Boeing’s fraud charge, Spirit deal show scale of growing crisis

Six months after a fuselage blowout threw Boeing Co. into crisis, the full weight of the legal and financial fallout from the near-catastrophic accident is bearing down on the embattled US planemaker. 

The US Justice Department plans to charge Boeing with criminal fraud after finding the company violated a 2021 deferred-prosecution agreement tied to two previous, fatal crashes, Bloomberg News reported late on Sunday. Just hours later, Boeing announced a plan to buy back Spirit AeroSystems Holdings Inc., a supplier it spun off two decades ago, for $4.7 billion in a bid to improve manufacturing.

The intertwined developments reveal the sheer magnitude of Boeing’s current troubles. The planemaker now has a few days to make a tough legal choice: plead guilty or go to trial, neither of which are without risk. The Spirit deal, meanwhile, will saddle Boeing with more debt and tie up the manufacturer with the complex task of turning around operations at a contractor that’s suffered from poor workmanship for years — at a time when Boeing’s own facilities aren’t running smoothly. 

Neither of Boeing’s legal options are particularly appealing. Pleading guilty and accepting a fine potentially locks the company out of important government contracts and might lead to higher compensation to families of victims in the two crashes. But going to court creates an uncertain legal overhang for whoever follows Chief Executive Officer Officer Dave Calhoun, who has said he will step down by year-end at the latest. 

“Either way, this is a terrible outcome for Boeing,” Nick Cunningham, an analyst at Agency Partners in London, said of Boeing’s legal options. With Spirit, “Boeing gains very little from this transaction and would not have chosen to do it, given that it only spun Spirit out about 20 years ago.”

Boeing shares slipped 1.2% in premarket US trading, while Spirit gained 6.3%. 

The US planemaker said Monday that it will pay $37.25 a share for Spirit in an all-stock deal. The total transaction value is about $8.3 billion, including Spirit’s last reported net debt. Arch-rival Airbus SE, meanwhile, gets to walk away with some parts of Spirit that make components for the European planemaker, and stands to get $559 million in compensation.

The purchase will close in the middle of next year, giving Boeing some financial wiggle room as the company seeks to protect an investment-grade credit rating hovering just one level above junk status. Cunningham estimates Boeing will end the second quarter with about $45 billion in debt, near the high-water point of $45.8 billion two years ago.  

Boeing has been in turmoil since the mid-air blowout. The company’s shares are down by almost a third this year and it has warned that it’s on pace to burn through about $8 billion in cash during the first half of 2024 as it deals with a production slowdown in the aftermath of the near-catastrophe on an Alaska Airlines flight. In response to the mishap, the Federal Aviation Administration capped production of the 737 Max and required Boeing to submit a sweeping plan to address the quality issues at its factories.

In the Jan. 5 mishap, a door-shaped panel that had been assembled by Spirit and removed for repairs at Boeing exploded off the fuselage of a 737 Max 9 jet during a nearly full flight. It triggered a chain reaction at Boeing, which has seen a wholesale management shakeup, federal investigations, and scrutiny from regulators.

“We believe this deal is in the best interest of the flying public, our airline customers, the employees of Spirit and Boeing, our shareholders and the country more broadly,” Calhoun said in a statement. 

The Boeing transaction, once completed, will reunite assets that for decades once sat under one roof, bringing together thousands of workers and decades of shared expertise. It also brings a longtime former Boeing leader back to the company as directors hunt for a new leader: Spirit CEO Pat Shanahan was a longtime Boeing executive steeped in factory operations, known for helping turn around the 787 Dreamliner program after a troubled start. 

He’s considered a potential contender to succeed Calhoun in Boeing’s top role.

The deal struck after months of negotiations comes as Boeing approaches another milestone, a settlement with the US Justice Department that would potentially involve pleading guilty to criminal fraud in relation to two crashes involving the 737 Max aircraft that occurred in rapid succession in 2018 and 2019.

The US government plans to charge Boeing, according to people familiar with the matter said on Sunday. The department concluded in May that the company had failed to meet a requirement to implement an effective compliance program to prevent and detect violations of US fraud laws. Boeing has told the DOJ that it disagreed with the finding.

The Justice Department and Boeing declined to comment. 

Bloomberg previously reported that the planemaker is in talks with the department to resolve potential charges stemming from the crashes, and that a settlement is expected to include the appointment of a corporate monitor.

A guilty plea to criminal charges would mark a low point in Boeing’s century-long history and a stunning development for a company that was once renowned for its cautious, straight-laced culture. It raises concerns over future US government contracts for the company at a time when Boeing needs its defense division to counteract plunging revenue at its commercial airplane business.

Between the legal troubles, the challenge of integrating Spirit and continuing scrutiny from the FAA, “Boeing is probably a long, long way from putting their issues behind them,” said Rob Morris, the global head of consultancy at Ascend by Cirium.