combined, which makes sense given the size of the economy—but it also spends (almost) the highest percentage of GDP at 3.5%. It held the GDP title until Poland spiked defense spending to 3.9% last year. Expect the results of this year’s US elections to weigh heavily on this in 2025.

The Air Force’s next-gen fighter needs a cost-cutting redesign to survive. The current program has the 6th-gen fighter costing roughly $300M each and a plan to buy approximately 200 jets. The Air Force has delayed picking the winner (Boeing or Lockheed Martin) while it deliberates a path forward.

• The Merge’s Take: Ignore the technical limits the program is pushing. The economics and quantities of the jets in this program have been well-known for many years but were often hand-waved or obfuscated with several re-brandings over the past decade or so. Remember when the pitch was for a Digital Century Series that traded long-term sustainment costs for higher up-front procurement costs per plane with designs that only lasted ~15 years? That concept quietly died, but the sticker price has not.

• The Merge’s Spicy Take: At the end of the day, the Air Force has spent over $4B on this program to date and is delaying a decision because it still lacks a clear, concise, cohesive narrative on the force design strategy and the unit economics that inform it. Beyond the sticker price, 200 fighter jets—no matter how capable they are—is just not enough to matter for any US National Defense Strategy. Look no further than the F-22 fleet (and F-15E fleet) for a case study of what not to do.

They Said It
"It can mimic things that are sent to it that it detects, turn it around and send it back. So it becomes a hole, it becomes a black hole, it becomes mostly undetectable."

— Marine Corps Commandant Gen. Eric Smith, on the special pods being adapted to the service’s MQ-9A Reapers

Knowledge Bombs

• DIU is looking for solutions for Autonomous Collaborative Teaming

• SpaceX is intentionally de-orbiting 100 Starlink satellites and the Space Force is using the rare opportunity to practice Space Domain Awareness with real-world events

• The Air Force requested $150m more money for its Collaborative Combat Aircraft program this year (adding to the $392m previously appropriated)

• The Navy and Army completed an end-to-end flight test of a joint hypersonic missile for their respective Conventional Prompt Strike and Long Range Hypersonic Weapon programs

• Sikorsky received GE’s next-gen helo engines for Black Hawk integration

• Finland approved a defense treaty with the US, giving access to bases, training areas, and approval to preposition stocks

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ANSWER
B. They had no involvement in producing military trucks, but they did create a submarine way ahead of its time and spy balloons for the CIA—and the pigeon-guidance kit for bombs is worth the click.