Speculative musings: What does the future hold for Vought?

In its first quarter earnings, Vought Aircraft Industries announced it was planning for an industry downturn that puts the aerostructures manufacturer in the cross-hairs of significant production cuts in 2010.

“Our forecast now reflect impact from the global economic slowdown,” said CEO Elmer Doty.

Doty cited production cuts on the 777, G450 & G550, A330/A340 and slowing ramp ups on the 767 and 747-8, an uncertain C-17 budget, as well as Cessna’s decision to suspend the Citation Columbus program as the cause of the 2010 re-assessment.

Doty adds:

“While decreases in production are inherent to the cyclical nature of our business each announcement has had an impact to our plan, mostly impacting 2010 and we continue to adjust our resource allocation accordingly. While we remain optimistic on the industry’s long term fundamentals we are nonetheless prepared with additional contingency plans should things deteriorate further as some analysts suggest may happen.”

This hits Vought at a time when the company was already coming out of financial trouble during the higher part of the industrial cycle. The downturn is likely to hit Vought hard, by its own admission. So what does the future hold for this company?

With Boeing’s ambitious 787 ramp-up getting underway, 2010 will especially challenging for the airframer, and maintaining a stable supply chain is paramount.

If Vought gets in serious financial trouble, would/could Boeing step in and buy the company’s Charleston operations to ensure an uninterrupted flow in production? The aft fuselage for the 787, is fabricated and integrated at Vought’s North Charleston, SC facility.

The 787 program’s general manager and VP, recently answered (in a general sense) “Yes.”

Here’s Scott Fancher’s quote (in its entirety) on Boeing’s approach to its supply chain and the circumstances under which it would switch/assist a 787 supplier:

You know, you get into a situation where either some of the first tiers, or their sub-tiers simply aren’t able to perform, now there could be a lot of reasons for that, could be that their in financial stress, could be that technically they’ve run into a situation they can’t handle or could be the complexity of the production of the product that they’ve designed is beyond their capability, so we tend to look at the root cause of the non-performance and how can we help them succeed.

Generally speaking, switching to another supplier will take more time and cost more money than helping a current supplier perform, so that tends to be the lion share of our focus. Now, to bring the broad based best of Boeing to bear on this looking at resources of BCA, IDS or one of our technology organizations to help these suppliers along the way. Sometimes the help is financial in nature, we’d like to avoid doing that but it’s unfortunate and that is an alternative at some point.

And only in an extreme case of true non-performance do we really look at switching suppliers. Now, it does happen and clearly as we go forward we’ll look at some re-balancing of work scope as we sort through where work is most efficiently and cost effectively done, but by and large the focus is on helping our supply chain succeed, not moving the work in a rapid fashion [with travelled work]. Emphasis Added.

Boeing has already shown its willingness to assume control of parts of its 787 supply chain as it did with the 50% purchase of Vought’s share of Global Aeronautica in 2008. Already, staff at the Charleston facility have noted an significant influx of new Boeing staff and contractors.

Many in the analyst community have expressed significant misgivings about the financial future for Vought, declining to discuss the situation on the record, but add that Boeing is mum on any discussions about the future of one of its key 787 suppliers. For Vought’s parent company, The Carlyle Group, it has been a tumultuous year as the group was hit hard by the financial crisis, suffering significant liquidity issues. A big boost in cash for Carlyle might act as a stabilizing force.

If we let this hypothetical play out a bit, then its reasonable to think that Boeing has no need/desire to own the whole of Vought. “Re-balancing” the 787 work scope is one thing, taking on extensive aerostructures manufacturing infrastructure is another. Vought serves many non-Boeing products that company wouldn’t need to be involved in such as A330/A340 and G350/G450/G500/G550 programs.

I’m inclined to say that if all of Vought is divested by Carlyle, another major aerostructures supplier would want the remaining non-787 parts of the company. But who?

Slide 29 of the Spirit Aerosystems 2008 investor day offers an interesting hint. The slide, titled “More New Business Opportunities” outlines future areas the company would like to be involved. On the lower left corner the company identifies “Regional and Business Jets” as an area of interest. The two pictures displayed are of the Cessna Citation X “fuselage and wing” and Gulfstream G450 “propulsion”. Curiously, Vought is responsible for the manufacture of both the wings of the Citation X and the G450 engine nacelle.

Spirit has never been shy about its desire to grow its aerostructures footprint, and Vought’s Nashville and Dallas – its two biggest facilities – might further bolster its commercial portfolio with expansion of its workshare on 747-8, A330/A340, as well as Cessna and Gulfstream products.

So where does this leave Vought? The future for the company appears uncertain, even by its own admission. All signs point to Boeing and Spirit trying to answer exactly this question too. Stay tuned.